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Enron and the role of tone at the top in fraud

Paper Type: Free Essay Subject: Criminology
Wordcount: 3956 words Published: 19th Oct 2016

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Research and review the Enron case against the concept of tone at the top. Produce a referenced report and bibliography which demonstrates specifically how the conduct of the senior leadership in Enron shaped the dominant culture of the company and how this contributed towards an acceptance of the use of Fraud for personal gain within Enron.

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The central purpose of this report is to examine and review the Enron case; the most profiled, serious white collar crime reported in the world today. The report shall specifically look at the how the companies ‘tone at the top’ contributed to their failure and also how the demeanour of the senior leadership within the company shaped the culture of the company and how this contributed towards an acceptance of the use of Fraud for personal gain within Enron.

In the business atmosphere it is important for there to be a trust between management and employees, and that either party does not abuse their positions for personal gain, as doing so can often have detrimental effects on a business as proved by Enron.

The eventual demise of the Enron Corporation was a result of a lack of ethical corporate behaviour, corporate greed and the utilisation of special purpose entities, which were used to hide financial debt. A large contributing factor to the fall of Enron was down weak tone at the top of the company. However other factors such as mismanagement of risk and over extension of capital resources, philosophical differences in management, involvement in mark to market accounting, earnings to assets failures and the tone set by the management of the company to overestimate assets to meet targets for greater bonuses also contributed to the failure of the company.

To remove competition – Ir. in Jacobs? He was bought out using the employees’ pension fund, a move which is morally wrong.

People to mention

Jeffrey skilling – CEO of enron

Ken Lay – background? Little management experience and qualifications

1999 – annual report – Ken Lay – we support employees

Cressey – fraud 3 elements – pressure, opportunity and rationalisation.

Arthur Anderson their accounting company – desperate to gain contracts in the competitive market. They became involved in the Enron scandal and even shredded important documents which were requested by investigators later on.

‘Tone at the Top’[1] refers to the moral construct which is formed in a workplace. ‘The tone is set by top management, the corporate environment within which reporting occurs.’[2] ‘Tone at the top is described as…. ACFE’

Examples of good tone at the top –

  • following the code of ethics
  • Zero tolerance to crime and fraud within a company
  • Good tone at the top of an organisation reduces the likelihood of rationalisation for ‘unethical’ behaviour, creating an honest and trustworthy work environment.
  • Good tone at the top doesn’t always lead to a successful business, however it gives a business a better chance.
  • Don’t cover anything up.


IBM suffered a bad spell, were honest and open about it and discussed how they could improve the situation.

Enrons code of ethics, which integrity, respect, communication and excellence.

Enrons bad tone at the top

  • Enrons foundations wernt based on the marketing of a successful product, but a free market which they thought they could abuse.

poor business ethics including the ‘rank or yank’ scheme which enron employed, employees were ranked on their performance and would dismiss the bottom 15% if they didn’t improve within the consecture 6 months. This strategy meant that employees were scared of loosing their jobs, therefore didn’t question business practises and were even often forced to make unethical decisions for themselves. Employees rationalised their actions, as they had to commit fraud in order to meet targets and keep their job safe.

  • Enron recruited young employees who had just graduated, who were ‘impressionable’ and who needed the job, therefor would not question or report the operating style of the company.
  • Enon needed contant funding to provide high returns with little risk.

It has been discovered that an organisation can be dictated on the upper management’s attitude towards integrity and ethical values; this suggests that if the manager’s outlook can dictate employee’s views, it therefore can increase or decrease the chance of fraud occurring within the business.

Corporate greed often destroys a company,[3] as it did with the Enron Corporation. In the mid 1990’s Enron was the dominant energy company in the United States, and one of the leading companies in the world and later on in 2001, they went onto filing for bankruptcy.

Enron went bankrupt the way that most companies fail, investing in projects that are too risky, and therefore they were unable to keep up with the debt obligations of the firm. (niskanen, 2005, p. 2).

High level managers in mark and skillings teams were taking advantage of huge compensation packages for having completed deals through questionable practises.

