The Legal and Ethical Environment of Business - Case Study Example

The Legal and Ethical Environment of Business Introduction The unethical and illegal practices sank the boat of Enron, WorldCom, Tyco and other large companies in 2001. The practices such as the creative accounting were mainly carried out by the senior management of these companies. The practices such as accounting for the unrecognized profits and sales in the company accounting; creating and entering into the partnership agreements with the fictitious companies and recording illegal and unethical business transactions were largely carried out by the management of the Enron. And, mainly greed, power, profits were given higher preference by the leaders of the Enron; they promoted and nurtured the organizational culture in which, deception, fraud, embezzlement and other unethical and illegal practices were largely carried out by the senior and junior management of the companies. In the following parts of this paper, first, Enron debacle is described, it is followed by the causes of unethical and illegal practices in the corporate world; before the conclusion, implications from the investor and business perspectives are provided. Enron Debacle The unethical and illegal practices sank the boats of Enron, WorldCom, Global Crossing, Tyco and Adelphia at the beginning of this century (Friedrichs, 2004). Particularly, the case of energy giant, in 2001, Enron was the most colossal fiasco in the entire corporate history in which a number of unethical and illegal corporate practices such as creative accounting were carried out at the cost of thousands of its shareholders and employees. Enron carried out the illegal accounting practices under the banner of the partnership. Enron took partnerships to a new level by developing ‘Special Purpose Vehicles’ (SPVs), or pseudo partnership, that allowed Enron to sell assets and ‘create’ earnings that artificially increased its bottom line; Enron massaged its earnings by accounting for gains on the sale of assets to SPVs (Sims and Brinkmann, 2003). They also maintain that Enron in some cases booked revenues before the partnership producing significant revenues; in this regard, they quote that the Project Braveheart, a partnership Enron cultivated with Blockbuster was nurtured to cater movies to homes instantly over the phone lines. More seriously, the worst example of the creative accounting was that after a very few months to the partnership, Enron in advance accounted for $ 110.9 million profits in its business accounts despite these profits were never actually gained or earned by the company as the partnership collapsed after only a 1,000-home pilot (Sims and Brinkmann, 2003). Causes of Unethical and Illegal Practices in the Corporate World The encouragement of the rule-breaking nurtures the practices of unethical and illegal practices in the corporate world. If the corporate leaders do not discourage the rule-breaking and at the same time, admire the acts of intimidation in the corporate world, it would be no surprise to face the severe violations of ethical and legal practices in the corporate world. In this regard, Schein (1985) has emphasized on leadership as playing a key and critical part of the organization’s culture because it is the role and moral supremacy of the leaders to create, reinforce, or change the organization’s culture. This remains applicable not the least to an organization’s ethical environment (Sims, 2000; Trevino et al., 2000). And, the organizational culture can be influenced by the leaders by applying any of the five primary mechanisms such as attention, role modeling, reaction to crises, criteria for dismissal and selection and allocation of rewards (Schein, 1985). But, in Enron, all were taken in the opposite direction. Zellner (2002) describes Jeffrey Skilling, a top level executive at Enron, as saying that a leader driven by the almighty dollar and that Skilling would say that all that matters is about money; and you buy loyalty with money. Within this context, Enron executives’ attention, which is the primary mechanism suggested by Schein (1985) about the leaders to enforce change, was largely focused on the profits, influence, power and greed; and, directly or indirectly, the top executive management of Enron was putting down and putting across this message to the employees working in the company. In addition to that, the unethical practices were so common as soon as the crises became public, the top management of Enron put every effort in order to conceal accounting irregularities; moreover, the leaders of the company were denying the existence of any such problem; not only that, they started to blame and raise fingers at each other for the wrongdoings at Enron. At Enron, leaders themselves were involved in the unethical and illegal practices that indirectly encouraged the other staff members to follow the trend and behave in the similar fashion. Implications: from the Perspective of Investor and Business The unethical and illegal practices have raised a number of questions and doubts in the minds of all the relevant stakeholders. The regulatory authorities such as Securities and Exchange Commission, was severely criticized by the stakeholders and shareholders of Enron and other investors as it failed to protect the investment of the shareholders in the company. And, it was the pressure of the stakeholders that brought the recommendations of the Sarbanes-Oxley Committee. Now, the regulations and regulatory requirements of the companies have become stricter than they used to be in the pre-Enron era. The investors had lost their confidence over the management of the companies. The declaration of the Enron fiasco sank the investment of many individual and institutional investors. In addition to that, the stock exchanges observed a substantial reduction in the investors’ activities. Many of them decided not to invest anymore till more stringent regulatory measures were enforced. Prior the Enron debacle, the investors did not contemplate much over the practices and policies of the existing management of the organizations and put their investment in the companies as they were confident about the safety and security of their investment in the companies. However, after the collapse of Enron, the individual and institutional investors have lost their confidence. The business is not immune from the impacts of the unethical practices and policies of the companies. In today’s commercial world, a number of businesses considerably need investment funds in order to entertain their business short term and long term objectives. For a large business companies, the most reliable and confident source of funding is provided by the individual and institutional investors. Both types of investors do not put their money without having trust over the management of the companies; it is the function of trust and confidence over the top management of the companies and long their policies and practices that motivate and convince the current and potential investors to keep investing in these companies. All in all, it is the role of trust that works as a bridge between the management and the investors. However, after the appearance of the unethical and illegal practices by the Enron, WorldCom and other companies, the investors have totally lost their trust and avoid investing in company. As a result, the entire business environment in the United States of America has become more uncertain, unreliable and complex as well not only for the current individual and institutional investors but also for the potential investors as well. Conclusion The collapse of Enron took away the investors’ confidence over the management of the companies. A number of factors were involved that were chiefly responsible for the collapse of the Enron such as the greed and power culture nurtured and promoted by the management of the Enron. Consequently, a number of investors in these days are reluctant to put their trust over the management of the companies and they prefer to avoid investing in companies. References Friedrichs, D., (2004). Enron et al.: Paradigmatic White Collar Crime Cases for the New Century, Critical Criminology, 12, 113-132. Schein, E. H., (1985). Organizational Culture and Leadership. San Francisco, CA: Jossey-Bass,) Sims, R. R. (2000). Changing an Organization’s Culture under New Leadership. Journal of Business Ethics, (25), 65–78 Sims, R.R. and Brinkmann, J. (2003). Enron Ethics (Or: Culture Matters More Than Codes). Journal of Business Ethics (45), 243-256. Trevino, L. K., L. P. Hartman and M. Brown: 2000, ‘Moral Person and Moral Manager: How Executives Develop a Reputation for Ethical Leadership’, California Management Review 42(4), 124–142. Zellner, W.: 2002, ‘Jeff Skilling: Enron’s Missing Man’, Business Week Online (February 11). Read More