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Enron Sandal

The research paper discusses the organizational issue in relation to Enron Scandal. The
paper has identified that ineffective leadership was the cause of the collapse of Enron
Corporation. It has also proposed and discussed three solutions to the organizational problem that
faced Enron Corporation.
The chosen topic is Enron Scandal. The scandal involved one of the biggest bankruptcy
cases in the United States (Li, 2010). It also involved the disbanding of Arthur Anderson auditing
firm. Enron Corporation was a company that dealt in energy. It was based in Houston city of
United States. Arthur Anderson firm was one of the largest auditing firms in the world. The
failure of Enron Corporation is attributed to the incompetence of Arthur Anderson auditing firm
in relation to being straightforward about the health of the company (Li, 2010). Around 2001, the
state found that the financial condition of the company did not reflect the truth regarding the
health. The financial condition was sustained using accounting frauds. In the real sense, the
company had incurred losses that amounted to 586 million dollars (Li, 2010). The status of
Enron Corporation implicated Arthur Anderson firm negatively. The firm lost a large number of
their customers due to credibility and dishonesty issues. The focus of this paper is to establish
how Enron Scandal relates to organizational behavior. It also seeks to provide four areas for
research in the paper that will follow.
Organizational behavior focuses on discussing how people behave in organizations in
relation to the influence that result from individuals, groups and structures. The relationship

between Enron scandal and organizational behaviors lies in how the behaviors of employees
contributed to the collapse of the company. Such aspects include ethical leadership, group
cohesion, motivation structure, companys image and management control.
The organizational behavior is the product of the decisions made by the individuals who
have been authorized by the companys constitution to make and implement decisions. The
decisions influence the ethics of a company. When the leaders of the organization encourage
ethical behavior through actions, the rest of the group becomes ethical automatically (Gebler,
2006). The executives are responsible for establishing factors that guide behavior in the
organization. Such factors include values, attitudes and norms among others (Gebler, 2006).
They are also responsible for linking all the stakeholders of the company. The stakeholders
include employees, shareholders, suppliers and customers. The leaders of Enron Corporation
such as Jeffrey Skilling and Kenneth Lay used to ask employees to follow their lead.
Enron Corporation failed due to lack of leaderships commitment towards maintaining
ethical standards in the company. The lack of ethical leadership resulted in the collapse of the
organizations work philosophy and arrangement. The insistent on conformity by the executives
of Enron Corporation forced employees to adopt to the standard of behavior displayed in the
leadership. There were early signs of the unethical conducts at Enron, which were perpetuated by
the executives of the same. For instance, the board of directors failed to notice when the
executives used the unconsolidated companies for financial reasons. The decision of the board of
directors permitted the omission of 27million dollars from the records (Li, 2010). The error is
one of the factors that led to the collapse of Enron Corporation. The executives non-adherence
to the code of ethics was evident to employees at Enron Corporation. Employees did not report
such cases due to the influence of behavioral cues around them.

Groupthink is an element of organizational behavior study.Groupthink may be thought of

in terms of affiliating and being loyal to a particular group (Wilcox, 2010). Loyalty implies being
in cohesion or good terms with other members. The need for group cohesion leads to irrationality
in decision-making processes of the members (Wilcox, 2010). The irrationality result from desire
to minimize conflicts in the group. The consequences of groupthink include discounting
information regarding irregularities in the company. It also interferes with an individuals ability
to develop independent perceptions regarding issues. Such circumstances compel members to
avoid external factors that may influence their perceptions in a different direction (Wilcox,
2010). Groupthink led to the collapse of Enron Corporation. Employees were reluctant to reveal
the unethical conducts in the company due to the influence of group cohesion. They kept the
information to themselves until the time when the company collapsed. Most of them decided to
come forward only when they realized that the collapse was going to affect their benefits and
cause them unemployment.
The levels of motivation determine the behaviors of employees in an organization. It
affects the decision-making processes. The responsibilities of an effective manager involve
identifying the needs of employees and exploit the same in rewarding them. The strategy aims at
increasing the commitment of employees towards achieving the goals of the organization. The
motivation structure at Enron Corporation subjected it to unethical behavior. The taskforce of the
company comprised of individuals whose behaviors were highly influenced by money and
position (Li, 2010). The executives of the company misused motivation to achieve unreasonable
goals. It created a culture that encouraged employees to do everything possible to meet the goals
of the company. Most employees started disregarding the law and the company policies in the
quest to succeed. The semi-annual review used to render most employees as uncompetitive. The

