Failures in Enron’s Corporate Governance System: Internal and External Factors

Which parts of the corporate governance system, internal and external, do you believe failed Enron the most? In the evaluation of the Enron’s case; by trying to see the very big picture, it is not only about that the internal part of the corporate governance system was failed or but also the external part of the corporate governance system was also failed. As noted on the last paragraph of the mini case, many people from different positions and different companies didn’t act responsibly and according to the generally accepted corporate governance rules.

Internally; because of the head executives used the companies resources and the power that their positions provides them for their own interests without thinking on behalf of the stakeholders and shareholders, collapse of Enron’s corporate governance system affected not only Enron’s company but also all the other institutions which integrated to the Enron’s system. Externally, especially legal counsel and auditor company didn’t act ethically. To avoid losing the best and the most powerful customer, they swept all inappropriate practices under the carpet.

Therefore we can think that, internal and external part of corporate finance act harmoniously in that case. In the event of the absence of any single actor would result in different consequences or to outbreak of the event much earlier than it did. 2. Describe how you think each of the individual stakeholders and components of the corporate governance system should have either prevented the problems at Enron or acted to resolve the problems before they reached crisis proportions? If we evaluate the Enron Case without going on deeply, we will surprise how such a giant corporation can break down in a very short time process.

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However, when we evaluate the case deeply, it is understood that the fall of Enron is the last part of a chain reaction which has been already started long time ago. Therefore, before reaching the crisis point, stakeholders or components of the corporate governance should have taken some measures. The radical changes by Enron’s managements can be evaluated as the first alarm of the bad end. For such big companies Board of Directors should have been controlling for same neutral authorities for the sake of stakeholders. This control mechanism is not just necessary for financial of accountancy issues.

After the fall of Enron, the government brought the General Accepted Accounting Principles, Statements on Auditing Standard and Auditing Procedures. However, if these kind of preventive laws have been implemented before the fall of Enron and A. Anderson, result could be very different. In fact, auditor companies are the part of commercial mechanisms. Therefore it is very normal to expect them to act in favor of companies that they consult, if there are no control mechanisms over them as in the case of Enron. For this reason, US increase the pressure over these kinds of companies.

Management is responsible of corporate governance applications to decrease fraud and irregularity and control the procedures. While the duty of internal auditor is to control the entity’s internal applications, the responsibilities and duties of external auditor are to make efficient audit planning, to audit based on audit planning work done and to make appropriate documentation which forms evidence in the documentation process. Another important point for the Enron case is that why the government allowed the Enron act as a monopoly in the US energy sector. After fall of Enron, the electricity couldn’t be delivered to the some parts of US.

Obviously, supply control system has been disfunctional in this market as a result of inefficient political management. 3. If all publicly-traded firms in the United States are operating within the same basic corporate governance system as Enron, why would some people believe this was an isolated incident, and not an example of many failures to come? We cannot say “The Enron collapse is just an example of misleading financial reporting”. It may be said that it is the wrong combination of leadership, business evolution, market behaviors, and the ‘times’ all combined to create a monster.

As it is known, Corporate Governance is the system used to direct and control a corporation. And it defines the rights and responsibilities of key corporate participants such as shareholders, the board of directors, officers and managers, and other stakeholders. The Enron Case is a breakdown of corporate governance in the most baroque of recent scandals where there were not only conflicts with standards for good corporate governance but also unusually extensive use of sophisticated techniques and transactions to manipulate the firm’s financial reports.

During the same year’s with Enron Case, Parmalot and Worldcom cases also occurred, mainly because of the same reasons, and resulted in a same way. Therefore wrong combinations for the corporative governance may result in a same way. Corporative Governance has been argued too much after the Enron Case. However some people believe that Enron was an isolated incident and not an example of many failures to come according to above writings. The biggest factor behind this thinking can be related to that Enron is much bigger than other failed companies and was acted like a monopoly.

That is to say, all of the case showed us that how some companies can bankrupt because of the wrong combination of leadership, business evolution, and market behaviors. We think the following citation would be helpful so as to cover the Enron Case a little more. On March 5, 2002, Kirk Hanson, executive director of the Markkula Center for Applied Ethics gave a speech on a newspaper: “Enron is a prominent example of a "new economy" company. Kenneth Lay and Jeffrey Skilling claimed that Enron was the most innovative company in the United States and at times tried to intimidate reporters or analysts who questioned their strategy.

In the new economy, new kinds of companies have been created. Enron's collapse will encourage investors, analysts, reporters, and employees to ask "old economy" questions about these new economy companies: How does this company make money? Can it sustain this strategy over the long term? How do those who work in and with this company feel about it? The new economy has lost some of its appeal after the collapse of many dot. com companies and of Enron. ”

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