Enron - Analysis of an Ethical Business - Case Study Example

Analysis of an Ethical Business of Introduction A corporate scandal emerged in October that made Enron insolvent. Enron is an energy company in Texas. The company was one of the most innovative companies in America during the late 1990s. The collapse of the company, therefore, shocked the public seriously. On top of the company’s success, Enron was hailed for corporate ethics and social responsibility (Fox, 2003). Everyone wondered why a company with such reputation could collapse just like that. The answer to the shock lay in the unethical behavior of Enron’s executive management, which was fueled by the external audit failure and the lack of transparency. This paper explores the ethical dilemmas that Enron faced and the manner in which it navigated the same. Summary of the Scandal The Enron scandal that occurred in 2001 gave business ethics a new dimension. Enron was an energy firm operating in Texas. The firm was for a long time considered a success story in the realm of economics. The company’s stock grew at a faster rate, and its entire board of directors was content with the management of the company (Fox, 2003). However, it was later discovered that the company’s management kept two sets of books that hid billion dollars in debt. One major accounting firm – Arthur Andersen – knew of the deception but continued to work with Enron. The Enron scandal was quite a big shame to America, which was viewed globally as having a weak form of business management. The Enron scandal is so far one of the most notorious in the history of America. While the regulation of term within a corporate and commercial setting applied to the ability of the government to authorize and regulate commercial behavior and activity regarding individual businesses, Enron executives applied for the same and were granted government deregulation. Consequently, Enron executives were allowed to maintain agency over earnings reports, which were issued to employees and investors alike. The agency gave room for Enron’s reports to be tampered with – losses were not projected fully, prompting more investments from investors wishing to invest in a seemingly profitable company (Collins, 2006). The Enron executives embezzled funds streaming in from investments as they reported fraudulent earnings to the investors. This trend not only encouraged more investments from existing stockholders, but also attracted other investors desiring to reap from the apparent financial gains of Enron Corporation. Due to the executives’ actions, Enron Corporation became bankrupt. The loss occasioned to investors exceeded $70 billion. Moreover, the actions cost both employees and trustees upwards of $2 billion (Collins, 2006), an amount considered to have resulted from misappropriated investments, stock options, savings plans, and pension funds – due to Enron’s limited liability status and government regulation. Only a minute portion of the lost cash was ever returned. Enron’s Reaction to the Ethical Dilemma A crucial aspect of the scandal was the Board’s disinterest in questioning the company’s management. Due to the hiking stock prices and profits, the Board saw no need to question the company’s management. The Board considered itself as the stockholders’ representative without an obligation to the employees of the company or the public. The ethical dilemma in this scandal was the Board’s role in controlling the company’s management. The management sought to enrich itself whereas the Board sought to make the company’s stockholders rich (Fox, 2003). The role of the Board in overseeing the company’s management was reevaluated following the scandal. An audit firm should work together with the Board to monitor the finances of the company. The audit firm should be the stockholders’ eyes and ears that diagnose the financial position of the company. On the contrary, Arthur Andersen doubled up as a consultant in the case of Enron. Precisely, this meant that the audit firm was interested in the company’s continued prosperity. Therefore, the audit firm saw no need to expose the fraud of the company. As much as the company made profits, and the Board was happy, the audit firm considered it needless to expose any fraud (Collins, 2006). Most companies are caught in the dilemma of accruing short-term profits and realizing stable development. Enron clearly went for the former option. Stockholders seek dividends on their holdings, but the Board represents them. Enron made everyone happy in the short-term – the stockholders, auditors, and Board. Investors made quick fortunes due to the rising stock prices. The stock plummeted following the discovery of the fraud. All the fortunes disappeared in thin air (Boje et al., 2004). The ethical dilemma here was the real purpose of Enron – was it a stable and productive economic unit or a profit-making machine? Enron was the latter. Stakeholder Analysis The major stakeholders affected by the Enron scandal were the employees, executive management, third parties in touch with the company including Arthur Anderson, the company’s stockholders, and the economy. The executive management of Enron believed that the company must be the best in all it does and that they must safeguard their reputations and compensation as the United States’ most successful executives. The secrecy most sought after by the executives had the short-term outcome of financial gain. This came at the expense of the unforgettable reputation that would haunt them for the rest of their lives as well as the anticipated litigation (Boje et al., 2004). The company’s employees had their jobs terminated and were deprived of their retirement savings. Arthur Anderson was dissolved following the scandal despite being among the top five audit and accountancy firms in the world. The stockholders lost their investments because Enron’s stock went down following the scandal. The economy was largely affected because Enron was a significant contributor to the GDP owing to its annual income, which translated into higher corporate tax. Opinion on Enron’s Ethical Conduct A closer look at the ethical dilemmas reveals that Enron failed to act in the most ethical manner possible. The company was stuck between making quicker short-term profits and building a stable and productive firm that would last longer. This was an easier choice that any layperson would make easily. To make matters worse, the executives knew that the profits were coming in the wrong way. The executives maintained two separate books of account. This move amounts to utmost unethical conduct on the part of the executives and the company overall. The Board of Directors neglected their role on the assumption that all was well in the company. This is so lame an excuse to bar the Board from overseeing the activities of the executives and the