, however the firm’s success was down to an elaborate scam ran by executives of the company. The rapid suc­cess and the pos­i­tive scrutiny the com­pany was receiv­ing from the press and finan­cial ana­lysts, supplemented fuel to the company’s com­pet­i­tive cul­ture.

Jefferey Skilling a company executive ran a staff of executives who used loopholes, mislead financial information and used deception to hide billions of pounds of debts they were in from previous failed projects and deals. The culture at Enron was that any ‘ethical wrongdoing is to be hidden at any cost; deny, play the dupe, claim ignorance, lie, quit’.[4]

Enron used a technique called ‘mark to market’ this is an accounting technique which is used by recording the price/value of a security on a daily basis to calculate the profits and losses, this allowed Enron to project earnings from long term energy contracts as their current income, this was how they distorted their balance sheets to inflate their revenue by manipulating projections for future revenue. This technique made it difficult to see how the company was making money, and therefore stock prices remained high for the company however Enron wasn’t paying high taxes, therefore this method allowed the company to make money without bringing in taxable money, by doing this the company had wiped out ‘$70 billion of shareholder value but also defaulted on tens of billions of dollar of debts’[5] This approach increased the pressure at the top of the company, the company used bonuses to push employees to keep the business going.

The organisational culture for the company was seen as a ‘dysfunctional corporate culture’ whose main focus was on profit gains through the means of bonuses.

practice was carried out at all levels of the organisation, disregarding the quality of cash flow or profits, in order to achieve a better rating for their performance tables. This meant that stakeholders and lenders saw inaccurate figures.

fraudulent reporting and accounting was to ensure that the business kept up with the stock price value. This practice enabled employees within the organisation and executives to receive large bonuses.[6]

These are common features that indicate that tone at the top failed in the Enron’s business environment and it also produces evidence that moral ethics can affect a whole organisation. If cor­po­rate lead­ers encour­age rule defiance and fos­ter an intim­i­dat­ing, aggres­sive envi­ron­ment, it was indisputable that the eth­i­cal bound­aries at Enron eroded away to noth­ing.

In 2001, Richard Grubman an Analyst from Wall Street discovered that Enron weren’t producing their balance sheets or financial statements. The CEO of Enron - Jeffrey Skilling responded to this by saying, “Well, thank you very much. We appreciate it… a–hole!”[7] This comment made gives a picture of the culture ran within the organisation and also gives an idea of the tone at the top of the company, that executives who ran the company didn’t have high standards of civility or integrity. When their malpractice was discovered Lay and Skilling argued that they were participating in ‘normal business practice’,[8] however their defensiveness towards the situation intensified the awareness of such ‘Gaming the system’.[9]

The failure of the Enron Corporation identified certain judgements which need to be considered with regards to business ethics, the issue isn’t the fact that fraud was classed as acceptable in that business environment. The occurrence of disreputable practices and the systematic temperament of the misinterpreting and reporting of financial reports in the case lead the UK and US to implement regulations to stop this behaviour happening in other businesses.

Accord­ing to Schein (1985) there are five pri­mary mech­a­nisms that a leader can use to influ­ence an organisation’s cul­ture - atten­tion, reac­tion to crises, role modelling, allo­ca­tion of rewards, and cri­te­ria for selec­tion and dis­missal. Schein’s assump­tion is that these mechanisms rein, force and encour­age behavioural and cul­tural norms within a business environment. However the exec­u­tives at Enron used the five mech­a­nisms to rein­force a working cul­ture that was morally indecent, exposing the company and employees to degen­er­a­tion, lying, cheat­ing, and stealing.

Rafraf commented that the executives in the company were solely focused on profit and gains in the short term and not achieving long sustainable business goals or profits,[10] he suggested this was their main focus, regardless of business ethics.[11] A previous employee commented that executive Jeffery Skilling was ‘driven by the almighty dollar.’[12] It was evident in the Enron case that employees were ‘overconfident’ therefore it has been suggested that this behaviour can often lead to fraudulent behaviour to become or stay successful.[13]

The company went under investigation after scrutiny from its own employees who whistle blew as they didn’t like the way that the business was being ran as the activities that were undertaken to stay successful were unethical, morally wrong and illegal. A former employee commented, “We are such a crooked company.’[14] Executives such as Kenneth Lay soon started to sell off their own shares whilst also pocketing some money.[15] Whilst in the meantime Lay was telling workers in company to buy shares as they were incredibly low, this supports that it was executives within the company who determined this crooked culture within the organisation. The company executives were charged for fraud and money laundering.

