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University of Alberta The Influence of Organizational Forms and Client Relationships on Professional Behaviour: The Case of Enron by Rajshree Prakash ^jpN A thesis submitted to the Faculty of Graduate Studies and Research in partial fulfillment of the requirements for the degree of Doctor of Philosophy In Organizational Analysis Faculty of Business Edmonton, Alberta Spring 2008 Library and Bibliotheque et 1*1 Archives Canada Archives Canada Published Heritage Direction du Branch Patrimoine de I'edition 395 Wellington Street 395, rue Wellington Ottawa ON K1A0N4 Ottawa ON K1A0N4 Canada Canada Your file Votre reference ISBN: 978-0-494-45581-4 Our file Notre reference ISBN: 978-0-494-45581-4 NOTICE: AVIS: The author has granted a non L'auteur a accorde une licence non exclusive exclusive license allowing Library permettant a la Bibliotheque et Archives and Archives Canada to reproduce, Canada de reproduire, publier, archiver, publish, archive, preserve, conserve, sauvegarder, conserver, transmettre au public communicate to the public by par telecommunication ou par Plntemet, prefer, telecommunication or on the Internet, distribuer et vendre des theses partout dans loan, distribute and sell theses le monde, a des fins commerciales ou autres, worldwide, for commercial or non sur support microforme, papier, electronique commercial purposes, in microform, et/ou autres formats. paper, electronic and/or any other formats. The author retains copyright L'auteur conserve la propriete du droit d'auteur ownership and moral rights in et des droits moraux qui protege cette these. this thesis. Neither the thesis Ni la these ni des extraits substantiels de nor substantial extracts from it celle-ci ne doivent etre imprimes ou autrement may be printed or otherwise reproduits sans son autorisation. reproduced without the author's permission. In compliance with the Canadian Conformement a la loi canadienne Privacy Act some supporting sur la protection de la vie privee, forms may have been removed quelques formulaires secondaires from this thesis. ont ete enleves de cette these. While these forms may be included Bien que ces formulaires in the document page count, aient inclus dans la pagination, their removal does not represent il n'y aura aucun contenu manquant. any loss of content from the thesis. Canada Abstract This thesis examines the factors that influence professional behavior. Specifically, it focuses on the role of organizational forms where professionals work and client relationships. Transcripts of Congressional Hearings related to Enron form the empirical context. Theoretically the thesis draws upon the research on the sociology of professions by revisiting the literature on professionals and organizations and professional-client relationship to suggest that the notion of professional behavior is more complicated than previously assumed. Acknowledgement This thesis could not have been written without the guidance, support and encouragement of my advisor, Dr. Royston Greenwood, and members of my thesis committee - Professor Bob Hinings, Dr. Roy Suddaby, and Dr. Marvin Washington. Special thanks are due to Dr. David Cooper for keeping me engaged and excited about the Ph.D. process and being a very patient listener. My partner, family, friends, members of the SMOrg department, Kathy, Jeannette and Michelle ensured that there were enough laughs along the way to keep me relatively sane. Table of Contents Chapter 1 Introduction 1 Professional Behavior 6 Professionals and Organizations 11 Professional-client Relationships 13 Chapter 2 Theoretical Context 17 Professional Behavior 17 Professionals in Organizations 20 Problems in the Literature 36 Chapter 3 Methods 56 Overview 56 Research Design 56 The Case: Failure of Enron 58 Data 62 Analytical procedures 68 Arthur Andersen 69 Vinson & Elkins 70 Stages of Analysis 70 Chapter 4 Exploring Professional Space 93 Introduction 93 Multiple models of professionalism 95 Models of professionalism and organizational forms 104 Organizational Forms and Professional Behavior 118 Discussion 122 Chapter 5 Professional and Client Relationships 135 Overview 135 Introduction 135 Client Capture and Professional Behavior 137 Historical Background 139 Research Streams 143 Weaknesses in the literature 149 Resource Dependence Theory 152 The Field Approach to Client Capture 156 Chapter 6 Methods II 161 Introduction 161 Client Capture and the Failure of Enron 162 Data 163 Analytic Procedures 168 Chapter 7 The Complexity of Professional-Client Relationships 185 Introduction 185 The Small World of Professional-Client Relationships 185 Antecedents of the small world 196 Summary 217 Discussion and Conclusion 217 Chapter 8 Conclusions 222 Introduction 222 Professional Behaviour, Professionals