rest of the employees. Had the Board taken its obligations seriously, the fraudulent schemes could have been detected before they reached disproportionate levels. In this case, Enron could have saved much in terms of resources, reputation, and stock performance. The choice of the Board to assume everything was well in the company is quite unethical. All stockholders vested their confidence on the Board to oversee the company’s affairs on their behalf. The Board failed to do so through negligence. Therefore, the Board should take responsibility for the negative consequences that befell the rest of the chain, including the employees, the stockholders, and the economy. How the Scandal Could Have Been Avoided or Mitigated Examining the Ethical Climate and Setting up Safeguards Corporations are made up of cultures. Enron could have considered conducting carrying out a formal assessment of its corporate culture from the various perspectives of attitudes, values, perceptions, standards of conduct, communications, pressures to commit misconduct, risks, and vulnerabilities. It should have paid attention to its corporate values and how effective they had been internalized by its Board senior leadership, key stakeholders and employees at all levels (Ailon, 2011). Not Just Printing, Posting, and Praying If there is a Code of Conduct, it does not suffice to simply print the copies and pin them on the walls or bulletin boards Codes of Conduct are a projection of a company’s vision, mission, values, and strategies. Effective corporate codes offer guidance for ethical business decision-making, which balance conflicting interests. Codes of conduct should be living documents valued and encouraged at the top levels (Ailon, 2011). Senior executives should set an example for the kind of conduct they expect from lower level employees. Ethical flaws at the top-level management are often perceived as a ticket to choosing the easiest route at lower levels. Executives should hold themselves to the highest conduct standards before demanding the same from lower level employees. ENRON had this weak link, and that is why it messed up everything. Separate Auditing Functions from Consulting Functions Permitting Arthur Andersen to both consult and audit with Enron presented at least the appearance of a conflict of interest. Thereafter, hiring employees from Arthur Andersen as Enron employees to manage the affairs of its former employees cemented this conflict of interest. The integrity and independence of financial auditing firms are crucial to the growth and stability of businesses and free markets across the world. Consulting and auditing functions must be kept separate. Talking with Employees Communication failure causes much more pain than smashing a thumb with a hammer. Poor communication does not heal, but the sore thumb heals eventually. "Managing by Walking Around" (MBWA) is a simple way for managers and supervisors to communicate their requirements and expectations effectively in informal, daily meetings with employees (Ailon, 2011). These conversations present employees with two sets of data: the spoken words and the inferred data, which the employees grasp from the manager’s words. Employees want to know two important things: what is required and expected of them to survive and succeed, and how they are faring at a given time. Managers should communicate Expectations, Roles, Goals and Priorities. Choose to Live the Corporate Values No compliance manual can cover every contingency regardless of its thoughtfulness. If one could be drafted that covers all possibilities, it would take so much space and become cumbersome to use that employees would never open its covers. By equipping employees with values and empowering them to decide based on the values, they will be freed to act even in the absence of specific guidance. An enjoyment of the peace of mind would be experienced knowing that employees have a common ground from which they can make all decisions. Changed Relationships with Stakeholders The Enron scandal strained its relationship with the stakeholders in several ways. The company fired most of its employees because it could no longer afford to pay them due to its bankruptcy. In addition, the company denied the employees retirement benefits. A number of employees filed suits against the company to claim for wrongful termination of employment, as well as deprivation of benefits. On the other hand, the executives lost their jobs, and most of them were sued for perpetrating fraud in the company. Enron no longer engaged Arthur Anderson because it masterminded the fraudulent activities of the executives. The eventual dissolution of the audit firm precluded all chances of working together with Enron at some future date (Nelson et al., 2008). Lastly, the economy was the most affected. Enron supplied a greater proportion of the energy needs of America. Its collapse meant that America had an energy shortage. Prices of energy went up as the remaining energy firms struggled to fill the gap created by Enron. In addition, the government suffered a blow in terms of revenue generation because Enron was a large company with a huge capital base. The corporate tax for Enron was a huge amount. Conclusion Fraudulent accounting has been ranked as a high priority risk. On the other hand, whistleblowing has been proven as the fastest detection strategy for fraud. Although Enron had a watertight ethics policy, it could have averted the financial scandal if it had encouraged whistleblowing within the organization. Arthur Anderson audit firm failed to perform its obligations of detecting fraud. An organization should not be taken as an individual but rather a group of individuals with a common goal. Consequently, companies require transparency and proper channels for reporting unethical activity regardless of the hierarchical status of the persons involved. The ethics program of a company should not be assessed solely based on the looks on the paper, but the mode of integration into the organization’s culture. The assessment should also take into account ethical autonomy and the extent of transparency applicable to all positions within the organization. References Ailon, G. (2011). Mapping the cultural grammar of reflexivity: the case of the Enron scandal. Economy and Society, 40(1), 141-166. Boje, D. M., Rosile, G. A., Durant, R. A. and Luhman, J. T. (2004). Enron Spectacles: A Critical Dramaturgical Analysis. Organization Studies, 25(5), 751-774. Collins, D. (2006). Behaving Badly: Ethical Lessons from Enron. Dog Ear Publishing, LLC. Fox, L. (2003). Enron: The Rise and Fall. John Wiley & Sons. Nelson, K. K., Price, R. A. and Rountree, B. R. (2008). The market reaction to Arthur Andersens Role in the Enron scandal: Loss of reputation or confounding effects? Journal of Accounting and Economics, 46(2-3), 279-293. Read More