IV: Enron /Arthur Andersen Case

Arthur Andersen/Enron case emerged in the second half of 2001. The collapse of the energy giant company was the headline then, today it is just a story to remember. Enron was a huge energy company, and Arthur Andersen was its auditing company. Arthur Andersen was one of the top five audit companies of the time. In 2000 capitalization of Enron exceeded $300 billion, 70 times earnings, and six times book value due to unethical practices hidden in balance sheets with complex business models.?

There was no limit for luxury spending among top executives. Spending 1.5 M for Chrismas Party was quite normal. Secretary Day was celebrated with expensive crystal gifts. Lavish parties were a common practice in the company risk management was neglected.

Employers at Enron were mostly focused on initiating deals, rather than the quality of cash flow or profits, in order to get better performance reviews. Some put the blame on the company’s reliance on political lobbying and manipulating the social and political environment.

It was very hard to tell from the financial reports whether Enron was making or losing money. They had classified Enron revenues improperly and misleadingly leveraged in order for the shares of Enron to gain value unjustifiably.

Eventually, the smell of misleading reports sniffed by finance wizards, and inescapable downturn ignited.

Once an energy giant of 300 billion, filed bankruptcy as the largest in US history resulting in 4000 jobs lost.

With Enron's bankruptcy, the 401,000 retirees and workers who had tied their retirement to Enron stocks had to say goodbye to their retirement plans. Enron was a company with annual revenue of $101 billion between 1985 and 2000. On December 18, 2000, Enron had a share price of $84.87. Prices fell in 2001, with company losses reaching $638 million in the third quarter alone. On December 2, 2001, Enron's share price was under one dollar.

Enron had the arrogance they didn't deserve, the greed as an individual and as a working group.However, the inadequacies of Arthur Andersen, who was tasked with scrutinizing and auditing Enron were no less important than Enron's fate. Arthur Andersen becomes the tool for covering up Enron's deficiencies.

Arthur Andersen was charged with obstruction of justice and found guilty for shredding thousands of documents and deleting emails and company files that are connected to the firm and Enron. The number of employees who were involved in the scandal was not large, but the company was put out of business due to the loss of trust.

On June 16, 2002, Arthur Andersen's trial concluded; and was penalized $500,000 and suspended from activity for five years. The court ruled that Arthur Andersen had allowed Enron to gain an unfair advantage by violating generally accepted accounting principles. In August 2009, the 89-year-old company ended its operations. Prior to the Enron incident, its 28,000 employees and 1200 corporate customers now had to find themselves elsewhere. Although the Supreme Court overturned Arthur Andersen's sentence, but its name wore off. 1 And it was impossible to return to the auditing business anymore.

In the business world, trust meant everything.

After the Enron scandal, auditor companies started to make their audits more meticulous with the understanding called the "Arthur Andersen Effect".

However, Arthur Andersen had a very strict corporate culture. New entrants to the company were taken to a very strict introductory course, which would look like a military camp. Even the suits they would wear in the 1950s were strictly inspected. The brand and type of hat they would wear were predefined, and the employees were paid $5 for the shape and particular brand of a hat. 2

How they would behave and act during the day was governed by strict directives. Even where to hang their hats was a matter of directive. In a book written by an employee, the corporate culture was referred to as "a company dominated by the leader and the rules culture."

In the second half of the 1990s, new entrants were becoming part of the wheels.

It became very common for employees to be paid for overtime hours for the companies they supervised or advised while creating problems in the audits and staying with the companies they audited for longer hours.

The managers could not bear to hear an answer of "no".

They did not consider or care that the ability to object can come from knowledge and realism

Executives began to move away from generating strategy, direction, and cohesion within the company.

In 1998, the report of the "Risk Management Executive Committee", which was created by some employees within the company, who understood that the company was at risk of preparing erroneous audit reports and that its name would be endangered, was also not considered. The report was an opportunity, but the company's course could not be diverted to safer waters. Reports and warnings were ignored with overconfidence and narcissism

The commanders did not listen to the warnings of the warriors. Neglected risk management. They were blinded by the successes of the past and the glimmer they had created for inner consumption. As many commanders did in the past, and many more unfortunately will…

Was it,

Narcissism?

Overconfidence?

Indifference?

being out of control?

cutting off communication lines with subordinates?

Maybe all.

For whatever reason, ignoring honest warnings from his subordinates is the same as in the dozens of military and business mistakes we've seen and read about.

1 The Fallout of Arthur Andersen and Enron, HG.org Legal Resources, https://www.hg.org/legal-articles/the-fallout-of-arthur-andersen-and-enron-on-the-legal-landscape-of-american-accounting-31277#:~:text=According%20to% 20court%20documents%2C%20Enron,true%20value%20of%20the%20corporation , Eri?im Tarihi: 2 May?s 2021

2 The New York Times, William Holstain, A Culture Turned Against Itself at Andersen, 23 ?ubat 2003, https://www.nytimes.com/2003/02/23/business/book-value-a-culture-turned-against-itself-at-andersen.html , Eri?im Tarihi: 3 May?s 2021

3. Wikipedia, Enron Scandal

4. The Newyork Times, ENRON'S MANY STRANDS: CORPORATE CULTURE; At Enron, Lavish Excess Often Came Before Success, httpss://www.nytimes.com/2002/02/26/business/enron-s-many-strands-corporate-culture-enron-lavish-excess-often-came-before.html, 02, Feb 2002

4. Investopedia, Fall of a Wall Streed Darling

5. Bloomberg, The Fall of Enron

#Blunders #Leadership #Management