Question

CASE STUDY

Introduction

Students will submit Case Study of corporate practices in accountability and transparency.

The overall aim of the Case Study is:

·    Contribute to documenting and increasing knowledge on corporate accountability and transparency

·    Engage and inspire business students in understanding real-life application of integrity, ethics, responsibility, governance, transparency and accountability within a business context

·    Improve the links between business students and companies

·    Recognise companies with accountable and transparent business practices

Rules

·    A team can be up to 4 students

·    a written Case Study (target 1,500 words) in English

·    The Case Study should describe an example of a practice within a company (international or local) on any Integrity-related policies, for example:

         o  Anti-corruption policies

o  Third party due diligence

o  Ethical labour practices

o  Anti-money laundering

Criteria for Assessment of Case Studies

1.   Is the Case Study a leading example of a fully implemented integrity-related practice, according to the frameworks?

2.   Has the team rigorously researched the company practice, using secondary and primary data gathering, including interviews with company executives if possible?

3.   Is the Case Study structured according to the template and written comprehensively, concisely and clearly?

-Please refer to attached rubric assessment –

Case Study Template – Integrity-Related Practices

Company Name: [full name] Headquarters: [city, country] Sector: [sector]

Number of employees: [number, excluding subcontractors] Annual gross revenue: [US$ and local currency; if disclosed] Status: [listed, private or government owned]

Name of company executive interviewed: Position:

E -mail:

Phone number:

Date of interview: upon availability 

Company Description

In this section, please flesh out the above information, adding company history, geographic scope, range of operations, and business sector.

Description of the Integrity-related practice:

In this section, please describe the company’s specific integrity-related practice. This should include:

–    Brief description of the practice

–    Drivers for applying the specific practice (can be from various reasons such as but not limited to  cost reduction, new employees/leadership, existing company values, host community or government encouragement, press coverage, or investor requirement

Policy Development

In this section, please describe how the company developed the policy. This should include:

–    Brief description of the policy

–    Process transforming the idea into a policy (such as key individuals in the organisation responsible with developing the policy, resources used, external guides consulted)

–    Level of stakeholder engagement in development of the policy

(Please attach the policy or include it as an on-line link if applicable)

Process for Embedding the Practice within the Organisation

In this section, please describe how the company embedded the practice within the company. This should include:

–    The various means that the company used to embed the practice within the organisation, for example through the use of training or change in tone from leadership and so on

–    How each of the above means were implemented in detail, for example if training was used, it can include how the training was performed (through use of online software, informal sessions, external training programs), how were the trainers selected, who ran the training, how were the training materials developed, how was the training customised for each department and so on

–    The key challenges that the company faced in the implementation of the practice and how this was overcome

–    Explain (if applicable) how the practice was extended throughout the supply chain

Identification and Reporting of Issues

In this section, please describe how the company identified and reported the issues for the practice within the company. This should include:

–    Description of the mechanisms that have been placed for the identification and reporting of issues, for example a whistle-blowing system, help desks, hotlines and so on

–    Description of how the mechanism works, why it was selected and how it was implemented

–    Explain how the information gained from using the mechanism was reported and to whom

Enforcement

In this section, please describe how the company ensured the enforcement of the practice within the company. This should include:

–    The actions that the company is taking and process it is using to ensure enforcement

–    Describe who is responsible for the enforcement of the practice (it can be a team of selected individuals, use of external auditors, an individual such as the compliance officer and so on)

Lessons Learned

In this section, please describe the lessons learned in this case study.

Please write it in a format to show what are the key lessons in this case that are vital for other regional companies to learn from when implementing such a practice.

References

In this section, please include all of the references you used when producing the case study.

Answer

Enron Case Study

Contents

Introduction. 2

Company Profile. 2

Company Description. 3

Integrity-Related Practice. 3

Policy Development. 6

Embedding the Practice Within the Organization. 8

Identification and Reporting of Issues. 10

Enforcement. 11

Lessons. 13

Conclusion. 14

References. 15

Introduction

            Enron Corporation is one of the most studied cases when dealing with ethics and corporate governance issues. Its sudden and unexpected collapse led to exposure of a series of governance issues that were affecting corporate organizations. The major corporate accounting scandals led to the shaking of confidence in both the corporate world and the stock market. Prior to its imminent collapse in December 2001, the company had been categorized as one of the most innovative, fastest growing, innovative, and the best managed business in America. The swift collapse of the company led to Enron workers and shareholders losing billions of dollars from the stock that they owned. Enron Corporation had been in a bad financial shape from 2000 but it had managed to fool the regulators with fake accounting records. The corruption case was investigated and concluded but it left a negative impact on the corporation.  Today, the company has different projects mostly in India, but its reputation continually affects the way people deal with it. This is notwithstanding the exit of the masterminds behind the huge scandal and even after the company has invested much in image restoration.

