Ethical Issues on the Collapse of Enron - Article Example

Table of contents An ethical issues report on the collapse of Enron…………………………………….2 Introduction……………………………………………………………………………2 Mark to market valuation and its role in Enron’s collapse…………………………….2 Consequences of Enron’s actions and their impact on truth…………………………..3 Whistle blower’s ethical dilemma or ethical issue…………………………………….6 Whistle blower protection and the steps to be taken…………………………………..7 Business ethics issues in Enron collapse and their relationship with truth……………8 Conclusion…………………………………………………………………………….1 An ethical issues report on the collapse of Enron Introduction The Enron scandal came to light in 2001 October and it resulted into the collapse of Enron which was an energy company in America based in Texas. It was formed by Kenneth Lay in 1985. The collapse of the company came about when Jeffery Skiling the CEO formed an executive staff that used accounting loopholes, poor reporting on finance and special purpose entities to hide debts worth billions of dollars from deals and projects that had failed. Share holders and investors lost billions of dollars with many people losing jobs. This report examines various ethical issues surrounding the collapse of the company. Mark-to-market valuation, and its role in Enron’s collapse Mark- to-market valuation is accounting based on an asset’s fair value or liability of the same asset based on prevailing market price of that liability or asset or similar assets and liabilities or based on a different fair value that is assessed objectively. The accounting done through mark to market has the ability to change balance sheet values on frequent basis with changing market conditions. The mark to market technique of accounting can easily be inaccurate in case there is an unpredictable market price (Ferrel & Fraedrich 2010). The collapse of Enron is blamed by some people on the fact that Enron was allowed in 1992 to use the mark to market technique. This technique was formerly used by trading and brokerage companies alone. Mark to market required that the value of a security be recorded daily to be used in calculating losses and profits. By use of this technique it became possible for Enron to start counting certain projected earnings expected form long term contracts in energy as income available at that time. With mark to market it is not easy to accurately value the expenses and income of the future in a collective way because of false information, over pessimistic and overoptimistic expectations. This money counted as current income could take many years before being collected. It is therefore believed that mark to market was used in inflating the numbers of revenue through manipulation of projections for revenue that was to be obtained in the future. The use of the mark-to-market technique together with other bad practices is the things that made it hard for people to understand how Enron’s money was being made. The numbers could be found in the books meaning stock prices were high although Enron was not paying large sums of money in taxes (Fusaro & Ross 2002). The accounting method used by Enron could make it possible for the company to make grow and make money but they could not bring in a big a mount of taxable money. It was possible for Enron to buy new ventures which appeared promising as new profit centers. These acquisitions were registering exponential growth. The company was also in the business of making entities off the balance sheet so that debt could be moved from the balance sheet and they also transferred the risks for the rest of the business ventures they owned. Consequences of Enron’s actions and their impact on the values of truth and trust With the collapse of Enron resulting from the unethical actions of its leadership elicited reactions from various quarters. These were warranted because of the effects of the collapse of the company to the people involved. Many people became jobless, with thousands of others losing their pensions and investments. Markets for electricity trading collapsed and brought about an era in which corporate scandals were abundant which made people world over to remain without any confidence in corporate integrity. As a result companies are forced do defend any financial arrangement that may be complicated even if it is legitimate. Over 4000 people formerly employed at Enron struggled a lot to find jobs with several retirees losing their full retirement portfolios. The reactions that came up were meant to put measures in place which can help avoid similar occurrences like that of Enron in the future. In the U.S the House of Representatives passed the Sarbanes Oxley Act in 2002. This was done in an attempt to bring about improved principles as well as accountability in American company operations. The law was meant to increase restrictions on any company operating in the U.S. This law has been seen to be major and comprehensive in the business security matters of the U.S in the past few years. Those found violating this law have been given major penalties in the boards of companies. The Sarbanes Oxley is to help big businesses from falling into financial deception and giving false information to share holders and investors. It therefore compels the business management to adhere to the truth so that they can nurture trust in their relationship with the share holders as well as the investors. The investors find protection under this act from the unethical behavior of the public companies. Investors therefore cannot lose assets unfairly the way things happened in the Enron case (Ferrel & Fraedrich 2010). The Sarbanes Oxley Act has eleven main sections which range from extra