Corporate Communal, Enron Corporation - Case Study Example

Business Ethics: Enron Introduction Enron was established in 1985 when Kenneth Lay’s Houston NaturalGas merged with the Nebraskan-Northern Natural Gas Company’s holding company called InterNorth. The merged company was named Enron. Before the merger, the two companies were primarily dealing with the distribution and transmission of oil as well as electric power in America. On a secondary level, they were also active in the construction, development and maintenance of various power plants, gas pipelines and other similar energy related infrastructure (Thomas, 2002). Under the new company name, Kenneth Lay was made the Chief Executive Officer and he wanted to expand Enron’s market share as well as the type of markets Enron was in since he had a very different vision for the new shape of the company (Welch, 2005). The Background Houston Natural Gas had previously been in the business of making their money from junk bonds which were also used in the formation of Enron. At the same time, Kenneth Lay wanted to become the biggest player in the energy sector through successful trade earnings from futures contracts (NPR, 2006). To his advantage, Spectrum 7, an oil-well concern welcomed a partnership with Enron a year after its creation. Spectrum 7 was headed by George W. Bush, son of the then-Vice President George H. W. Bush. With falling gas prices in the mid 1980’s, Enron and other gas firms vigorously lobbied for deregulation to get benefits for themselves (Thomas, 2002). It has been known for many years that ethically dubious political connections can help a business but such situations often come to light if the business is unsuccessful (Medawar, 1976). The deregulation action came into effect when buyers switched to the fuel oil as the cheaper alternative. Fluctuating gas prices allowed Enron to start marketing gas futures; securing gas prices at a later date promised to their stakeholders. Similarly, the company lobbied once again for electricity just before selling electric power futures contracts (NPR, 2006). From then on, Enron was aggressive in expanding its services in other sectors such as the water utility sector by creating a company named Azurix which partly collapsed on the NYSE in 1999 and finally shut down operations in 2001 (Thomas, 2002). Concurrently, Jeffery Skilling who had been hired in 1990 to lead the financial side of Enron’s operation became a major personality of the energy trading businesses and became the president and COO for Enron. He built wealth reserves for the company by trading in thirty different industries and was reputed as being one of the pioneers in the marketing and promotion of power industry (Thomas, 2002). Additionally, the firm worked with steel and wood fiber contracts, financial instruments, weather derivatives and Internet bandwidth capacities. Its diversification into other market futures included the futures in sugar, coffee, grains, hog and other commodities (Wikipedia, 2006). The Scandal The Enron’s business was expanded with numerous trading ventures along with creating new partnerships for every contract. The company even established new markets for itself by being a new-economy trailblazer (NPR, 2006). However, the company was still providing products and services for its original industry i.e. electricity and gas via the construction, distribution and maintenance of its power plants. Enron had heavily invested in these partnerships to the tune of hundreds and billions of dollars within the few years of the early 90’s. Yet at the same time, those investments did not produce enough returns for the company to be profitable and this situation was being completely ignored (Thomas, 2002). For this company, simple business ethics and honest dealings did not seem like the right way to go where market leadership and economic advantages were concerned (Lachapelle, 2005). In an effort to remain the leading player in the energy trading businesses, Enron developed and launched EnronOnline in October 1999. It was to be the first web-based transaction system that would allow buying and selling commodities globally. EOL’s earnings came from being a third-party in all business transactions placed on its website. This venture earned a lot of money for the company before proving to be another fatal financial blow to Enron (Thomas, 2002). Subsidiaries like Azurix, Enron Energy Services, the closure of the original pipeline that generated the company’s revenue and broadband services also drained the company of its cash flow. However, these were not clearly mentioned in the auditing and accounting reports of the company which maintained that it had a positive outlook (Adams, 2004). This placed more emphasis on the Enron Global Finance department to keep the company afloat and in an immediate effort to rescue their remaining assets, Enron entered into talks with a rival company, Dynergy, for a partnership. Dynergy accused the company of deceitful bargaining and pulled out of the deal within the initial weeks of their negotiations. This final straw