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Company Profile

Company Full Name: Enron Corporation

Headquarters: Houston, Texas, United States

Sector: Energy sector

Number of Employees: 20,000 staff

Annual Gross Revenue: $101 billion

Status: Listed

Company Description

            The firm’s full name is Enron Corporation. It is an American energy and services company that is headquartered in Houston, Texas. The company began its operations as Enron Corporation in 1985 (Moberly, 2006). At the peak of its operations, the company had shares that were valued at $90.75 (Moberly, 2006). However, the scandal in 2001 led its shares to plummet to $0.26 (Moberly, 2006). It came to be associated with the preposterous levels of share prices. Enron Corp. engaged in a number of expansions that led it to occupy the top charts of “America’s most innovative companies” from 1996 to 2001. Before its collapse, the company employed at least 20,000 staff members (Moberly, 2006). It had also reported gross annual revenue of $101 billion in 2000 before it filed for its bankruptcy in 2001 (Moberly, 2006).  The fall of Enron Corporation can be attributed to greed. The collapse of the company began when it started using mark to market accounting, a system that immediately taken advantage of to benefit some executives.

Integrity-Related Practice

            Enron Corporation was accused of committing an accounting fraud. Until 2001, the company had been viewed as a good example of a company that had undergone a good transformation leading to outstanding success. Its annual revenue had grown from $10 billion to approximately $101 billion in the year 2000 (Moberly, 2006). The problems that led to the collapse of the collapse of the company never arose in its main operations of energy sector but in other investments that included the internet and hi-tech communication. Enron wanted to tap into the internet market because they believed it offered unlimited opportunities. It thus engaged in an expansion program that included the acquisition of online marketers and service providers. It also engaged in the construction of fiber optic communication system. It then ventured into the business of selling broadband communication capacity. The firm was entering into the venture when it was nearing its peak. It, therefore, had to pay high prices that left it with a lot of debts. The crash of the dot com era in 2000 led to a reduction of revenues earned from the investments thus leaving the company with a heavy debt (Moberly, 2006).

            As noted earlier, the main factor that led to the collapse of the company was greed. The CEO of the company, Jeffrey Skilling wanted to maintain the positive image that the company had created hence embarked on hiding the financial losses that were being experienced by the company (Moberly, 2006). Jeffrey Skilling introduced an accounting model that is known as mark-to-market accounting that is used to hide the trading business and other financial operations that were undertaken by the company. Enron implemented the accounting technique in its financial operation where it would engage in an investment and immediately declare the projected profits on its books even when they had not earned a single coin from the venture. In cases here, the revenue earned from the investments was lower than the projected amount. The company did not want the losses to be reflected in their books. The loss made by the company would thus go unreported. The accounting technique allowed Enron Corporation to write off all its unprofitable ventures without harming its bottom line.

            Before the major scandal, Enron Corporation was majorly involved in the energy sector. Over the years, accounting frauds and a series of corrupt activities defined the company. However, it wasn’t until 2002 when the application of the Sarbanes-Oxley Act oversaw the application of necessary intervention measures to other companies (Rockness & Rockness, 2005). Later, Arthur Andersen, a renowned accounting company was dissolved in reference to the Enron scandal. Five years after its institution, Jeffrey Skilling, the company COO, entrusted the company’s accounts with Andrew Fastow (Moberly, 2006). He was in charge of the limited liability special purpose entities, which permitted Enron to transfer credits to other firms without putting its name on the transactions. Even though this is permissible in the energy industry, powerful entities manipulated records through the finance manager. After rising to the position of one of the 100 most successful firms in the Forbes list, the company became incapable of paying workers or financing pensions. Secondly, the media noted an increase in the population of staff members being fired and speculations were that they were whistleblowers. These factors were drivers that contributed towards business failure and the subsequent discovery of the scandal.