Tone at the top failed at Enron, as business procedures show that morale ethics can affect the whole organisation. Business ethics were not evident in the company, regardless of position in hierarchy. Tone of the Top allows a business to have control over itself, the stronger the tone at the top, the more likely the business is to be successful, however it has been suggested that organisations who rely too much on tone at the top give businesses too much independence. The reason for Enron’s failure was due to the lack of tone at top, ethical values and morals also didn’t play a role in the decisions which were made at the expense of the business, employees and customers. This particular case of failure in business highlighted the fact that when tone at the top is not implemented into a business, employees often follow the decisions made even if they are ethically immoral, this can be down to personal circumstances and a need for the job. There are regulations in place that deter organisations and employees from committing this white collar crime and also the criminal law prosecution. The Enron case highlights how an organisation can quickly sink if they lack tone at the top, however the case failed to provide a message against ‘gaming the system’[16]. Tone at the top is imperative in a business that wishes to be successful, as otherwise the company can be led astray by an individual who has no business morale and lead the company into committing fraud to make the company successful.


The poor tone at the top at Enron allowed the management to profit through their illegal business practises. This was also the case for many employees who were taught in an environment that allowed for personal gain, from illegal activities. Enron had a code of ethics, which was evidently not followed.

code of ethics, - Honesty and integrity. Followed by all ranks of a company to set a good ‘tone at the top’, ethical behaviour.

National commission on fraudulent financial reporting suggests; identify and understand the factors that lead to fraudulent financial reporting, design and implement internal controls within the company, which detects/prevents this behaviour.

Integrity is an important characteristic to behold, as compliance goes hand in hand. This attitude encourages whistle blowers and deters staff from using rationalisation and justification to commit fraudulent behaviour. The main element in the fraud triangle, therefore reducing the likeliness of fraud within a company.

A culture of narcissm fostered at Enron, rewarding individuals for unethical practises, such as CFO chief financial advisor Andrew Fastow who created an illegal scheme Chewco to hide enrons mounting debt.

Mark and skillings dispute to which business model to follow, accounting scandals emerged to the public in 2001, finally brought Enron to the ground.

Enron culture developed – trait theory

Stogdill found leadership changed depending on situations encounted,

5 major leadership traits intelligence, self confidence, determination, integrity and sociability (northhouse, p. 19)

Traits worked together to provide effective leadership, balance between individual leader n situational factors needed to influence group member behaviour and develop healthy organisational culture. One or more of the traits are lacking in the leader, problems can arise in the social exchange between leader and group members. Impacting in a negative manner the development of organisational culture.

Enron: absence of key trair – integrity.

Enrons leadership did not live out the ethics they claimed to have valued.

Mixed deontology and universal ethical egoism help to understand how the culture of narcissm at enron developed from an ethical framework.

Trait and transformational theories help us to make sense of what went wrong at enron from a leadership perspective.



Kershaw. D, 'Evading Enron: Taking Principles Too Seriously in Accounting Regulation' [2005] The Modern Law Review 594-625, 596

King. A, 'Tone at the Top: Why Investors Should Care' [2013] Strategic Finance 25-31, 28

McBarnet. D, 'After Enron Will 'Whiter Than White Collar Crime' Still Wash?' [2006] British Criminology Journal 1091, 1098

Rafraf. T, 'From Thriving to Surviving: The Bad Apple Conduct at Enron' [2002] Journal of Business Ethics 1-19.