and Organizations and Client Relationships 223 Main Contributions and avenues for further research 226 Tying it all together 236 Limitations 239 References 241 List of Figures Figure 1 A Variables Influencing Professional Behavior (Adapted from Greenwood & McDougald, 2004) 5 Figure l.B Number of articles on Professionalism (1972-2005) 7 Figure 2 A The Three Research Streams in Professionals in Organizations 35 Figure 6 A Stage 3 of the Analysis: Deriving Higher Level Categories 183 Figure 7 A The Small world of professionals and clients: Antecedents and Constitutive Traits 187 Figure 7 B Analysts' Recommendations from Investment Banks Participating as Underwriters for Enron 200 List of Tables Table 1-1 Current investigations and scandals involving large professional organizations 9 Table 2-1 Examples of Studies Focusing on Organizational Professional Conflict Thesis 41 Table 2-2 Example of Studies focusing on Proletarianization Thesis 48 Table 2-3 Example of Studies Focusing on Adaptation Thesis 52 Table 3-1 Accounting firm and their investigated clients 62 Table 3-2 Summary of Data 68 Table 3-3: Key professionals in the two organizational forms discussing professional responsibility (based on transcripts and media reports) 69 Table 3-4A Keyword count for aspects relating to Professional Behavior 72 Table 3-4B Key Word Counts for Aspects Relating to Organizational Features 73 Table 3-5A Textual segments representing issues related to professionalism 75 Table 3-5B Number of Textual Segments Representing Professional Responsibility78 Table 3-6A Textual segments representing professionals' perception of organization related features 80 Table 3-6B Number of Textual Extracts Focusing on Organization Specific Features 86 Table 3-7 List of Congressional Hearings 88 Table 4-1 Textual extracts related to models of professionalism in the two organizational forms 104 Table 4-2 Textual extracts relating to formal and informal aspects of organization forms 105 Table 6-1 Amount of Capital Raised by Enron and its Associated Professional Service Firms 169 Table 6-2 Investment Banks Involved with Enron's Capital-Raising Deals 170 Table 6-3 Snapshot of Analyst Recommendation 170 Table 6-4 Testimonies used for Professional-client Relationship 172 Table 6-5 Major Issues Emerging after the First Step of Analysis 174 Table 6-6 Number of Textual Extracts Related to Each of the Eight Issues 175 Table 6-7 Textual extracts that illustrate the major issues 176 Table 7-1 Investment Banks Involved with Enron's Capital-Raising Deals 197 Table 7-2 Percentage breakdown of Investment Banks involved with Enron's Capital-Raising Deals 197 Table 7-3 Breakdown in terms of Percentage of Investment Banks participating as both: Underwriters and Bookrunners 198 Table 7-4 Auditors for the Capital-Raising Deals of Enron (1995-200) 201 Table 7-5 Legal Advisors for the Capital-Raising Deals of Enron (1995-2001).... 201 Table 7-6 Enron's Board of Directors, other boards they were on and auditors of the other firms 202 Table 7-7 Number of extracts associated with relational aspects of the small world. 204 Chapter 1 Introduction My interest in professional behavior was stimulated when the Enron debacle happened. Enron Corporation was an American energy company based in Houston, Texas, United States. Before its bankruptcy in late 2001, Enron was one of the world's leading electricity, natural gas, pulp and paper, and communications companies, with claimed revenues of $101 billion in 2000. Fortune named Enron 'America's Most Innovative Company' for six consecutive years. It achieved infamy at the end of 2001, when it was revealed that Enron's reported financial condition was sustained mosdy by institutionalized, systematic, and creatively planned accounting fraud. Investigations into the affair revealed that a group of Enron executives: in-house accountants and attorneys; along with management personnel with professional backgrounds, had been worried about the accounting practices from as early on as 1998. Despite communicating their apprehensions to top management, the auditors and even the associated law firm, their concerns were explicidy ignored for a long time. With increasing numbers of such Enron personnel continuing to disapprove, in August 2001 the CEO instituted an internal investigation headed by Vinson & Elkins LLP, one of the most prestigious law firms in the United States. The two-member team had access to internal accounting as well as to the auditors' documents. Yet, after a month, the Vinson & Elkins lawyers gave Enron's accounting practices and Arthur Andersen a clean chit. It later came to light that the scope of the investigation was substantively restricted through mutual agreement between the law firm, members of the top management and Arthur Andersen,