duties of the corporate board to punishment. The SOX has an influence on the way company records are managed by way of its three points. Point 1 is for restricting record alteration, falsification and destruction. A person found doing this faces imprisonment and severe penalties. Point 2 requires the business to follow some guidelines on recording, communication, records and audits among other things. The Sarbanes helps keep the big corporations from engaging in fraudulent behavior. All these points are meant to ensure that the truth is said and maintained in all circumstances with trust being upheld between the companies and their investors and shareholders. Australia’s reaction to the scandal that rocked Enron was almost the same to that of the U.S since both countries enacted legislation to curb future scandals of the same nature. In Australia the wake of the Enron scandal together with other corporate scandals such as the HIH insurance group resulted in some regulatory responses which saw the enactment of the CLERP 9 Act. The “Corporate Law Economic Reform Program Act 2004” was a reform done on the corporations Act 2001 that is used for governing corporate law within Australia. Its enactment was done in 2004. The Act is based on proposals about reforms found in the CLERP 9 discussion paper released by the government of Australia. The CLERP Act has certain reforms as well from the HIH Insurance Royal Commission report which was released in 2003 July. In the CLERP Act there is a proposition for 3 bodies which are meant for representing some interests. First there is the financial reporting council which oversees standard setting for the purpose of accounting and audit. It also has the corporate governance council for Australian Securities Exchange which oversees the development of the guidelines of best practice for corporate governance in listed companies (Ferrel & Fraedrich 2010). Finally there is the Share holders and investors advisory council which provides the forum for considering the concerns of retail investors. A suggestion by CPA Australia required the this legislation needs to build the framework that can also identify the practices and conduct of the boards of directors, the staff responsible for preparing financial reports as well as external and internal audit functions. Another suggestion was that the roles of agencies for credit rating, institutional investors, investment banks and financial analysts be included. In the U.K there is the Companies Act 2006 and it is the basic source of company law in the U.K. This Act is a code for company law that is very comprehensive since it brought changes on all facets in the law concerning the companies. Major provisions are that it codifies various principles of common law like the ones that relate to the duties of directors. It also has an implementation of the directives of transparency obligations as well as the European Union’s take over. It also introduces the some new provisions meant for both public and private companies. Whistle blower’s ethical dilemma or ethical issue The whistle blower was faced with an ethical issue and not an ethical dilemma. An ethical dilemma presents two contradicting morals which require the person to choose one but in the process a contradiction comes up. In the case of the whistleblower in the Enron scandal she was supposed to choose from right and wrong which constituted an ethical issue. She knew that things were not going on well in the company and something needed to be done immediately (Fox 2003). She failed to get an opportunity to confront Jeffrey Skiing the then CEO. She prepared her memo and put it inside the box but still the issue was not addressed by the Lay she prepared to meet her personally. It is clear that she faced serious consequences for coming out reveal the hidden issues but she had done what was morally right. Therefore the problem was an ethical issue because she only needed to choose between revealing the rot in the company or keeping quiet which could have been unethical. Whistle blower protection and the steps to be taken Organizations should seek to protect whistleblowers. The reason for this is that whistleblowers are people who know and act ethically in most cases in environments where many people are behaving unethically. Ethical behavior is required in order for corporate world to succeed. Unethical behavior such as failing to tell the truth and eroding trust like what happened in the Enron case are sources of so many financial, economic and social problems to those who are affected. The noble thing needed to save loss of property is to reveal the wrongs being done by other people by whistle blowing. This ensures that major scandals are avoided, the collapse of major investments is avoided and the property of share holders and investors is protected from fraudulent activities (Ferrel & Fraedrich 2010). Companies must ensure that any whistle blower is protected in order to promote and nurture the ethical culture of whistle blowing to save other people’s property and interests from corrupt business dealers. When whistle blowers are protected then many others will come up without fear meaning the level of corporate scandals will go down tremendously. In order for an organization to protect whistle blowers it should seek to comply with the available whistle blower legislation in its country of operation. Many countries have enacted legislation which seeks to protect whistle blowers. For example the Sarbanes Oxley Act provides that companies should have no retaliation on people who do the work of whistle blowing. All the companies should ensure that a policy for whistle blowers is put in place so that people can