Generating a Positive Workplace Culture Case Study

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Unethical Practices at Enron

Enron was a company that imploded in the early 2000s after a public scandal involving its accounting books and organizational leaders. The unethical practices at Enron were essentially accounting fraud. LAX market regulation laws were exploited by these leaders and corruption ensued as these activities quickly paved the way for real fraudulence, as losses and unprofitable investments were virtually "erased" from the books and stashed in entities where they could remain hidden, like a rotting corpse in a cellar. However, this trick did not last for long. Inquiring minds soon wanted to know how Enron was able to rise so quickly -- and what it would take to make it fall.

Enron's management team, led by Skilling and Fastow, was a dynamic, "likeable" force, which lacked two important elements of good leadership -- transparency and accountability. Enron was changing as an organization, moving from being simple energy providers to being also a finance and trading company. As a result, the workplace climate changed, thanks mainly to the presence of Jeff Skilling and Andy Fastow, two men who embraced the "get rich quick" spirit of the late 1990s. To do so, they used accounting tricks and created shell companies to hide losses and fool investors into thinking that there was far more money coming in than there actually was. Essentially, they embarked on a Ponzi-like scheme that was deliberately misleading. Elkind and McLean, for example, analyzed cash-flows and saw that Enron's "financials didn't make sense" (p. 117). Skilling saw the same thing; his apprentice, Andy Fastow, Enron's CFO, was given the job of covering up these financials as well as the fact that Enron was "$30 billion in debt" (p. 118). Why did they do it? And why did Ken Lay, CEO of Enron, wink at their activities? There were a number of personal, situational and organizational factors that contributed to the unethical behavior of these three main players.

Section II

Starting with Lay, he had every reason to want to succeed. He had effected a giant merger a short time prior but had put himself precariously in the spotlight by alienating individuals within the organization by assuming control of the board. After spending time with Skilling, he became convinced that Skilling represented a new way forward and the best answer to being cash flow positive. Skilling, however, was an accountant. Using mark-to-market accounting methods, Skilling saw that he could essentially pull the wool over the eyes of everyone. So while Lay was motivated by a personal desire to be seen as a successful CEO, Skilling was motivated by a personal desire to be a leader at Enron and a situational desire to be a mark-to-market pioneer in the light of the new, looser accounting regulations under federal law.

Then there was Andy Fastow, whom Skilling appointed CFO. Fastow was motivated by organizational factors, which Skilling and Lay had unwittingly cultivated at Enron: a "be creative" atmosphere in which all were challenged to "think outside the box" -- so that is what Fastow did. But he thought way outside the box, as in outside the parameters of ethics -- essentially following the devious example set down by Skilling and permitted by Lay. Fastow came up with the numerous shell companies behind which he hid debts, which he then used as leverage to gain credits and bamboozle investors. Fastow lured other workers at Enron into his Ponzi-scheme, convincing them that "investing" in his shell projects was a good thing -- which it appeared to be as their investments paid off 100% and more within months. This should have been a red flag to everyone, but few were willing to say anything because the culture at the top of Enron was so supportive of anything that showed that Enron was "in the money." As Anand, Ashforth and Joshi note, the leaders were able to "rationalize" their behavior by doing so "prospectively (before the act) to forestall guilt and resistance" as well as "retrospectively (after the act) to ease misgivings about one's behavior" (11). All three did both -- Lay, Skilling and Fastow. Others within the company, as well as investors and the accounting firm Arthur Andersen, who should have done a better job examining Enron's books before signing off on them, were "unconsciously fooling themselves" as Bazerman and Tenrunsel note happens in corporations where laxity is built into the organizational environment. Or, as Carter suggests, no one in management did "the hard work of discerning whether what he most deeply believes is right" (4). Lay, Skilling and Fastow all avoided examining their consciences and questioning their beliefs: they assumed that making money was good and that everyone would be on board with their system.

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They failed to ask whether that system was ethical and avoided all hints of this like the plague.

One whistleblower was Sherron Watkins, who wrote a letter to Lay suggesting that there was some very crooked business going on under Fastow and Skilling. Lay received the letter but did not really know how to respond. He had allowed himself to be convinced that the extraordinary practices of his lieutenant and CFO were ethical. Watkins assured him they were not. Still instead of taking action or investigating further, Lay buried the letter and suggested Watkins take a vacation. By this time, others were taking notice -- particularly investigative journalists who could not make sense of Enron's books. Lay most likely felt that it was too late to right the ship anyway, for from this time forward he was essentially stuck in his seat gripping the sides of the car as the rollercoaster that was his company plummeted 10,000 feet to earth.

Section III

The unethical activity at Enron could have been prevented had Lay, first of all, taken accountability for the actions of his management team and gotten to the bottom of the rumors whirling around. He also should have asked whether the activities of Skilling and Lay were in line with good accounting principles and practices instead of shrugging off the "explanations" without attempting to really understand them.

As far as regulation was concerned, the deregulated market that Enron took full advantage of in its rise to power was quickly shown to be a bad idea. After the fall of Enron, the Sarbanes-Oxley Act was passed in 2002, which was called the Public Company Accounting Reform and Investor Protection Act and whose name speaks to what it did for the market. Enron was a giant scandal that called attention to the fact that many companies were taking advantage of investors by using misleading practices. This could have been avoided had the market been properly regulated from the beginning but the mixture of business and politics proved a dangerous concoction and the regulators were obliged for a time to bow down before the political-business world.

Part of the reason for this is as Schiffman notes, "living in a bubble of extreme wealth also fosters what has been called a 'compassion deficit'." The relationship between politics and money/business has long been apparent and the problem that this relationship can lead to is exactly as Schiffman states -- the lack of compassion. This lack of compassion is manifested in various ways, for example, by deregulation, which is designed to benefit businesses who stand to profit from less government regulation -- but at whose expense? It is the average citizen who ends up being burned -- and Enron is a perfect example. Average workers lost their pensions, their 401ks, their stock, their savings -- because the "money" problem and the bubble of wealth that insulates the leaders of major political administrations and major business operations fail to consider the little guy -- the people who make the difference in others' lives.

Thus, the organizational culture at the top should have prevented this unethical action but it did not because those at the top were infected by a spirit that was antithetical to standard ethical practices: these were innovative approaches that were a slippery slope into outright deception and fraud, and once the company was on its way down the slide there was no stopping it because the course and direction of the company was already aligned, culturally, with the aims that the fraudsters set as goals. A better spirit of transparency and accountability should have been implemented at the top, but it was not and because those at the top were insulated from the average workers by their money bubble, there was no connection to reality -- until the bubble burst.

In conclusion, Enron is a good example of how not to act: its unethical accounting practices sank the ship. Had Enron's management team been more on the ball in terms of holding themselves accountable and making sure from the outset that they were not in violation of any laws, the company would have avoided a great deal of stress. However, because external laws had already been loosened and federal deregulation made official, the effect was that organizations like….....

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