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            Even though the special purposes entities are commonly used in the energy sector, Enron mostly used the strategy to cover a series of corrupt activities. Besides, whistleblowers were threatened and intimidated making it difficult to discover the extent of damage caused by the accounting issues. The corporate officers were engaged in a scheme that gave the company the wrong impression to the public (Rockness & Rockness, 2005). Apparently, this created an illusion about the firm’s performance and deceived a huge population who invested in it. In reality, the company was plunging into debts, yet the society believed that the company’s stock was blue chip. The accounting department was the most vulnerable to corruption. However, the corporate officers did nothing to intervene. In any case, they fueled the fraud by being part of the scheme. Furthermore, an accountancy firm that needed to regulate financial activities equally plunged into corruption. In addition, it took a long time for SEC to intervene even though the commission is mandated with the regulation of markets (CIMA, 2002). Finally, entrusted financial and corporate officers like Fastow participated in the manipulation of accounts to suit personal interests. In essence, the corporate governance team failed to act ethically when confronted (Rockness & Rockness, 2005).

Policy Development

            Enron’s case prompted the development of the Sarbanes-Oxley Act of 2002 that oversaw the assessment of accounting activities at Enron. Sarbanes-Oxley Act is a set of legislations that introduced an expanded responsibility that was aimed at increasing corporate and auditing accounting responsibility in the United States public companies (Rockness & Rockness, 2005). The provisions contained in the act were also applicable to the private companies. The bill was enacted to help in dealing with the increased number of corporate scandals that were occurring at that time that included Enron Corporation and WorldCom. The core part of the act is that it adds a criminal penalty for company executives for particular instances of misconduct. Among the elements contained in the act is the establishment of a Public Company Oversight Board that plays an oversight role on companies that conduct auditing in both public and private firms (Rockness & Rockness, 2005). The act provides for auditor’s independence as well as corporate fraud accountability. The Sarbanes-Oxley Act promoted the development of reforms to align Enron’s policies with the expected ethical standards (Moberly, 2006). Later, Enron sold some of its subsidiaries including Cross-country Energy, because the losses it experienced would continue if the company further associated with Enron. Therefore, reforms were necessary to promote transparency and accountability.

            The effects of the scandal were evidenced by the company’s poor performance. Therefore, the application of SOX was highly recommended. The policies were embedded in daily practice and investigations by SEC assisted in further identifying the vulnerable accounting sections of the organization. The federal law encourages the process of embracing reforms and Enron sought to restore its image through Sarbanes-Oxley Act in 2002 (Rockness & Rockness, 2005). In fact, it was the scandal, which prompted the introduction of the policy, and the government had to intervene and recall a previous act, which deregulated the oil and gas industry because of Enron.

Sarbanes-Oxley Act was an act that arose out of public outcry from the citizens of the United States. They were concerned with the increasing rates of financial fraud that was occurring in both the private and public sector. During that time, the fraud cases that were occurring were at three major companies that included Enron, WorldCom, and Tyco (Rockness & Rockness, 2005). The analysis of the cases that had occurred in the three companies led to the establishment of the act. The bill was sponsored into the parliament by Paul Sarbanes and Michael G. Oxley. The bill was meant to ensure that the executives take the responsibility of any financial reports that were produced by the company. After Enron was declared bankrupt, it was placed under the credit recovery management under the name Enron Creditors Recovery Corporation (Rockness & Rockness, 2005). The management of the Enron Creditors Recovery Program was responsible for the implementation of the policy that enabled the company to recover money and pay most of its creditors.

The introduction of the policy required the firm to reorganize its management and have people who are familiar with the act. As a result, major reshuffles were done with previous management body being dismissed and a new one being instituted. The process involved the incorporation of various stakeholders of the company. The main aim of the management during that moment was to pay out all its creditors by selling some of the assets and settling down most of its debts. The creditors of the company were broad on board to provide their opinions on how the firm would best implement the policy to aid in its financial recovery and payment of most of its debts.

The development of the act involved activists as well as major stakeholders in the big firms within the United States. The shareholders of most companies were concerned with the financial losses that they accrued out of the corporate financial scandals that were being orchestrated by the executives in the firms (Rockness & Rockness, 2005). It had led to huge financial losses to the shareholder due to loss of stock. They, therefore, required a policy that would make the executives more accountable for the financial problems that affected their companies. They proposed an expansion of the criminal liability for executives whose firms would in future be engaged in a corporate financial scandal. The stakeholders were thus mainly involved in the level of opinion sharing. Most of their opinions were incorporated in the draft that was used to draft the bill. The bill was then presented to representatives who sponsored the bill to the parliament. The bill underwent all the procedures required for it to become a law. After the passing of the bill, it became implementable to all the public and private companies.