exercise resulted in the loss of employment of some employees. Everyone started to employ
dubious means just to succeed and avoid dismissal from the company (Li, 2010).
A good image for the company is essential in attracting competitive workforce, investors
and customers. Investors are the alternative sources of capital for expanding the scope of the
company into other lines of businesses. They also offer financial securities to the company in
cases of severe losses in the company. Just like investors, customers also want to associate with
successful companies. The association offers a sense of recognition and class. Such are the
reasons that led Enron Corporation to commit accounting frauds. Through the help of Arthur
Anderson firm, Enron Corporation was able to falsify financial statements (Li, 2010). The aim of
the dubious exercise was to remain relevant in the market. In the years preceding 2001, Enron
Corporation was the seventh largest companies in the world (Li, 2010).
Bad business decisions from the executives of the company led the company to
bankruptcy. Another factor that led to bankruptcy involved misuse of company finances. The
creativity of Arthur Anderson firm covered Enron's 586 million dollar losses from the assessment
of the state and various investors (Li, 2010). The company appeared successful instead. As a
result, many people bought several shares. They also made investments in the company. If Arthur
Anderson had revealed the true financial status Enron, it would have lost credibility. The loss in
credibility would have discouraged people from investing in the company. The decision to cover
the truth was not successful because it led to the collapse of the two companies.
The management control refers to the strategies that aim at establishing practices that
help in achieving strategic goals of the company. The strategies include effective budgeting,
appraisals on performance and standard operating procedures among others. They aim at setting
a risk-free environment operating a business. The strict adherence to the strategies helped Enron

Corporation become successful in the period preceding 2001 (Chandra, 2003). The failure to
adhere to the management control tools at Enron was facilitated by unethical leadership. The
gaps in the management control system gave way to dubious practices in the company (Chandra,
The Enron Corporation case study reveals a contradiction between group cohesion and
the need to maintain an ethical culture in the organization (Li, 2010). The employees chose to
remain loyal to their groups through hiding information despite knowing that the executives of
Enron were engaging in unethical practices. As a result of this, people made investments on the
basis of wrong financial statements of the company. The financial statements were doctored
intentionally through the collaborative effort of Enron executives and Arthur Anderson auditing
firm (Li, 2010. This question is relevant because it focuses predicting the behavior of employees
in critical circumstances such as the case of Enron. It also focuses on understanding the exact
reasons why the employees chose to discount information regarding the unethical behaviors of
the executives of Enron Corporation. Sometimes groupthink can be a barrier towards achieving
the goals of the organization (Wilcox, 2010)
According to Maslows hierarchy of needs, the ability to afford basic needs is more
urgent compared to the need to establish cohesion with group members at work place. The
following research should focus on investigating how employees perceive group cohesion in
terms of survival. The advantages of group cohesion in the perspective of employees determine
the factors that encourage employees to remain loyal to group cohesion even in critical
circumstances. The research should also investigate the level of commitment of employees to
maintaining ethical cultures in various organizations. It is a general assumption that employees
understand the role of ethical culture in enhancing the wellbeing of the respective organization. A

healthy organization implies financial stability. A financially stable organization offers attractive
wages to employees. It also offers security in employment. If employees understand how ethical
cultures affect their employment and financial statuses, why do they choose group cohesion over
protecting the wellbeing of the company? In general, the investigation should focus on
determining the level of influence of groupthink on employees. It should also focus on
determining the level of influence of companys wellbeing.
Enron scandal involved manipulation of financial statements to preserve the companys
image in the market (Bauer, 2009). The aim of the manipulation was to trick individuals into
investing in a company that had incurred huge losses. The trick worked because several people
made investments in the companys stock exchange and other areas of trade (Bauer, 2009). The
company suffered a number of lawsuits in court regarding frauds. The executives of the two
companies managed to trick investors despite the existence of the government policies regarding
business operations. The financial accounting policies in the United States require all companies
to provide accurate financial information to help investors and stakeholders to make informed
decisions (Bauer, 2009). The policy indicates the intention of the government of America to
establish fairness in the business field. Enron scandal is just one of the cases of frauds in the
history of America.
The research question is important because it reveals the extent of security that the
government offers to investors against acts of fraud (Albrecht et al. 2010). The government's
involvement in operations of private business is essential because it facilitates the growth of the
economy. The involvement is also important because the private business sector creates
employment opportunities for the citizens of the country. Lastly, the private sector is one of the
major sources of government revenues (Albrecht et al. 2010). The government collects taxes

from private companies to facilitate the operations of the government. The research question is
also important because it provides information upon which various states can use to establish
approaches that will protect the welfare of employees (Albrecht et al. 2010).
The following research should determine how the government is involved in corporate
governance. It should reveal the strategies that the government uses to ensure accurate reporting
of the financial statuses of companies. The research should also determine the effectiveness of
the government's policies in preventing fraud. The study should focus on revealing the gaps that
exist in the government's strategies. Lastly, the study should address the current approaches that
the government uses to offer effective corporative governance.
A collaborative effort of the Enron Corporations and Arthur Anderson auditing firm to
manipulate financial data caused a scandal at Enron Corporation (Bauer, 2009). Agreeing to
manipulate the financial data of Enron was a risky step for the auditing firm. One can only argue
that the auditing firm must have benefited from the scheme to have agreed to participate. The
main role of external auditors includes verifying that the financial statements provided by
various companies are accurate (Bragg, 2011). The financial statements should reflect the exact
financial statuses of the companies. If the auditing companies do not approve of any processes or
outcomes of the exercises of internal auditors then, they are expected to notify regulating bodies
with evidences of the same (Bragg, 2011). The governments of various countries rely on the
services of the auditing firms in the assessment of the private companies. The auditing firms are
parties to the agreement that contains the code of ethics. The code of ethics is inscribed in the
business policies of various states (Bragg, 2011).
The research question is important because it provides a deeper insight into the integrity
issue of companies. Investors can use the information from the investigation to make informed

