Examining a Business Failure

Over the past decade, an overwhelming number of corporations have failed and filed for bankruptcy. Enron is one of the biggest corporate failures to date. Enron went from a Wall Street favorite to one of scorn and humiliation. This paper will review the leadership failures, which should have been predicted, that led to the failure of Enron.

Enron’s Leadership and Outside Auditors

Enron Corporation’s leadership consisted, not only a chief executive officer (CEO), but a board of directors as well. Within the board of directors, an audit committee (a requirement of any publicly traded company) was set up to work with the outside auditors, Arthur Anderson, to oversee the financial stability of the company. Enron’s CEO and management claim they were operating with the consent and approval of Enron’s board of directors (Gundinkunst, 2003). Enron’s outside legal counsel, the Security and Exchange Committee, credit agencies and banks all relied on each other but yet each failed to miss the inevitable failure of Enron.

Public corporations are under tremendous pressure to beat Wall Street predictions for quarterly financial results. The new direction Enron took in the 1990s was falling short of financial expectations. The result of poor leadership decisions embarked Enron on a path of using available accounting devices to understate the amount of borrowed capital and to manufacture higher after tax reported profits (Gudikunst, 2003). Enron created Special Purpose Entities (SPEs or partnerships) to accomplish this. SPEs were not required to be consolidated into Enron’s financial statements so it appeared Enron was in better financial positions than it actually was. Enron followed the generally accepted accounting principles (GAAP) set up by. Enron stretched GAAP to the limit and used creative accounting resulting in misleading financial statements.

Enron’s auditor Arthur Anderson came into question for a conflict of interest because the audit firm was not only used as...