What steps can be taken and by whom to ensure that an Enron case never happens again?

Introduction

The Enron case was a terrible black mark on the corporate sector, and is a good lesson against an organisation having too much ambition, power and arrogance. This case may not have occurred in the first place if not for the fraudulent creative accounting by the selfish senior staff, auditors who supported it and the board of directors who did not control the firm. In this essay the possible precautions a firm could do to avoid such a scandal would be discussed.

I.   Board of directors

Giving financial incentives for employees for making deals and giving ideas ultimately made Enron a firm with many employees who had their own agenda, rather than all employees working towards the organisation’s vision, mission and values. Thus from the beginning of operations a firm needs to inculcate a culture where employees follow the corporate values, have a respectable standard of conduct, have minimum pressure to commit misconduct, and know to manage their risks and vulnerabilities. These must be implemented top-down by the board of directors, senior staff, employees of all levels and key stakeholders. The board must eradicate any flaw in the organisational structure and system that makes an employee step into unethical grounds, and enforce a mentality among the people that ethics is vital. These could be done for example by having workshops and training, controlled incentive schemes, constantly recognizing talent, etc.

Moreover the firm could establish their code of conduct and internalize their corporate values. Even so it is an insufficient measure on paper, rather the firm should encourage and recruit senior level managers to be strict concerning the ethical grounds. When the top level management is ethical, eventually it would spread to the whole organisational structure, as it would be widely known that in that particular firm no unethical practice is tolerated.

Furthermore the firm should have an independent corporate ethics office, and subject their staff to training and evaluate their compliance system, and provide effective protection for whistle blowers who revealed unethical or illegal activities done by other members in the firm. The firm could have hotlines for employees to discreetly communicate with the company about their conflicts in an ethical dilemma.

Another possible step is to publicly declare their code of ethics. In this instance the external auditors would be required to sign and comply with the terms of the firm’s code of ethics.

One of the main reason for the failure of Enron was working with Arthur Anderson for auditing as well as consulting purposes, causing high conflict for him and the employees. Independence of the auditing organisations are fundamental for a business’s success, as it identifies any flaws in the accounts, for which the firm would be able to find the root cause and remove it. As the board of directors don’t directly interfere with the managing of the firm these responsibilities must be bestowed upon the CEO, whom the board believes is ethical and has ideas to match with the corporate’s values.

II. Chief Executive Officer

The Chief Executive Officer (CEO) must also follow all of the above, as well as it is best to follow the Management by Walking around (MBWA) approach (Peters & Austin, 1985).  Peters and Austin says that when the manager walks around the office regularly and have one on one conversations with the employees, this would improve the communication considerably and they would be able to understand the employee’s concerns better and remedy them. The benefit of this is that employees would know what is required of them (tasks and ethics) and how they are doing currently (task and ethics), thus they can take decisions in a situation where they are faced with an ethical dilemma.

III. Auditors

Accountants all have six fundamental principles they have to follow; integrity, objectivity, professional competence and due care, confidentiality, and professional behavior. Nevertheless like in the case of Arthur Anderson due to conflicts of interest as an auditor and consultant, the auditors may not comply with their standards. In such situations the auditors under Anderson should have taken steps to prevent the violation of their code of conduct. If the auditors were conflicted they should have contacted the professional accounting body they are affiliated with and asked about what to do. In the case of Enron they had a duty to disclose all fraudulent acts they were engaged in (Chartered Institute of Management Accountants, 2014), for example hiding the investment loss in a subsidiary’s accounts.

Meanwhile the professional bodies could take steps to stress the dangers of not being compliant with the fundamental ethics in accountancy, like regular seminars for the professionals.

IV. Human Resource Manager

The Human resource department of an organisation deals with the people within, more specifically it deals with managing, recruiting, motivating, developing and supporting people in accordance with the employment and human rights standards (Strandberg, 2009). Thus it is the HR manager’s responsibility to impress upon the employees the right way to do things, for this the HR manager should change the corporate culture to a more suitable one that goes in parallel with the firm’s corporate values. Further the HR Manager should be able to instill the sense of belonging to the employees, so that they would get the “we” and “us” culture, and the firm could avoid or at the least minimize the number of misconducts occurred by individual greed.

V. Non-Executive Director

Non-Executive director’s role in a firm is to keep the company on the path towards its mission and goals, to set the strategy, ensuring adequate human and financial resources are available, review the management performance, communicating on behalf of shareholders and finally setting the company’s values and standards (Pinsent Masons LLP, 2010).  Thus when the firm is being led in the incorrect path the Non-Executive director should intervene to stop the corruption of it, so that like in Enron ultimately the shareholders would not suffer. Therefore the shareholders must elect a righteous person for this post.

Conclusion

The reason Enron failed was due to the overstated profits and understated debts, and the highly optimistic and rapid expansion of deals that failed, which all budded from the culture of individualism which was encouraged by Enron.

Employees are what makes a firm, as seen in the Enron scandal, the employees attitudes of personal gain was ultimately the end of that firm. Therefore an employee should have the moral obligation to not break their code of conduct at all times, especially the top level employees.They are the most influencing in a corporate environment, as they are directly involved with the employees, thus their positive actions would cause a ripple effect on the employees, however so does the negative actions.

In conclusion, for a firm to prevent from being the next Enron, the entire workforce should be working towards a common goal; that of the firm’s, the external auditors of the firm should be independent, the consultancy firm should not be related to the audit firm (like in the case of Enron), and each and every stakeholder should be ethical in what they do and report any misconduct occurring within the organisation. If so that organisation can flourish and look forward to a sustainable growth in the future.

Reference

Chartered Institute of Management Accountants (2014)Ethical Dilemmas: What would you do?.[Online]Available at: http://www.cimaglobal.com/Documents/Professional%20ethics%20docs/dilemmas%20FINAL.pdf [Accessed 23 June 2014].

Peters, T. J. & Austin, N.(1985)A Passion for Excellence. 1st ed. New York: Warner Books Incorporated.

Pinsent Masons LLP (2010)The role of the board, chairman and non-executive directors – the UK Corporate Governance Code. [Online] Available at: http://www.out-law.com/page-8215[Accessed 23 June 2014].

Strandberg, C.(2009)THE ROLE OF HUMAN RESOURCE MANAGEMENT , Burnaby: Strandberg Consulting.