led Enron to open its books to the world and uncover the truth since on December 2, 2001, Enron filed for bankruptcy. Not only the financial world, but traders and investors worldwide were alarmed by the company’s action. What seemed to be the most stable and trusted energy company representing the American industry came down to being nothing but smoke and mirrors (NPR, 2006). Ethical Issues Underneath all those flashy layers of art deco offices, long-term financial benefits and security for its employees, Enron was a company only committed to its own executives’ financial gain rather than generating any gain for stakeholders (Bogle, 2005). Labeled as Fortune Magazine’s “America’s Most Innovative Company” for six consecutive years (1996 to 2001) Enron had suddenly turned non-existent. The US Congress immediately took note of this and since a lot of people had lost money in the company, they started an investigation and summoned Enron’s executives into the Congressional hearings. Kenneth Lay did not appear in two of those hearings. While the company’s annual reports make no mention of wrongdoing (Chwastiak & Young, 2003), investigative reports revealed that all relevant documents had been destroyed while top government administration officials were being sought for help. Allegations were made that company officials ignored prior warnings about the company’s position while transferring millions to their personal accounts (NPR, 2006). Enron’s shortcomings uncovered the secret mishaps of the accounting world where Arthur Andersen, their auditing company, was charged on obstruction of justice for the same company. The scandal at Enron took place under the very eyes of the auditors from Arthur Andersen who worked there all year round. The telecommunications company, WorldCom was also declared bankrupt creating the domino effect for the discovery of other accounting malpractices. Amongst them, high-level corruption, accounting errors and insider trading were the main reasons for several companies downfall (Thomas, 2002). Ethical Analysis The situation can be viewed predominantly from two different ethical viewpoints, i.e. the ethics of Utilitarianism and Deontological Ethics. Looking at deontological ethics, it becomes clear that the company acted unethically since they behaved immorally by deceiving their investors and their stakeholders. Such a deception cost their investors a lot in both monetary and emotional terms and led to suffering for their employees as well as their families. Since deontological ethics provide a clear viewpoint for things being morally right or morally wrong, the ethical debate in the case of Enron falls strongly against them. In fact, had they correctly followed the ethical guidelines given under deontological ethics, it is unlikely that they would have lied in their reports and falsified information to the personal advantage of the company owners. The ethics of utilitarianism are not very different since utilitarianism asks us to do what will bring the most benefit to people who are connected with the enterprise. Of course it can be debated that a company is always out to make financial profit and can not be overly concerned about what happens in society at large but utilitarianism for a company or a business depends on doing what is best for its stakeholders. These stakeholders include the owners of the company, the investors, the employees, the business partners as well as the public at large since they depend on the company in one way or another to a greater or lesser extent. The situation as it occurred at Enron shows us that the company worked only to help its owner’s pocket books and did not do enough for other stakeholders of the company that led to the eventual demise of the company. In fact, the company actively sought to deceive the stakeholders and managed to do so successfully until their crime was discovered. In conclusion, it is clear to me that Enron did not behave ethically with either ethical approach and the results of not following these ethics are crystal clear. Works Cited Adams, C. 2004, ‘The ethical, social and environmental reporting-portrayal gap’, Accounting, Auditing and Accountability Journal, vol. 17, no. 5, pp. 731-757 Bogle, J. 2005, The Battle for the Soul of Capitalism, Yale University Press. Chwastiak M. & Young J. 2003, ‘Silences in Annual Reports’, Critical Perspectives on Accounting, vol. 14, no. 1, pp. 533-552. Lachapelle, E. 2005, ‘Morality, Ethics, and Globalization’, Perspectives on Global Development & Technology, vol. 4, no. 4, pp. 603-644. Medawar, C. 1976, ‘The Social Audit: A Political View’, Accounting Organizations and Society, vol. 1, no 4. pp. 389-394. NPR, 2006. NPR: The Fall of Enron, National Public Radio, [Online] Available at: http://www.npr.org/news/specials/enron/ Thomas, C. 2002. The Rise and Fall of Enron, The American Institute of Certified Public Accountants (AICPA), [Online] Available at: http://www.aicpa.org/PUBS/jofa/apr2002/thomas.htm Welch, J. 2006, ‘Winning’, HarperCollins. Wikipedia. 2006. 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