Ethical Implications of Enron Scandal - Case Study Example

How the Enron scandal unearthed bad ethical practice by the organisation? The essay seeks to outline the ethical implications of a scandal which negatively impacted on Enron Corporation, a company based in Houston, Texas. The essay starts by giving a brief background of the company which is followed by an outline of the consequences which transpired which led to the unearthing of the scandal. The paper also looks at ethical implications of such practices in business and the significance of law in order to counter such practices. The paper will also attempt to establish the impact of cases involving fraud and measures that can be taken in order to minimise such events. Basically, Enron Corporation was established in 1985 and it dealt with issues related to energy. The executives practised off-book accounts which negatively impacted on the operations of the organisation. The executives of the company capitalised on the use of loopholes in the accounting system as well as poor financial reportage Hanson (1). Debts amounting to billions of dollars in projects and deals which did not succeed were hidden in the process. The company misrepresented its financial statements in order to portray a positive picture to the shareholders about its performance. Interestingly, the company sought to appeal to investors through falsehoods. In actual case, this was not the situation obtaining on the ground given that it hid its financial statements from public scrutiny. Such practice was blessed by the Chief Financial Officer, Andrew Fastow and other executives. The system adopted by the organisation in its operations contributed to a malfunction of the corporate culture. Emphasis was shifted to short term earnings which resulted in bad accounting practices. This came to light when the company refused to be censured about its performance by its unwillingness to reveal its balance sheet as well as other financial records. This practice is mainly viewed as unethical in business. The concept of ethics plays a significant role in shaping the operations of an organisation in different situations. Basically, business ethics refers to the values, principles and standards that operate within business and these attempt to make a distinction between something that is morally good from bad (Rossouw, 6). The value system of an organisation mainly shapes its ethical code of conduct. Thus, Desjardins (5), describes values as “essential and enduring tenets” that help define the company and are “not to be compromised for financial gain or short term expediency,” (DesJardins 2006:5). The opposite is exactly happening at Enrons where it can be seen that the executives in the company are mainly concerned with short term earnings at the expense of proper business principles. According to Kirk Hanson, the executive director of the Markkular Center for Applied Ethics, the Enron scandal is the most significant corporate collapse in the United States as a result of failure by banks dealing in savings and loans. This shows the need for reforms in accounting and corporate governance in the United States and a consideration of ethical values by corporations operating in this country. Ethical values are not taken into consideration by the company which seems to be obsessed with making more profits at whatever expense. It can also be noted that the company was involved in illegal, corrupt dealings which were highly risk. By any standard, Enron’s bad practice negatively impacted on the economy of the US as a whole and the shareholders were at the losing end. Financial institutions ought to be regulated in their operations for the sake of protecting the members of the public who may have interests in investing in such organisations. The main people involved in this scandal are the executive officers who are at the forefront of manipulating information in a wrong way in order to appeal to the interests of the members of the public. The employees are also involved as they are the ones who carry ought the activities that are meant to undermine the interests of the members of the public. The board members are also responsible as they authorise such kind of practice by the executives in particular. It can also be seen that the auditors are also involved in this scandal as they manipulated the data in favour of the company. On the other hand, the investors are impacted by these activities as risked their money. Hanson (1) argues that executives who display arrogance as well as claim that they are the best should be treated with suspicion. These should be a "red flag" for the investors, directors and the general public as they risk losing their money to companies which are involved in bad practices. Public companies should be open for scrutiny in order to attract investor confidence in their operations. A company that refuses to be criticised by the stakeholders should be treated with suspicion as it would be trying to hide something from them. In order to be accountable to the investors, a company should make its financial statements public to the people with interest in it. It is also important for public corporations to hire independent auditors who cannot be easily manipulated by the company directors in order to present favourable results which do not reflect a true picture of what is happening on the ground. According to Tesfatsion (2) Enron was charged with securities fraud which involved fraudulent manipulation of financial results. The deregulation of the energy sector contributed to this malpractice given that there were loopholes in the system. Financial as well auditing companies have to be regulated so that their operations are in compliance with the expected standards. Failure to regulate them may result in bad practices which can lead to many people being negatively impacted. As such, stiff penalties should be applied to all people who are found guilty of committing such a serious offence. Auditors should also be encouraged to be transparent in order to gain public confidence. In most cases, auditors are regarded as the custodians of members of the public hence they must make sure that organisations operate in a transparent manner for the benefit of different stakeholders. The investors were seriously hurt by the unethical behaviour displayed by the executives at Enron. For instance, the shareholders lost money amounting to about $11 billion when the company’s stock price fell to less than a dollar in 2001. Its stock price use to trade at around $90 and the abrupt change of circumstances led to an unprecedented decline in business. This resulted in the company filing for bankruptcy which meant that the investors were severely affected by this unfortunate incident. Other financial institutions which were owed money by this company were also affected as they lost their money. When a company files for bankruptcy, various parties are negatively affected as they may not be able to recover their money invested in the company. In my own opinion, I think the right people were brought to book. The trial and subsequent conviction of the executives which led to their imprisonment is commendable given that this is a serious offence. The executives were convicted of several counts of fraud and were given varying prison terms. Cases involving fraud of this nature often betrays the shareholders as they are bound to lose all their investments. Unsuspecting people end up losing their hard earned money to unscrupulous business people who are bent on profiteering. I think there is need to formulate laws that are specifically meant to regulate the operations of organisations which deal with public funds for the sake of safeguarding the public interest. Such law should be enforced so that all culprits are brought to book in a bid to deter the would be offenders. I think it is also proper for the auditors to publish financial information about all public corporations so that their operations are closely checked. In order to promote accountability and credibility, public corporations should not conceal their dealings as this can attract negative criticism. Over and above, it can be noted that the Enron Scandal highlighted a high profile case involving fraud and bad accounting practices. The company’s practices were unethical as it triumphed on inflating its financial information in order to attract investors. However, this came to light when its stock prices plummeted and it subsequently filed for bankruptcy. Investors as well as other financial institutions owed by the company lost their money. It has been observed that there is need for regulation of this particular industry in order to avoid a similar situation in the future. Without proper legislation, investors risk losing their money to unscrupulous corporations hence the need to enact as well as to enforce laws that are meant to guide the operations of all organisations. In my own opinion, I think the right people were brought to book as these were the chief engineers of the bad practice which led to the demise of the company. Fraud should be treated as a serious offence as it can negatively impact on unsuspecting investors who risk losing their money should such an incident happen. Works cited DesJardins, Joana. An introduction to business ethics. 2nd Edition. Boston: McGraw Hill international Edition, 2006. Print. Lessons learnt from the Enron Scandal, Markkular Center for Applied Ethics 2002. . Professor Leigh Tesfatsion, the Enron scandal and moral hazard,ND. . Rossouw, Daniel. Business Ethics: 3rd Edition. Cape Town: Oxford University Press, 2004. Print. Read More