Enron’s fraud and collapse: the role of management consultants

First of all, let's look at Enron. Many of you will remember the Enron disaster and the fact that this multi-billion pound company which was touted as one of the most successful companies went down. What many people don't realize is the role of consultancies. Specifically, we're going to be talking about McKinsey, which is one of the world's most famous consultancies and Andersen Consulting, which is no longer in existence directly because of their involvement in Enron. So the situation of Enron before the year 2000 was that it was one of the most successful companies in the world. Its share price had gone up from about two dollars a share when it first started out to around $90 a share. This had huge dividends in for the shareholders. Fortune Magazine had called it America's most innovative company for around five years in a row. Enron was a large energy company that shifted its focus from providing energy to really acting as a futures trading company. It did so under the advice of Ken Lay and Jeff Skilling, who were the CEO and Finance Director of Enron. Mckinsey was involved very early with Enron. They sold around $100 million worth of consulting to Enron each year, really advising them around the strategy in terms of what they should be doing. Moving from this pipeline company to more of a trading finance company. Jeff Skilling was an ex McKinsey consultant and brought in a lot of these ideas that really brought in a very highly competitive cut-throat culture. He was very keen on a concept called the 'war for talent', which is a McKinsey idea, which basically argued that if you treat people pretty rough, they're going to work harder and harder. Arthur Andersen were the audit company. So these people were really responsible for making sure that Enron posted true and fair accounts. However, at the same time, they were also getting around 50 million a year in terms of consulting fees. So we'll talk more about this conflict of interest later. But the consequence of this as you will remember is that Enron started posting false profits. This was under the advice of Arthur Andersen and under the leadership of an ex McKinsey consultant. Eventually, when the market found out about this, the share price plummeted from around $90 a share down to about $0.12 a share. Eventually, the company went bankrupt. Tens of thousands of people lost their jobs and most people lost their pension funds, especially in America. So this is a good example of how the involvement of consultancy in companies can go wrong and why ethics is important in understanding that. Now, in terms of who was to blame for this, leaders and the politicians who were involved with Enron very much focused on this idea of the bad apple, that Jeff Skilling and Ken Lay were rogue individuals that the consultancies involved had bad consultants in them. So they very much focused on the individual as the source of ethical risk as opposed to the system, the companies, or the structure that were involved.