Unethical Business Processes: Enron Bankruptcy

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Kenneth Lay founded Enron in 1985 following a merger with two strategic companies dealing with gas distribution. Enron saw positive growth in its business process until Jeffrey Skilling secured a job as the chief executive officer of the company. Reports from Enron’s case revealed that Skilling developed a staff of members who allowed his management to develop accounting loopholes, and there was poor accounting of the finances of the company throughout his tenure. Skilling was particularly good at hiding the large debts, and his charismatic and manipulative leadership skills enabled him to lure the members of the executive team to lie about the company’s performance. He particularly misled the company into making poor investments that were rocked with failed projects and deals that further led to losses. Despite making these financial mistakes, Skilling compelled the accounting department to continue lying to the public about the financial performance of the company by producing fake reports. The first giveaway of Skilling’s cunning plan was the plummeting of the company’s stock price. It had reached over $90, but it plummeted to less than a dollar in 2001 (Benston & Hartgraves, 2002). Shareholders of the company filed many lawsuits challenging the issue because it became apparent to them that the company had been conducting unethical business processes. This paper looks into Enron’s bankruptcy, with a close focus on how and why the company went into bankruptcy.

How and why Enron went bankrupt

Enron started experiencing challenges when Fortune Magazine, published the article ‘Is Enron Overpriced?’ in February 2001. In the article, Bethany McLeans highlighted some of her findings of hidden debts of the company. McLeans also questioned the validity of Enron’s stock value, which was over fifty times the earnings of the company. By April 2001, Wall Street also became actively engaged in questioning Skilling about the accounting methods used by the company. Financial analysts were particularly concerned with Enron’s failure to release financial balance sheets and other statements highlighting the company’s financial stand. In August 2001, Skilling announced that he would be resigning from his position. The CEO sold a big portion of his shares of the company at a price that was significantly lower than the value per share at the time. Financial analysts were concerned about this, but Skilling assured the public that the stock value would remain the same. Skilling would later confirm that he was leaving because the company’s stock value was falling drastically (Fusaro & Miller, 2002).

When Enron went bankrupt

Enron filed for bankruptcy on 30th November 2001 after Dynegy denounced its offer to purchase the company (Benston & Hartgraves, 2002). The company had run out of cash for its basic organizational operations, and its accumulated debt could not possibly be repaid. The company had pledged most of its assets to the secured creditors, but the unsecured creditors would face heavy losses after Enron’s bankruptcy. The employees of the company relied on the savings placed on the company’s stock; hence, they also made huge losses as they departed the company.

Major reasons that Enron went bankrupt

The major reason that Enron went bankrupt was the unethical approach to financial allocations and reporting. The company went from a highly profitable organization to bankruptcy after Skilling took the leadership role in the company (Benston & Hartgraves, 2002). The leader was the primary instigator of the bankruptcy because he manipulated the members of the executive to make the wrong financial decisions during his six-month tenure. The accounting department played a major role in bringing Enron down because the leader of the department was acquainted with the debts, failed projects, and the misappropriation of funds by the company. The company had focused on maintaining a high stock value, and it was forced to alter its financial reports to ensure the factors that determine the value of stock kept appreciating. The company lied to the investors continually until it was exposed by the media and financial analysts (Mizrach, 2006).

Data collection

Enron’s bankruptcy was a function of the failure of its stock value. The company once valued its stock at over $90 per share, and it maintained steady growth by satisfying investors. While the company maintained a high stock value in the public domain, it secretly engaged in failing projects in different parts of the world. For instance, the Dabhol Power Plant in India was a big undocumented loss for Enron. By November 2001, the stock value was at $0.63 per share. The company had about $23 billion worth of liabilities at the time, and there were no hopes of having more creditors to clear the debts. Employees had saved their assets with the stock at the value of $83, and they left with the value of their savings per share valued at less than $1 (Benston & Hartgraves, 2002). The graph below shows the falling trend of Enron’s stock price in 2001 (Schepp, 2001).

Enron's share price collapse

The role of the managers in the bankruptcy

Managers at the company yielded to the manipulative leadership of the CEO. They failed to take responsibility of the financial decisions made by the company. The managers just watched as the company continued to engage in unethical financial operations (Johnson, 2003).


Enron’s financial strategy during the tenure of Skilling was the main issue that led to bankruptcy. The CEO focused on increasing the value of the company’s stock to ensure that more investors were willing to inject their capital into the company. The price per share for the company rose tremendously because the investors were fed with the wrong accounting reports, and the CEO hoped that the high value of the share would help cushion the debts. While the financial performance of the stock value increased, the company continued to make losses in its global business process. Misappropriation of funds by Skilling and his team of executive members was the core of the crisis that faced Enron. Enron’s bankruptcy was a result of unethical leadership and negligence of responsibilities for the accounting department, as well as the management of the company. The CEO of the company used most of the financial resources of the company for his private interests, and he forced the members of the executive team to support his decisions. The CEO hoped that the public would never find out about the discrepancies in the company’s financial records, but his cunning strategy did not succeed.

Lesson learnt

The lesson that must be learned from Enron’s case is that observing business ethics should be held paramount by leaders and managers in companies. The case also presents a good lesson that the management function in an organization must look into the decisions made by the CEO because he or she might mislead the company. The case should compel companies to always uphold honesty in their financial reports. If Enron had reported the correct accounting reports, the relevant actions would have been applied immediately to ensure the company did not fall into bankruptcy.


Benston, G. J., & Hartgraves, A. L. (2002). Enron: what happened and what we can learn from it. Journal of Accounting and Public Policy, 21(2), 105-127.

Fusaro, P. C., & Miller, R. M. (2002). What went wrong at Enron: Everyone’s guide to the largest bankruptcy in US history. New Jersey: John Wiley & Sons.

Johnson, C. (2003). Enron’s Ethical Collapse. Journal of Leadership Education, 2(1), 45-56.

Mizrach, B. (2006). The Enron Bankruptcy: When did the options market in Enron lose it’s smirk?. Review of Quantitative Finance and Accounting, 27(4), 365-382.

Schepp, D. (2001). Markets unfazed by Enron’s failure. Web.

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