The Enron Corporation Scandal Analysis

Subject: Case Studies
Pages: 1
Words: 330
Reading time:
2 min
Study level: College

Enron Corporation, an American energy business based in Houston, Texas, was involved in an accounting controversy. The corporation declared bankruptcy, and its accounting firm, Arthur Andersen – then one of the world’s top five audit and accounting firms – was virtually disbanded. Enron was recognized as the biggest audit failure at the time, in addition to being the largest bankruptcy reorganization in US history. The main reason for the corporation’s failure was a lack of control in the corporate governance sector.

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The disproportionate concentration of power in the hands of top management is today’s primary flaw in corporate governance. Shareholders and executives “created off-balance-sheet vehicles, complex financing structures, and deals so bewildering that few people could understand them.” (McLean & Elkind, 2013, p. 132). Controlling management fraud and fostering accurate financial reporting require rebalancing or equalizing this power. An innovative approach to corporate governance is required to recover the confidence of the financial markets. Formally identifying employees as a group and major players in the corporate process, rather than as a factor of production and a labor market commodity, is an important step toward a more balanced governance structure.

The operational control was ineffective in the organization, which led to the failure of the collaboration between top management and employees. Operational control is the authority to carry out command functions over subordinate forces, such as organizing and using commands and troops, assigning tasks, establishing objectives, and providing authoritative direction. The systemic flaws at Enron evolved as a result of a power imbalance in corporate organizations that favored top management. The shift in power from shareholders to management began with the rise of huge organizations as a result of the Industrial Revolution when small capitalists pooled their resources to fund larger ventures run by professional managers dubbed “managers for hire” later on (Tipgos & Keefe, 2004, p. 46). Employees have generally been considered under management’s supervision, while the board of directors and top management negotiate the conduct of the corporation’s operations.

References

McLean, B., & Elkind, P. (2013). The smartest guys in the room: The amazing rise and scandalous fall of Enron. Penguin.

Tipgos, M. A., & Keefe, T. J. (2004). A comprehensive structure of corporate governance in post-Enron corporate America. The CPA Journal, 74(12), 46.