Enron: The Smartest Guys in the Room is a 2006 documentary based on the identically named bestselling book written by Fortune Magazine reporters Bethany McLean and Peter Elkind. Directed by Alex Gibney, the film looks into the collapse of Enron Corporation that led to criminal trials of the company’s top directors. The film also examines Enron traders’ involvement in the 2000-2001 California electric power crises. It features interviews with Elkind and McLean along with former senior executives, the California Governor among other stakeholders (Simons 170).
The film is relevant to the course because it analyzes the various aspects relevant for academic review in films. The documentary gives a deep insight into the happenings at Enron hence making it relevant for academic review. The film is informational in that it depicts the corporate arrogance prevalent in major American corporations that eventually leads into financial crisis. The film is targeted at potential investors to caution them of risky ventures taken by company officials. The film makes it clear that Enron was a scheme aimed at defrauding the various stakeholders of their funds. However, the film is crucial in revealing the accounting manipulation at Enron where earnings were largely overstated. The documentary is useful in explaining intricate issues in simple terms. The documentary retells the story in clear terms. Peter Elkind and McLan were the authors of the book on which the documentary was based. Aided by Peter Coyote’s detailed coverage, they appear on the film to expound on what happened.
The documentary starts with Kenneth Lay’s profile, the person who established Enron in the year 1985. After two years, the corporation becomes entangled in scandal when two traders start betting on oil markets, a move that resulted in consistently high profits and gave rise to suspicion. Enron’s president, Louis Borget, is found to be transferring company’s funds to overseas accounts, too. The traders are sacked after it becomes known that they embezzled Enron’s reserves, causing the company to nearly go down (Simons 171). However, Lay denies being aware of any fraudulent activities.
Lay hires Jeffrey Skilling, a new CEO, who agrees to be in charge of Enron but makes his appointment conditional upon using mark-to-market-accounting. This would enable the company to guarantee profits on some projects, once the deals are concluded, irrespective of whether they are successful or not. The move also enables Enron to create an illusion of being profitable, though it is far from the truth. Skilling enforces his “only the strongest survives” philosophy on Enron by putting in place a review committee charged with grading workers and dismissing the bottom 15 percent on an annual basis (Simons 172). As a result, a very competitive and aggressive working environment is created.
Skiling hires lieutenants to enforce his policies within the organization. They include Lou Pai, Enron’s Energy Services president and Cliford Baxter, a smart but highly depressed executive. Pai has the reputation of misappropriating shareholder funds on strip clubs as well as inviting strippers to Enron offices. Pai then resigns from the company fetching $250 million after selling his shares (Simons 174). Pai invests his money in a ranch in Colorado and becomes the state’s second largest owner. Profiting from the bull market situation, Enron attempts to deceive stock market experts by increasing share prices and then cashing in on multi-million dollar options.
The company also launches a public relations campaign to make it look profit-making and stable, this despite the fact that its overall performance is quite poor worldwide. The primary setback experienced at the time is the Dabhol Power Plant in India that Enron constructs to overcome general wariness of investing in the country (Simons 173). But Enron withdraws from the project after India’s failure to pay for the power the plant produces, which results in losses in excess of $1 billion. In other areas, Enron tries to use broadband technology to provide movies–on-demand, which also fails. However, Enron covers up the failure by resorting to mark-to-market accounting to fake profit records for the ventures.
Undoubtedly, anyone who sees the film will agree that the main perpetrators of the financial crime, Skilling and Lay are guilty as charged. The fact that they aided other traders escape with millions of dollars when the company filed for bankruptcy indicates high levels of impunity. It is a great documentary even for those who don’t understand business. However, some parts are not clear such as the artificial corporations that Flatow hid Enron’s losses.
What are the characteristics of charismatic leaders and did Skilling embody them?
Charismatic leaders are those who use their personal charm to lead others. Such leaders use their personal allure to get things done. It is a powerful way of leading others and can be used to influence others to achieve extraordinary tasks. They have the ability to bridge the gap between what the company delivers to its stakeholders and what the stakeholders need from the organization. As a result, a vision of a future is created, whereby it is believed that it will be better than today’s environment.
Under Skiling, Enron was able to anticipate future profits from any deal. This was achieved through the application of mark to market accounting introduced by Skilling (Cox 264). Additionally, he uses charisma to market a novel idea. He implored the company to push its investment strategy, thus making Enron the biggest energy wholesaler. On February 12, 2001,he was named Enron’s President (Cox 266). In his tenure as the company’s president, he achieves his vision through consistently applying mark-to-market strategy.
One of the commentators in the film says there was a “high school mythology”. What does she mean by this?
Enron’s traders can be likened to powerful high school cliques in that the principal has no control over their activities. A system was instituted, whereby the employees rated each other and the lowest rated was dismissed (Gillepsie 164). Some workers admitted they would be willing to go to any extent to achieve results. High school mythology was prevalent in that each of the workers wanted to be the most popular on Wall Street. Further, they were willing to do whatever was needed to stay there (Gillepsie 164).