Embedding the Practice Within the Organization

            After the discovery of the accounting Fraud at Enron Corporation, the United States lawmakers realized the need to institute new compliance standards for both public auditing and accounting. The passing of the stringent laws was meant to restore the confidence of the American public in the corporate world. Being one of the biggest companies to go down under fraudulent means, there was need to assure the American public and the investors that the corporate world had been secured and that no further funds will be lost due to corporate fraud (Moberly, 2006). Immediately after the firm requested to enter into bankruptcy, Jeffrey Skilling resigned as the COO and fraud charged were instituted against him and another officer. Enron was to later emerge from bankruptcy in 2004.

            When the firm emerged from bankruptcy, it was keen on reorganization based on a plan that had been approved by the court. The approval of the reorganization plan by the bankruptcy court resulted into the company changing its name to Enron Creditors Recovery Corp (Patrick & Scherer, 2003). the company had a new management that oversaw its reorganization plan. By then, the Sarbanes-Oxley law on accounting and auditing had become law. The company was, therefore, required to implement the law by default. The new management that was overseeing its reorganization plan thus implemented the Sarbanes-Oxley law as was required by the Federal agencies (Moberly, 2006). The new management was fully in charge of the implementation of the various aspects of the enhance law that was meant to curb future accounting fraud cases in the corporate organizations. The law had various sections as mentioned in the policy section that the management of Enron had to implement. Not only was the law implemented in Enron, but also other organizations to prevent similar cases arising in future and people losing their money and source of livelihood. There was no training that was required for the management to implement the policy. However, new employees had to be brought on board to help in the professional implementation of the policies contained in the act.

            Informal processes were used to enhance the skills of the workers so that they could adhere to the requirements of the act. The main aim of the new management was to help in the repayment of debts that were owed to the creditors. Therefore, new directors of the corporation were concerned with liquidating some of the assets and operations to aid in the repayment of the creditors. The Sarbanes-Oxley act was implemented in all the operations that were being undertaken to ensure transparency and proper accounting and auditing methods (Moberly, 2006). Each department was thus taken through an informal session of training with the focus on the employees that were working in the finance department. The employees were given a brief informal training. They learnt further through doing consultations. The main obstacle that was encountered in the implementation of the act is limited resources to facilitate a smooth implementation of the policy. The new management was focused on acquiring funds from the liquidation of some of its assets so that it can pay the creditors. The management, therefore, tried to limit any overhead expenses in the firm.

Identification and Reporting of Issues

            In the previous instance of accounting fraud at Enron Corporation, the whistle-blowing was made difficult because the senior managers were involved in the scandal. Therefore, there was nobody to act on the fraud even if it was reported (Patrick & Scherer, 2003). The managers instead focused on covering the financial misappropriation so that they could benefit for a longer period. The employees who identified the financial fraud and were keen on reporting were intimidated by the top management from doing it. The creation of the poor reporting channels led to the increase of the financial losses that were experienced by the company. The junior managers could not work on the incidences of fraud because they were under the instructions of the corporate managers.

            At Enron Corporation, as well as many other organizations, it is company tradition for the senior managers to be part of the decision-making process. Occasionally, the middle level managers were responsible for reporting everything to the senior managers (Patrick & Scherer, 2003). Unfortunately, the executives at Enron were part of the scandal. Whistleblowers could not report anything because signs of information disclosure to the media and third parties cost them their jobs (Moberly, 2006). After the enactment of SOX, Enron faced difficulties in transferring its debts to its affiliates because the Accounting Standards Board assessed each move taken by the organization after the scandal (CIMA, 2002).

            The new management revamped the system to allow for the flow of information from junior employees to the corporate managers and vice-versa. Besides, the mechanisms created by the Sarbanes-Oxley act ensured that financial scandals could not go for a long period undiscovered (Moberly, 2006). The whistle-blowers were protected from any victimization or intimidation by the management. There was a neutral office that was created purposely for handling organizational issues that were related to corporate scandals. The employees could thus not be victimized by the top management because the process of reporting a suspected scandal was done surreptitiously. The office helped in the enhancement of transparency in the operations of Enron Creditors Recovery Corporation.

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            The method was selected because it allows for junior employees to take responsibility and report any financial scandal to the neutral office without fear of intimidation. Previously, the employees could not report the scandals because they had to do it to their managers. They could have been earmarked for layoffs if they did not comply with the requirements of their managers. The whistle-blowers office makes the reporting process easy regardless of whether an employee is a junior worker or a junior level manager. It enabled both bottom-up and top-down methods of communication. The information collected from the employees were investigated to establish their authenticity. The neutral office would then liaise with management to correct any problem that was established to be genuine and requiring attention. The office thus helped in providing an efficient way for handling the firms issues thus protecting the company from further financial losses due to corporate fraud.

