Management Controls: The Organizational Fraud Triangle of Leadership, Culture and Control in Enron

Summary

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This article draws on a vast database of public records, testimonies at the various Enron-related trials and insider accounts concerning Enron's rise and fall to answer the question: how did a sophisticated and comprehensive set of management controls fail to prevent and detect widespread and continued corporate-wide fraud, information manipulation and dishonesty. This article focuses on the cultural environment surrounding Enron's management control systems, and the influence of a powerful-risk taking culture on Enron's controls. Enron offers a number of important insights for managers. Firstly, it underlines the vital role of top management leadership in fostering organizational culture. Secondly, within organizations, the impact of culture and leadership on even most the sophisticated management control system must not be overlooked or minimized. Finally, the Enron saga speaks to the importance of not abandoning professional integrity.

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Extract

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Management Controls: The Organizational Fraud Triangle of Leadership, Culture and Control in Enron

Almost faster than you can say mark-to-market accounting, management controls disappeared once Jeff Skilling became CEO of Enron. The rest is sad history and a shareholder's worst nightmare come true. These authors document the subversion of Enron's management controls and suggest the lessons managers can learn from the worst financial collapse in U.S. corporate history.

The collapse of Enron has been described as offering the same sort of opportunity for reflection for the business community as the Challenger disaster did for the engineering profession or September 11 did for political scientists. This article draws on a vast database of public records, testimonies at the various Enron-related trials and insider accounts concerning Enron's rise and fall to answer the question: how did a sophisticated and comprehensive set of management controls fail to prevent and detect widespread and continued corporate-wide fraud, information manipulation and dishonesty.

Introduction

Throughout the Enron post-mortem, financial accounting irregularities and the audacious use of special purpose entities for off-balance sheet financing purposes have been the focus of attention. Seldom acknowledged is the fact that Enron had in place a comprehensive, state-of-the-art and award-winning management control and governance system, and that during Richard Kinder's term as ...

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