Business Ethics: The Enron Scandal - Research Paper Example

 Business Ethics: The Enron Scandal Introduction Business Ethics is perhaps the one area of business development that is given its own unique genre of priority. In order to be successful, the necessity of a strong Code of Ethics is undeniable for any organization (Shaw, 2007). As William H. Shaw notes in his thought provoking book, Business Ethics, the code of ethics of an organization contributes to the eventual success or failure of that organization. Over time, several books, papers and articles have been written upon Business Ethics and countless examples exist that strengthen the notion that the success of an organization is directly related to the achievements that the company accomplishes. Business Ethics is considered to be a part of applied ethics since a vast aspects of ethics related to business are rooted in practicality. Business ethics deal with the transparency of the functions of a business in a manner such that the information, services and products that an organization provides to its clients are based upon truth and honesty (DesJardins, 2008). A breach in business ethics would mean that the organization has either misguided its clients through false information, or provided services to its clients that are not equivalent to those that were promised earlier, or provided products to its clients that were of a quality inferior than that which had been either promised or quoted earlier. The subject The purpose of this particular paper is to consider a real world example of an incident that can be used to study the significance of Business Ethics. Over time, numerous scenarios have come forth in which various organizations have been exposed accounting frauds or money laundering or forms of cheating of the similar kind in which business ethics have been boldly violated. Uniformity in the vast majority of such cases can be found in the fact that once the breach of business ethics has been made, organizations have more than often attempted to cover up their shortfalls and mistakes. But unfortunately for all such organizations, the very existence of business ethics is meant for the existence of progress for the members of the corporate world. Any breaching of business ethics simply means that the organization involved in the breach has selected the path it will take and has chosen for the graph of progress to begin steeping downwards. What comes as even more in the study of such cases is the fact that the amount of collateral damage is more than often on a catastrophic scale. As the following paragraphs will elaborate, business ethics are meant to keep the organization safe, and all the elements that are involved in the functioning of the organization safe as well. The collateral damage suffered because of a breach of business ethics more than often ends up encompassing these elements. The case chosen for this purpose is that of Enron. The Enron Scandal, as the incident came to be referred to (Sterling, 2002), was an incident that shook the business world and influenced the ethics area of business to an extent where legislation had to be put into place in order to avoid repetition of such disastrous incidents in the future. The paper will also delve into the specific areas of business ethics that the Enron Scandal brought out and which became primary concerns for the future Code of Business Ethics that organizations established and adopted. Since information drives the modern day world of business, the paper will primarily focus on the area information disclosure in the field of business ethics. The paper uses the damage that the Enron Scandal caused as proof of the fact that the actions of the senior executives at Enron were of nothing less than a criminal nature and concludes with the implications that the case had on the legal infrastructure as well as upon the perception of business ethics in general. The Enron scandal Enron was an Energy solutions company that was based in Texas. It was not a modern day enterprise, but a company whose roots went back to as early as 1932. The company slowly but steadily developed and came to a point where it was a celebrity of sorts in the corporate world with a work force of tens of thousands of employees. It became the leader in electricity, natural gas, paper and communications solutions. By 2001, Enron was reporting profits of over a hundred billion dollars and was named America’s most innovative company by Fortune for over five years in a row. However, this was the point where the infamous Enron Scandal came forth as one of the biggest breaches of business ethics in the corporate world. It was at the end of 2001 that signs of corruption were uncovered in the Enron business framework. Facts unearthed indicated that the apparent economic stability that the company was quoting in its press releases for quite some time now had been generated by using accounting fraud techniques and were in fact fueled by channeling of finances from sources where the code of ethics did not give it permission to do so from. What followed was a chain of events in which Enron filed for Bankruptcy Protection in the southern district of New York in 2001 and collateral damage in the form of losses to several people and firms. This damage was of such a high extent that many of the several law suits that Enron was bombarded with were settled by Enron directors by paying money from their personal means. The Enron Scandal first came to light in late 2000 when speculators began to show doubts about Enron’s financial standing. As it turned out, Enron had been knee deep in the financial fraud throughout the 1990’s and it came as no surprise that name Enron became the chapter of world history to have undergone the largest bankruptcy