Schrand. C, 'The Slippery Slope to Fraud' [2010] 1-5


Annual Fraud Indicator 2012’, Home Office, March 2012 p8 http://www.homeoffice.gov.uk/publications/agencies-public-bodies/nfa/annual-fraud-indicator/annual-fraud-indicator-2012?view=Binary/> accessed 28st March 2014

Enron Online Blog, 'Jeff Skilling is Not Crazy for Calling Grubman an Asshole' (Enron Online Blog ) <http://enron-online.com/2011/07/21/jeff-skilling-is-not-crazy-for-calling-grubman-an-asshole/> accessed 28st March 2014

Inman. P, 'UK is weak on tackling white collar crime and short sellers, says HBOS chairman' (The guardian 2008) <http://www.theguardian.com/business/2008/jun/27/hbosbusiness.regulators> accessed 30th March 2014

Partnoy. F, 'The Unregulated Status of Derivative & Enron: Testimony at Hearings before the US Senate Committee on Government Affairs' (Financial Sense 2002) <www.financialsense.com/editorials/2002.partnoy.htm> accessed 24th March 2014

, 'The Enron Scandal' (Socialism Today 2002) <http://www.socialismtoday.org/63/enron.html> accessed 28th March 2014

Willet. B & Always. T, 'For Investors, X Marks the Spot, Whether They Choose To See It Or Not' (Fallstreet 2002) <www.fallstreet.com/enron> accessed 30th March 2014

Unknown, 'Tone at the Top, ethical dilemmas' (Corporate Compliance Insights 2012) <http://www.corporatecomplianceinsights.com/tone-at-the-top-ethical-dilemmas/> accessed 27th April 2014

B Jensen, 'Accounting Fraud' (Bob Jensen's Enron Quiz 2012) <http://www.trinity.edu/rjensen/FraudEnron.htm> accessed 27th April 2014

Unkown, 'How Cooking the Books Works Read more at: http://www.caclubindia.com/forum/how-cooking-the-books-works-75658.asp#.U2OHc4FdXHQ' (Caclubindia 2010)

<http://www.caclubindia.com/forum/how-cooking-the-books-works-75658.asp> accessed 27th April 2014

Unknown, 'Enron Ethics — The Culture of Enron' (Business School 2010) < http://business.mattprindle.com/leadership-skills/enron-ethics-the-culture-of-enron/> accessed 26th April 2014

Wang , 'The Effect of Tone at the Top on Internal Auditors' (Tone at the Top Assessment 2012) <http://cbe.anu.edu.au/media/2429892/wangancaar.pdf> accessed 27th April 2014


[1] Treadway Commission, 'Setting the Tone' (COSO 2013) <http://www.coso.org/NCFFR-Summary.htm> accessed 01st April 2014



[4] B Willet & T Always, 'For Investors, X Marks the Spot, Whether They Choose To See It Or Not' (Fallstreet 2002) <www.fallstreet.com/enron> accessed 30th March 2014

[5] F Partnoy, 'The Unregulated Status of Derivative & Enron: Testimony at Hearings before the US Senate Committee on Government Affairs' (Financial Sense 2002) <www.financialsense.com/editorials/2002.partnoy.htm> accessed 24th March 2014

[6] P Clauss, T Roncalli & G Wesiang, 'Risk Management Lessons From Madoff Fraud' [2009] 505-543, 507

[7] Enron Online Blog, 'Jeff Skilling is Not Crazy for Calling Grubman an Asshole' (Enron Online Blog ) <http://enron-online.com/2011/07/21/jeff-skilling-is-not-crazy-for-calling-grubman-an-asshole/> accessed 21st March 2014

[8] D McBarnet, 'After Enron Will 'Whiter Than White Collar Crime' Still Wash?' [2006] British Criminology Journal 1091, 1098



[11] T Rafraf, 'From Thriving to Surviving: The Bad Apple Conduct at Enron' [2002] Journal of Business Ethics 1-34, 19

[12] R Simms, 'Changing an Organization's Culture Under New Leadership' [2000] Journal of Business Ethics 65-78 Vol 25, 67

[13] C Schrand, 'The Slippery Slope to Fraud' [2010] 1-4, 2

[14] , 'The Enron Scandal' (Socialism Today 2002) <http://www.socialismtoday.org/63/enron.html> accessed 28th March 2014

[15] P McAfee, 'the Real Lesson of Enron's Implosion: Market Makers are in the Trust Business' [2004] The Economists 1-8 Vol 1 Issue 2, 4

[16] D McBarnet, 'After Enron Will 'Whiter Than White Collar Crime' Still Wash?' [2006] British Criminology Journal 1091, 1098


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