TEN (10) Corporate Weakness/Malpractices affecting Organization

management, Business ethics, Corporate governance and Social

responsibility.
1. Inappropriate Conflicts of interests
According to Keshab Panda who studied Enron failure, the time of Enrons collapse the
Sarbanes-Oxley Act was enacted yet, the Internal Revenue Service require corporation to
adhere to the Conflict of Interest to avoid wrong doing that can get it off the path. Aside from that
in order to Enron to be healthy and productive they need to focus on their four core areas. First,
financial capital in terms of investments and profits. Second, technological capital in terms of
cutting-edge software and hardware. Third, in their human capital in terms of knowledge,
expertise, and creativity and lastly, the social-spiritual capital in terms of ethics, relationship,
meaning and purpose.
Unethical practices marked by conflict of interests may have been the front runner cause to
its collapse because it was like a cancer cells that ruined its infrastructure, its financial
transactions, and its accounting practices or process.

2. Unethical practices
As stated by these two business analyst, Thomas Wheelen and David Hunger. When they
heard that Enron kept accounting documents hidden and well manipulated with the complicity of
its auditing company, they wrote the following unethical practices of Enron.
They said that Enron, in particular, has become infamous for the questionable actions of its
top executives in the form of: First, the off-balance sheet partnerships used to hide the
companys become progressively worse in their partners. Second, revenue from long term
contracts being spread over multiple years. Third is the financial reports being forge or fake to
raise executive bonuses, and the last would be manipulating of the electricity market leading to
California energy crisis.
If someone would to pinpoint things that directly led to the downfall of Enron, it will be
unethical practices.

3. Bad Corporate Culture

In business, corporate culture generally reflects the values of the founders and the mission
of the firm, it gives a company a sense of identity and shapes the behavior of people inside the
corporation. And because of that powerful influence on the behavior of people at all levels
affected the corporations ability to shift their strategic direction.
The fraud and off-balance accounting were the artwork of the high-level managers, because
mid-level managers who were in charge of bookkeeping could not distort data without approval
of supervisors. The collapse revealed the real culture of Enron that was until than presented as
culture of innovation, success and profits.

4. Fiduciary failure
The Enron Board of directors failed to safeguard Enron shareholders and contributed to
collapse of the seventh largest public company in the United States, by allowing Enron in high

risk accounting, inappropriate conflict of interest transaction, extensive undisclosed off-the

books activities and excessive executive compensation. The Board of Directors witnessed
numerous indications of questionable practices by Enron management over several years, but
chose to ignore them to the state of being damaged of Enron shareholders, employees and
business associates.

5. Lack of independence
According to Palgrave Macmillan case study in page 193 about Enrons Ethics,
Independence of Board members means that there should be no financial connection whatever
between the members and the company and the company other than their Board compensation.
Types of relationship that would compromise independence would be directors receiving
consultancies or fees from the company. Directors being employed by or sitting on the Board of
charities and foundations that receive donations from the company or directors being employed
by a third party that derives financial benefit from doing business with the company. If directors
of Enron engaged in these types of practices, they might not wish to challenge management in
order not to lose the side benefits.
The independence of the Enron Board of Directors was compromised by the financial ties
between the company and certain Board members. And because of that, Board of Directors
failed to ensure the independence of the companys auditor, allowing Arthur Andersen the
auditor and consultant of Enron to provide internal audit and consulting services while serving
as Enrons outside auditors.

6. Internal Control Weaknesses at Enron

Auditors assess the internal controls of a client to determine the extent to which they can
rely on a client's accounting system. Enron had too many internal control weaknesses to be
given here. Two serious weaknesses were that the chief financial officer was exempted from a
conflicts of interest policy, and according to David Hunger, internal controls over Special
purpose entities like were a bogus or false, existing in form but not in substance. Many financial
officials lacked the background for their jobs, and assets, in particular to foreign assets, were
not physically secured. The tracking of daily cash debt maturities were not scheduled, off
balance sheet debt was ignored although the obligation remained, and company-wide risk was
disregarded. Internal controls were inadequate. Contingent liabilities were not disclosed and
Arthur Andersen the auditor and a consultant of Enron ignored all of these weaknesses.

7. Excessive Compensation.
The Enron Board of Directors approved excessive compensation for company executives, failed
to monitor the cumulative cash drain caused by Enrons 2000 annual bonus and performance
unit plans, and failed to monitor or stop to abuse by Board Chairman and Chief Executive
Officer Kenneth Lay of a company-financed, multi-million dollar, personal credit line.
8. Lack in Ethical and Political analyses
Commentators attributed the mismanagement behind Enrons fall to a variety of ethical and
political-economic causes. Ethical explanations centered on executive greed and hubris, a lack
of corporate social responsibility, situation ethics, and get-it-done business pragmatism.
Political-economic explanations cited post-1970s deregulation, and inadequate staff and funding

for regulatory oversight. A more libertarian analysis maintained that Enrons collapse resulted
from the companys reliance on political lobbying, rent-seeking, and the gaming of regulations.

9. Mighty and Powerful greed of Enron

Being mighty and greed are the biggest weakness in any company. For Enron, it was their
destroyer. In the documentation of Enron: The smartest guy in the room $85 million of the
earnings were not related to the operating performance of Enrons Energy business and were
attributable to a scheme to generate earnings tied to an increase in Enrons stock price. As you
notice they are really greed to be the toughest corporation but they disclosed wrong information
about their true earnings. They manipulated and concealed the actual financial health of the
company and because of that Enrons stock drop straight down at high speed and Enron came
to be worth essentially nothing.

10. Evaluation of Accounting - Materiality

Auditors focus on material misrepresentations. A misrepresentation is material if knowledge
of the misrepresentation would change the decisions of the user of financial statements. When
Enron began to restate its financial statements and investors began to hold firmly its
misrepresentations, the response of the market is indisputable as to materiality. Many errors
were known, but were dismissed by Arthur Andersen (Auditor and consultant of Enron) as
immaterial. Other errors may not have been known, but should have been known if reasonable
inquiry would have revealed them.