ever seen. The multilevel breach of business ethics A point to note here that the breach of Business Ethics was not merely at the organizational level where several employees were stripped off their pension funds, but on a much vaster level since Enron’s accounting firm Arthur Anderson was intentionally involved in the scandal just as much as were the directors of Enron themselves. Enron was at the point where it was hoping to get US$100.00 per share, but the revelation of the bankruptcy led to the falling of Enron’s shares to mere pennies and since the general public had chosen to invest in Enron on the basis of the financial condition that Enron had been reporting, the damage that was caused by the actual financial deficiency was more than disastrous. The actual financial deficiency as not a sudden incident, as Enron later reported, it was because numerous debts and losses that Enron suffered were not reported by Enron and as a result, the picture that the public saw was that of Enron as a successful organization with losses and debts being next to none. This was a serious violation of business ethics since Enron had purposely kept important information confidential. This was information that had the significance to influence investor decisions, and by choosing to keep this information confidential, Enron had violated all boundaries of business ethics. Many people have opinionated that the Enron Scandal was a result of accounting frauds, while the majority agrees that on broader terms, the Enron Scandal was a violation of business ethics on Enron’s part. It was not the financial department that was the singular cause of the biggest bankruptcy in the history of the world, but also the decentralized infrastructure that Enron had been exercising which led to the portrayal of an inaccurate picture of the company’s financial standing to the investors. The self fueling fire caused by the breach of business ethics Enron breached business ethics by creating offshore entities in order to exercise tax evasions. This led to allowing Enron to conceal its losses. The result was the formation of a self-destruction cycle for Enron, since every time Enron desired to quote a stable business in the market, it had to increase the degree of financial fraud that it was exercising (Clark, 2008). Hence, it would not be unjustified to say that the moment Enron breached business ethics, it was bound for bankruptcy. This self-propelled cycle of damage continued to accelerate with every financial quarter as the company showed billions in losses instead of the actual losses. Investigations carried out later revealed that Enron had created false off-book companies and manipulated deals in order to give profits to specific members of the company involved in the scandal as well as their relatives (Clark, 2008). By breaching the general understanding of business ethics, Enron began building a card castle that was meant to topple the day its foundation was laid. It is necessary to understand that the interests that the senior executives of Enron chose to delve into were direct violations of business ethics. In the Enron Scandal, consultation fees were being paid to the directors at levels much higher than the usual standards and the misuse of finds also included the channeling funds to non-profit organizations (Hinman, 2002). Directors who worked for Enron while working for other non-profit organizations lavishly used Enron to donate funds to their non-profit organization. The compensation being given to board members was staggeringly high as well. Increased awareness of business ethics as a result of the Enron Scandal Needless to say, the publicizing of the Enron Scandal led to a heightened increase in the application and regulation of business ethics. The debate upon how to ensure that an organization was functioning with adherence to moral principles became the headline of almost every business journal and still remains in the first few pages of various business ethics journals. It is important to note here that it is not a one dimensional functioning of the business that business ethics is concerned with, but spans the internal and external functioning of the organization multilaterally. It is for the same reason that it is strongly suggested in the modern day business world that an organization that wishes should succeed should ensure that a business ethics program is established and is integrated into the corporate culture of that organization. The executives of Enron were declared to have been guided by sheer selfishness in their desire to make profits, and as The Intellectual Activist notes, the senior executives seemed to believe that the only one code of business ethics was to make as much money as we can without going to prison (Tracinski, 2002). We can derive from this observation of the Enron Scandal that while the executives were motivated by greed to gather money and to take away undeserved profits and monetary rewards, they also ended becoming a part of a downward spiral out of which it was impossible from them to recover. We can infer from the above observation that while a breach in Business Ethics is not only a breach of the basic principles of honesty with regard to business, but the violation of these ethics is quite similar to that of a quicksand where the perpetrator has no way out but to go deeper into the confusion and perplexity of the corrupting scenario that the breach eventually gives birth to. An example of this fact can be seen in the chain of events that Dynegy was faced with when it attempted a white-knight rescue of Enron but failed to do so because of the extensive degree of damage that Enron had already suffered. To this day, Dynegy is still busy making efforts to disassociate itself with the corporate crash