Enforcement

            After the declaration of bankruptcy, Enron Corporation started preparing most of its assets for sale. It participated in the sale of most of its subsidiaries to help in preventing further losses that were being incurred by the firm. The main intention of the new directors was to remain with the main company that dealt in energy services. The expansion of Enron into other areas, more specifically, the dot.com investment had created the unanticipated losses for the firm leading the directors to declare false accounting records to cover up for the financial losses (Patrick & Scherer, 2003). Therefore, selling the subsidiaries that were making losses would help in stabilizing the main company that dealt with energy. Selling the subsidiaries would help in the payment of the debts that were owed to the creditors. The declining number of shareholders led to the disposal of other subsidiaries and only the energy sector remained in control. The company also started transferring the debts to its affiliates.

            SOX played a significant role in empowering whistleblowers after the Enron scandal. Besides, it promoted transparency and disclosure of information, particularly to the shareholders. Arguably, the company had to share genuine information to ensure that the shareholders made decisions from an informed point of view. In fact, all efforts geared at salvaging the firm by transferring debts to subsidiaries were blocked. It wasn’t until 2001 that transparency surfaced at Enron upon the declaration of insolvency, even though this was long overdue (Patrick & Scherer, 2003). If the whistleblowing mechanisms had been established earlier in the company, the massive financial losses that were experienced by the shareholder of the company would not have occurred. The Sarbanes-Oxley act has allowed for the implementation of strong whistleblowing for corporations thus alleviating the potential for a major loss of funds. Apart from a strong whistleblowing policy, the Sarbanes-Oxley act has helped in the creation of transparent accounting and auditing policies that act as a check for limiting the occurrence of any corporate frauds (Moberly, 2006). Today, the company is transparent about accounting procedures, even though the bankruptcy declared in 2001 was long overdue.

Lessons

            Enron’s case has helped to highlight important lessons in the corporate world that have been helpful in all the industry. The first lesson learned is that no matter the complication of a scandal, it is not possible to hide it forever. At some point the financial misappropriation will be unearthed and the culprits will be punished. Another important lesson that can be taken from Enron case is that transparency is pivotal in winning stakeholder goodwill. Enron engaged in hiding its losses so that it could maintain its bottom line and attract more investors into its businesses. The corporate managers created a false impression that the company was doing well by misrepresenting the figures in its account books. Eventually, it came to be known and the directors of the firm were prosecuted. Firms should also make sure that they comply to the federal policies as it is the surest way of succeeding in business. Enron corporate managers circumvented the federal requirements by adopting an accounting method that allowed them to declare the intended profit from investment on their accounting books instead of the losses that the subsidiary companies were experiencing. They had hoped that the businesses will start generating profits to offset the balances. However, the businesses continued making losses and the corporate fraud was eventually discovered. Due to non-adherence to the federal policies, the top most directors of the company were prosecuted and sentenced to jail terms. Because the top tier managers at Enron hid the truth from the public, the shareholders suffered the most. However, the company was plunging into debts while deceiving the public. Enron wanted to come out the problem by transferring its debts to its subsidiaries and this move was equally wrong because the issue only escalated (CIMA, 2002). Truth and transparency are critical because a company does not have to go to an extent to which an entire policy is introduced to govern other entities.

Conclusion

            Without the Securities Exchange Act of 1934, Enron would have never been accused of the corruption scandal. The company’s disclosure policy failed to reveal important facts about the fraudulent accounts even after SOX was enacted. In essence, the process of covering up mistakes was perfected by Enron. The directors of the firm managed to hide the truth about the financial position of the country to the point that the company could not hold itself. As a result, the company had to be declared bankrupt. It engaged in a reorganization process by selling its operations and assets in the subsidiary firms to aid it in offsetting its liabilities. It sold most of its subsidiaries to remain with the energy sector business, which was it main area of operation. The strict policies developed much later assisted in the restoration of an image that the company still struggles to keep.

References

CIMA (August 2002). Business Transparency in a Post–Enron World. Retrieved from http://www.cimaglobal.com/Documents/ImportedDocuments/BustransparencypostEnron_techrpt_0802.pdf

Moberly, R. E. (2006). Sarbanes-Oxley’s Structural Model to Encourage Corporate Whistleblowers. BYU L. Rev., 1107.

Patrick, J. A., & Scherer, R. F. (2003). The Enron scandal and the neglect of management integrity capacity. American Journal of Business, 18(1), 37-50.

Rockness, H., & Rockness, J. (2005). Legislated Ethics: From Enron to Sarbanes-Oxley: The Impact on Corporate America. Journal of Business Ethics, 57(1), 31-54.