decisions on whether to use the existing financial information. Investors may decide to conduct
an independent analysis of the financial records of prospective organizations. The result of the
investigation can also provide information that various states can use to develop effective
corporate governance strategies.
The investigation should determine how governments policies prevent bribery of
auditing firms. External auditing firms are sourced and paid by the company whose financial
records are to be investigated (Bragg, 2011). The complexity of the situation lies in the process
of contracting the services of external auditors. The company under assessment can easily pay
the related auditing firm extra amount of money to manipulate their financial statements. The
company may also provide false statements to evade paying the required amount of tax to the
government. The investigation should also reveal the gaps that exist in the governments policies
that regulate bribery of external auditing firms. The gaps indicate the areas that require
The leadership at Enron Corporation permitted the practice of unethical behaviors in the
organization. Firstly, the executives and the managers of the company portrayed examples of
unethical behavior. Jeffrey Skilling used to encourage employees to emulate his examples. The
disregard of the companys policies by the executives encouraged employees to adopt similar
behavior. For instance, the employees of the company decided to enhance group cohesion rather
than reporting the mistakes done by the management of the company (Chandra, 2003). Secondly,
the motivation structure at Enron Corporation encouraged employees to use dubious methods to
achieve results that interested the company (Chandra, 2003). Enron Corporations failed due to
the collapse of ethical culture. From the analysis of the scandal, it is apparent that leadership is a
central factor upon which other factors revolve.

The research question is important because it helps board of directors and stakeholders to
develop policies that will establish leadership around purpose (Gebler, 2006). It is important to
monitor and control the actions of the executives of the company because they can impact on the
outcomes of operations of the company (Gebler, 2006). The research should review the existing
policies that focus on guiding leadership of companies towards establishing an ethical culture in
the organization. It should also establish how leadership influences the behavior patterns in the
organization. Lastly, it should determine the main importance of establishing an ethical culture in
the organization.
Enron scandal is an important case for studying the importance of effective leadership in
the business. Leadership influences all aspects of business operations in companies. Such aspects
include motivation, purpose and ethical culture in the organization. The entire system of Enron
Corporation collapsed because employees disregarded the ethical culture of the organization. The
mistake started from the management. It also helps in understanding the behavior of employees
in circumstances such as the one that involved Enron. Employees are more likely to stick to
group cohesion rather than report the unethical behaviors in the organization. The behavior of
employees in such a situation provides a basis for developing a research question.
Enron scandal case study is it contributes to the list of white collar crimes. It illustrates
how executives commit white collar crimes in various organizations. The justice department can
use the findings of the case to solve similar cases in the future. The insight provides the
information that is necessary for developing and establishing effective work policies that would
discourage the occurrence of the same. Various organizations can seal the existing loopholes
after reviewing their work policies and culture. The case reveals the ineffectiveness of the
governments strategy in detecting acts of fraud in various organizations. The government may

use the information to reinforce their corporate governance strategies. The case helps various
investors to act carefully when selecting companies for investment purposes.
Enron scandal involved manipulation of financial statements to trick investors into
investing in the company that had debts already. The relationship between the case and
organizational behavior lies in the behavior of employees that contributed to the collapse of the
company. The paper discussed the aspects of the company that is related to the elements of
organizational behavior to establish a relationship between the case and organizational behavior.
The aspects include ethical leadership, groupthink, motivation structure, company's image and
management control.
The paper also includes four research questions that are in relation to the Enron scandal.
The first question seeks to determine how employees prioritize between group cohesion and the
need to enhance the company's wellbeing. The second question focuses on determining the
effectiveness of government's involvement in preventing fraud in companies. The third question
seeks to determine the independence in relation to roles of external auditors. The last question
focuses on discussing how company policies direct leadership towards establishing an ethical
culture at work.
I hope to develop a deeper knowledge in organizational behavior by researching the
topic. Particularly, I hope to understand why employees behave in a contradictory manner in
situations such as the one that involved Enron and Arthur Anderson. The topic will help me to
develop effective leadership skills. Enron scandal is a case of poor leadership in the company.

Albrecht, W. S., Stice, E. K., &Stice, J. D. (2011). Financial accounting. Mason, OH:
South-Western/Cengage Learning.

Bauer, A. (2009). The Enron scandal and the Sarbanes-Oxley-Act. Munchen: GRIN
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Gebler, D. (2006). CREATING AN ETHICAL CULTURE. Strategic Finance, 87(11),
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Business and Management, 5(10), 37-41.
Wilcox, C. (2010). Groupthink: An impediment to success. Bloomington, IN: Xlibris