The Enron scandal involved widespread corporate fraud and misconduct at Enron Corporation. Key figures like CEO Jeffrey Skilling and CFO Andrew Fastow engaged in deceptive accounting practices such as using off-balance sheet entities to hide debt and inflate profits. This led to Enron overstating its earnings by hundreds of millions of dollars. An investigation revealed causes like the use of special purpose entities, weak corporate governance, and an obsessive focus on short-term earnings driven by an aggressive compensation system. The scandal prompted increased regulation and oversight of public companies.

1. The Enron Scandal – A Case of Corporate
Fraud and Misconduct
Department of Industrial Engineering
University of Engineering and Technology
Taxila

2. OBJECTIVE
• Understanding the concept of organizational
behaviour
• Aligning individual and group behaviors with strategic
goals and objectives.
• Determine causes of ENRON downfall
• Overcome issues using OB strategies
• How company avoid such downfall in future using OB
strategies

3. Overview
• Enron Corporation was a successful energy company in the
early 2000s.
• Enron engaged in fraudulent activities and deceptive
accounting practices.
• They used off-balance-sheet partnerships and special-
purpose entities (SPEs) to hide debt and inflate profits.
• CEO Jeffrey Skilling and CFO Andrew Fastow were key
figures involved in the fraud.
• Enron admitted to overstating earnings by hundreds of
millions of dollars.
• Skilling and Fastow faced criminal charges and received
prison sentences.
• The Enron scandal prompted increased scrutiny and led to
the passing of the Sarbanes-Oxley Act in 2002.

4. CAUSES OF DOWNFALL
1. Special purpose entities
2. Whitewing (SPE’S)
3. Corporate governance
4. Executive compensation
5. The Snowball Method

5. • Enron employed special purpose entities (SPEs), which were
limited partnerships or companies with a temporary or specific
purpose.
• These SPEs were created to manage risks related to specific
assets.
• The shell companies were established by a sponsor but
financed by independent equity investors and debt financing.
• As a result of a violation, Enron's balance sheet understated its
liabilities and overstated its equity.
• This manipulation led to an overstatement of earnings for
Enron.
SPECIAL PURPOSE ENTITIES

6. • Whitewing was the name of a special purpose entity used as a
financing method by Enron.
• Between 1999 and 2001, Whitewing bought assets from Enron
worth $2 billion.
• The asset transfers were not true sales and should have been
treated instead as loans.
Whitewing (SPE’S)

7. • In its 2000 review of best corporate boards, Chief
Executive included Enron among its five best boards.
• Enron’s board of directors failed to provide effective oversight
and challenge the questionable practices of the company’s
executives.
• This lack of effective corporate governance allowed unethical
behavior to persist and go unchecked.
Corporate governance

8. • Performance management system was designed to retain and
reward its most valuable employees.
• system contributed to a dysfunctional corporate culture that
became obsessed with short-term earnings
• Employees had large expense accounts and many executives
were paid sometimes twice as much as competitors.
Executive compensation

9. • Enron made a habit of booking costs of cancelled projects as
assets,
• This method was known as "the snowball“
• t such practices be used only for projects worth less than $90
million, it was later increased to $200 million.
The Snowball Method

10. • Ethical decision making
• Leadership and power dynamics
• Organizational culture
• Communication and transparency
• Organizational structure and system
• Employee engagement
OB STRATEGIES TO OVERCOME ISSUES

11. • The Enron scandal involved numerous unethical decisions, such
as manipulating financial statements to inflate profits.
Example
Enron executives manipulated the company’s financial statements
by creating special purpose entities (SPEs) to hide debt and inflate
profits.
Ethical decision making

12. • Enron’s culture was characterized by a concentration of power
in the hands of top executives like Ken Lay. These leaders
influenced the company’s direction.
Example
CEO of Enron, used his influence to encourage aggressive
accounting practices and silence dissenting voices within the
organization. This abuse of power demonstrates how leadership
dynamics can shape an organization’s behavior.
Leadership and power dynamics

13. Dysfunctional groups;
Enron had a competitive and aggressive culture that prioritized
financial success over ethical considerations.
Example
performance review system fostered a competitive culture that
encouraged employees to prioritize their individual success over
ethical conduct
Organizational culture

14. • Effective communication channels and transparency are crucial
for building trust within an organization and ensuring ethical
behavior.
Example
Enron’s financial reports were complex and intentionally
misleading. The lack of transparency and clear communication
made it difficult for stakeholders to understand the true financial
position of the company.
Communication and transparency

15. • The organizational structure and systems at Enron enabled
fraudulent activities to occur.
• Weak internal controls, inadequate oversight, and a complex
network of subsidiaries and partnerships allowed unethical
practices to go undetected.
Example
The creation of off-balance-sheet to artificially inflate profits,
leading to a distorted financial picture of the company.
Organizational structure and system