How did Lay and Skilling’s backgrounds feed into their desire to belong and be deemed popular and successful? How did this interfere with ethical behavior?
Jeff Skilling and Lay were former nerds. Skilling had eye surgery and reversed his baldness. Furthermore, he led the inner circle of Enron’s macho men in dangerous adventures and had also admitted he liked guys with something extreme about them (Gillepsie 165). Skilling got analysts to like him so that if he was questioned, he was believed in whatever he said. As such, they were rewarded for their praise of Enron. This led Skilling to make risky investment decisions where stocks soared, though eventually it did not work.
Lay was the company’s founder who encouraged his deputies to continue fetching millions for the company, in spite of receiving qualifies report from its auditors. The traders mismanage the company’s funds and Lay denies having any knowledge of the scandal. Lay had a background of individual consideration and had a vision of totalistic nature (Gillepsie 165). He was responsible for the emergence of a corporate cult in Enron. This interfered with ethical behavior in Enron where a recruitment system was adopted that penalized the dissent.
How did Andy Fastow use Enron and how did Enron use Andy Fastow?
Andrew Fastow was the conspirator behind a series of accounting deals at Enron and was the senior most executive to be implicated in the scandal. He was the one who helped engineer the use of off-the-books partnerships to hide millions of dollars in debt. Furthermore, Enron used him to raise the company’s profits artificially (Simons 171). Andy Fastow used Enron in that he and his wife, an assistant at the company, embezzled more than $45 million from the company.
What was Fastow’s motive for his schemes?
Being the chief financial officer at the company, he misled Enron’s board of directors and engaged in risky accounting practices for the firm. The motivation behind his schemes can be attributed to his greed to use the existing loopholes in the firm to siphon funds to his offshore accounts (Simons 173).
What would Niccolo Machiavelli have to say about the leadership styles of Lay and Skilling?
Machiavelli was a man of great observation, acuteness and hardwork. He also appreciated whatever passed before him. He analyzed the prosperities and failures in his surrounding, as well as how princes could strengthen their positions to retain their control. He was an amoralist in that he focused on the practical success at the expense of traditional moral values. He would have appreciated Lay and Skilling’s leadership styles. He would have judged the importance of the traders’ actions by how well they achieved the desired results. He would have counseled Lay and Skilling to use intimidation to avoid the common values of justice to achieve good results.
At the end of the film, the priest says we can “gain all the trinkets and lose our souls”. What does this mean?
The priest infers that while the traders solicited the company’s funds for personal gain, they ended up facing prosecution for various counts of fraud. This can be interpreted to mean that the traders ended up losing their freedom and had their images tainted.
Look up the Sarbanes-Oxley act. How does this act help prevent corporate crime?
The Sarbanes-Oxley Act has mandated various reforms to ensure corporate responsibility to bring about financial disclosures in order to curb corporate, as well as accounting fraud (Lobo 9). This is achieved through the creation of the Public Company Accounting Oversight Board to oversee the professionalism of auditing in organizations (Lobo 12).
What are the most severe consequences of misleading financial reports?
Financial statement fraud costs market participants heavy losses during any accounting period. Investors, creditors and employees expect vigilance, transparency and integrity of financial information from those involved. Cooking the books is a financial statements fraud, which amounts to a crime. The Sarbanes-Oxley Act establishes a framework that increases criminal penalties for securities violation using the applicable laws and regulations (Lobo 7). As such, financial fraud is prosecutable in a court of law.
Are these consequences enough to deter heads of corporations from committing corporate fraud?
Legal consequences are not effective enough in preventing financial fraud. This is because junior company executives are used by senior management to commit financial fraud and end up being prosecuted while the masterminds continue operating with perfect impunityd. Furthermore, the existing framework has a lot of loopholes that leaves many corporations susceptible to fraud among other financial crimes (Cox 280).
What surprises you most about the behavior of the Enron executives?
The fact that Kenneth Lay and Jeffrey Skilling continue to maintain their innocence, despite the scandal that rocked the firm, constitutes gross misconduct, hypocrisy and lack of accountability. In addition, there is the use of off the books partnerships to conceal billions of dollars debts, notwithstanding the artificial creation of the company’s profits (Simons 173). These acts constitute impunity on the part of Enron traders.
Do you think the Enron losses contribute to budget problems at the UC?
The University of California subscribed to Enron Stock at $68 a share. After the failure of the Enron-Dynegy merger, UC dumped its shares after they started trading at $5. To a small extent, the budget problems can be attributed to the losses at Enron. UC was among the many victims of financial crimes at Enron. However, UC had diversified its investments and the loss only contributed to only 0.3% of its managed funds as was revealed by the institution’s treasurer, David Russ (Ryan 2).
Do the losses affect your tuition at UCI?
While UC lost over $145 million, I am certain the loss will not affect my tuition at the institution. This is because academic endowments were not affected by the losses, as was assured by the university administrators (Ryan 2). In addition, the loss is a past consideration and is not likely to affect the current running of university affairs, as regards academics.