that led to the loss of billions of dollars of money that was supposed to be the pension funds of countless Enron employees. Not only is this a matter of concern for the organization involved in the breach of business ethics, also leads to the suffering of collateral damage in the form of other companies. Other companies may include sister organizations or organizations that are accredited for their partnership with the organization under subject. Implications of the Enron Scandal In perception of the Enron Scandal and the disaster that it caused, it came as no surprise that legislation was made in order to ensure that such practices do not happen ever again. The legislation that followed is considered to be monumental in its contribution to the application of business ethics, specifically in the areas of information disclosure. It was The Public Company Accounting Reform and Investor Protection Act of 2002 that came as a direct result of the Enron Scandal (allbusiness.com, 2008). The Public Company Accounting Reform and Investor Protection Act of 2002, also known as the Sarbanes-Oxley Act, addresses specific areas of Business Ethics pertaining to the information disclosure policy that an organization adopts. The Sarbanes Oxley Act came as perhaps one of the most major refurbishments of legislation in the history of the United States. The act, consisting of eleven titles, addresses issues that contribute directly to investor confidence since investor confidence was very badly shaken by companies such as Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. These organizations had led investors to lose billions and had caused a severe decrease in investment motivated by a fear of loss amongst the investors (Bumiller, 2002). The Sarbanes-Oxley Act made it obligatory for the CFOs and the CEOs of all publicly owned organizations for their financial reports. Amongst many other provisions, the act also instated that personnel on executive officer or director positions were not authorized to request for nor accept loans from their company, the act completely prohibited all forms of insider trading in organizations as well. The act made is mandatory that all internal audits were certified by outside auditors and enforced penalties for violations of the clauses of the act. The act served to strengthen the necessity for an adherence to business ethics by increasing the time period for jail sentences for violators of the clauses of the act. As a measure to avoid occurrences of the involvement of auditing parties in scandals similar to that of Enron and Arthur Anderson, the act made it illegal for accounting firms to provide any form of consultation services to their publicly held clients. The act specifically gave a framework for the creation and controlling of internal financial controls and their regular audits. By implementing this particular framework, the congress made a successful attempt at restoring investor confidence to a great extent. Conclusion When analyzing the Enron Scandal, there remains little doubt in the standpoint that what Enron did was a contravening of business ethics. The degree to which the infringement of business ethics was carried out by Enron can be seen through horrifying actions such as the staging of fake trading rooms in the Enron Head Quarters to give false impressions to analysts regarding its influx of business (BBC MMIII, 2002). It is clear to see from the selected example that if business ethics is to be implemented, then it is not merely a regulatory policy that is required, but much like the Sarbanes-Oxley Act, the implementation of regulation should not span only corporations but also analysts and auditors (Hinman, 2002). From the analysis presented in this paper, we can infer that the actions of Enron were unjustified and that in terms of hindsight, the conclusion that Enron met was deserved just as much. Measures such as the Sarbanes-Oxley Act have contributed to the renewal of confidence in investors and it does not come as a surprise that organizations have chosen to establish and implement their codes of ethics in manners that are directly related to the Enron Scandal in order to testify their intention to avoid the occurrence of a similar incident at any cost. Much research has been put into the field of Business Ethics following the Enron Scandal and even though it came at the cost of the loss of billions, it brought a degree of awareness to the public that may have been unattainable otherwise. Works Cited allbusiness.com. (2008). What Is the Sarbanes-Oxley Act? Retrieved March 5, 2009, from AllBusiness: http://www.allbusiness.com/government/business-regulations/11410-1.html BBC MMIII. (2002, February 21). Enron 'created fake trading room'. Retrieved March 2, 2009, from bbc.co.uk: http://news.bbc.co.uk/2/hi/business/1833221.stm Bumiller, E. (2002, July 31). Corporate Product. Retrieved March 5, 2009, from nytimes.com: http://query.nytimes.com/gst/fullpage.html?res=9C01E0D91E38F932A05754C0A9649C8B63 Clark, R. (2008, 1 27). How Poor Business Ethics Led To The Collape Of Enron Ethics. Retrieved March 5, 2009, from EzineArticles.com: http://ezinearticles.com/?How-Poor-Business-Ethics-Led-To-The-Collape-Of-Enron-Ethics&id=951763 DesJardins, J. (2008). An Introduction to Business Ethics. McGraw-Hill Humanities. Hinman, L. (2002, March 21). A Moral Challenge: Business Ethics After Enron. Retrieved March 5, 2009, from sandiego.edu: http://ethics.sandiego.edu/LMH/op-ed/Enron/index.asp Shaw, W. (2007). Business Ethics. Wadsworth Publishing. Sterling, T. (2002). The Enron Scandal. Nova Science Publishers. Tracinski, R. (2002, January 25). Enron Ethics. Retrieved March 5, 2009, from intellectualactivist.com: http://www.intellectualactivist.com/php-bin/news/showArticle.php?id=59 Read More