be encouraged to raise concerns over bad practices and corruption without entertaining the fear for retaliation. Organizations should have an open door policy and maintain no retaliation standards. Therefore a good internal process should be created to carter for the protection and anti retaliation policy of the whistle blower. Business ethics issues in Enron collapse and their relationship with truth The business ethics issues that befell Enron included the conflict of interest that came about as a result of Arthur Andersen being the consultant and the auditor of the company at the same time. The board of directors failed to show attention to the financial entities that were off the books and the failure of the management to speak the truth concerning the company’s health and business operations. The management at Enron covered up their failures when their business started falling. There was lack of ethical literacy because the Enron failed to see ethical issues before hand. Since 1969 when there was the Texas Gulf and Sulfur case in the Supreme court of the U.S it became illegal for directors such as the chairman of Enron with inside price information that is sensitive to trade in the stock (Salter 2004). Arthur Anderson a critical stake holder in Enron tried to reduce the effect of clients fleeing and tried to negotiate with other major accounting firms to sale some of its business parts. The top managers at Enron opted to deceive other stake holders and get short term financial benefits. The members of the board neglected their duty of providing adequate oversight and to restrain the excesses of top management. Institutional and individual investors lost many million dollars just because they were not given correct information about the performance of the firm financially because of questionable accounting activities. Employees were also deceived concerning the financial position of the firm and they were also deprived of the needed freedom to do diversification for their retirement portfolios. Harm also befell the government due to the political tradition in America where only those corporations serving the public good are chartered was violated because of absence of democratic protections from the big harms to public stake holders resulting from aristocratic power abuses which benefit few wealthy elite (Collins 2006). Within the legal profession the management of Enron put pressure on Vinson and Elkins to condone employee and investor fraud in a legal way. J.P Morgan Merill Lynch and Citigroup made fees of a value of more than $ 200 million from deals which assisted Enron to hide their debts and boost their cash flow and in the process harming stake holders. The Executives of Enron may have failed see the moral issues but it cannot be disputed that they were insensitive to those issues. They looked overly and erroneously confident over their wrong perceptions of what moral business conduct is and whenever they were challenged they retaliated against those accusing them and searched for information in a manner that confirmed the things they believed in. the members of the board and the top management ignored the feed back of the whistle blower and so they turned morally deaf, mute and blind which diminished their ability to be ethically aware and responsive (Ferrel & Fraedrich 2010). The board members and managers of Enron analyzed and resolved moral conflicts of interest in a poor way by use of self centered policies and also they trivialized the problems caused to the rest of the stake holders. Overemphasizing personal gain at other people’s expense destroyed any employee trust still existing. All the business ethical issues that rocked Enron are related to the value of truth. This is so because the management did not tell the truth to stake holders and investors concerning the true financial position of the company. They deceived the investors and stake holders on the progress of the company and how it was making its money. Since the stake holders and the investors were kept in the dark about the performance of the company their trust did not fall since they continued to believe the lies they were receiving from top management before the whistle was blown. Conclusion In conclusion the report carries an exposition on the ethical issues that resulted into the collapse of Enron. The use of mark to market valuation technique has been blamed for many of the unethical practices carried out by management. There were many ethical issues that arose that have a bearing on truth. The actions of the management resulted into many financial problems for the employees, stake holders and investors with the Sarbanes Oxley act being enacted in the U.S to curb corporate fraud alongside other legislations in the UK and Australia where the Companies Act 2006 and CLERP 9 Act were enacted respectively. The whistle blower in the scandal was faced with an ethical issue. Companies must adopt policies that will enhance the protection of whistle blowers. Works Cited Ferrel O. C., Ferrel L.,and Fraedrich J. Business Ethics: Ethical Decision Making and cases Cengage Learning 2010 Salter, M. Innovation Corrupted: The Rise and Fall of Enron. Harvard Business School Case, 9-904-036, 2004 Dworkin, T. & Near, J. Blowing the Whistle: The Organizational and Legal Implications for Companies and Their Employees. Maryland: Lexington Books 1992 Fusaro, P. C.;Ross M. M. What Went Wrong at Enron: Everyone's Guide to the Largest Bankruptcy in U.S. History, John Wiley & Sons, June 21, 2002. Collins, D. Behaving Badly: Ethical Lessons from Enron. Dog Ear Publishing, LLC, May 24, 2006. Fox, L. Enron: The Rise and Fall, John Wiley & Sons, December 22, 2003.  Read More