Enron, once the countries seventh-largest company according to the Fortune 500, Is a good example of how greed and the desire for success can transform Into unethical behavior. Good ethics in business would be to compete fairly and honestly, to communicate truthfully and to not cause harm to others. These are things that Enron did not seem to display, which led to Enron’s operations file for bankruptcy in 2001. Enron’s scandal has become one of the most talked about forms of unethical business behaviors.
The company’s collapse resulted from the disclosure that it had ported false profits, used accounting methods that failed to follow generally accepted procedures. Both Internal and external controls failed to detect the financial losses disguised as profits for a number of years. Enron’s managers and executives retired or sold their company stock before its price went down. Enron employees lost their Jobs and most of their retirement savings invested in Enron stock. Enron’s dishonesty and misleading business ethics unfolded when a Fortune article made people wonder whether Enron’s stock was overpriced.
Enron’s executives were later charged with fraud, money laundering and conspiracy. Other companies, such as Arthur Anderson, Citreous, and Merrill Lynch, also played roles in Enron’s scandal INTRODUCTION Although Enron went bankrupt and disappeared ten years ago, the impacts it has made on the ethical standards never faded. It took Enron 16 years to go from about ten billion dollar assets to more than sixty-five billion dollar assets, and took twenty- four days to go bankrupt. Enron, which once ranked as the seventh-largest company on the Fortune 500 and ranked as the sixth-largest energy company In the world, on
December 2, 2001 , filed for bankruptcy protection in the biggest case of bankruptcy in the United States up to that point Innings, 2009, p. 285). By November 2001, the company’s stock, which once peaked at $90 US, was down to less than $1 US. It was a disaster for the thousands of employees and investors (Killing v. United States, 2010). Employees lost their Jobs and pensions, and Investors lost billions of dollars. Business. In this article, the facts of Enron’s case were reviewed and the major ethical issues involved in Enron’s scandal were analyzed. The rest of the paper is organized as follows.
The second part is a brief summary of what has happened in Enron. The third part described the role of Arthur Andersen (AAA) in the Enron scandal. In the following parts the culture of Enron, the important people involved in this case, and also the major ethical issues about this scandal were analyzed. At last, the conclusion part discussed what we should do to avoid another Enron . Brief History of Enron Since found in 1985 as an interstate pipeline company, Enron had been a power supplier to utilities. Its business began through the merger of Houston Natural Gas and Omaha-based Inter North.
In the following 20 years, Enron grew quickly and became the largest energy trader in the world. By the end of the twenty century, Enron had many honorable titles, such as “one of the world’s leading electricity, natural gas, and communications companies”, “the world most admired corporations”, and so on. In the following years, with the increase of competition, Enron decided to use diversification and international investment to keep its market position. Actually, these activities brought Enron an unexpected large amount of losses rather than profits.
In 1999, after a foray into fiber optics and the broadband arrest, which was a wrong decision again, Enron suffered too many substantial losses and began bleeding quickly. Because of those frauds, from 1998 to 2001, the stock price peaked at $90 US. “By December 2000, Enron’s shares [were] selling for $85 each, its employees [had] their 401(k)s heavily invested in Enron Stock, and the company [had] a matching program in which it contribute additionally shares of stock to savings and retirement plans when employees chose to fund them with Enron stock” Innings, 2009, P. 356).
Therefore, both investors and employees suffered heavily from this disaster when Enron collapsed However, Enron had never declared any information about its losses until October 2001. Instead, in these years, Enron achieved a phenomenal bottom-line through overstating revenues and hiding liabilities. For example, the revenue numbers for 1998, 1999, and 2000, were $40 billion, $60 billion, and $101 billion respectively. Besides manipulated the financial statements, Enron never mentioned the risks which it should disclose to the investors. Enron’s “intellectual capital” was Shilling’s pride and Joy.
He recruited more than 250 newly minted Mambas each year from the nation’s top business schools. Meteorologists and Pads in math and economics helped analyze and model the vast amounts of data that Enron used in its trading operations. A forced ranking system weeded out the poor performers. “It was as competitive internally as it was externally,” says one former executive. On the contrary, the executives of Enron disclosed a great earnings forecast through the media and encouraged investors to purchase Enron’s stocks while, they are telling their brokers to sell their shares underground.
They also suggested their employees invest their pensions in Enron’s stock or stock options. Arthur Andersen, the audit many for Enron, helped Enron hide these frauds for five years. Every time when analysts or Enron’s employees expressed their doubts about Enron’s financial executive embezzled. The executives also drove up the stock price and put a large amount of money into their own pockets through trading stocks. The Role of Arthur Andersen in Enron Scandal Arthur Andersen (AAA) had served as Enron’s outside auditor since 1985.
Two years after the collapse of Enron, Arthur Andersen went from an international firm of 36,000 employees to nonexistence. In AAAS 16 years relationship with Enron, besides external auditing, AAA also provided Enron internal auditing and consulting services. From 1997 to 2001, Enron overstated its profits by $568 million, 20 percent of Enron’s earnings for those four years. Andersen auditors helped Enron hide this earnings manipulation. On June 15, 2002, Andersen was convicted of obstruction of Justice for shredding documents related to its audit of Enron. Arthur Andersen v. United State, 2005) Arthur Andersen contributed to the Enron scandal in four aspects. Firstly, facing the false financial condition, AAA never disclosed it. Enron was one of AAAS major clients. In order to avoid the loss of this big client, AAA helped Enron cheat on its financial statements. This action is not only unethical, but also illegal. To avoid losing this big client, AAA determined to violate the standards. From the ethical aspect, AAA should have stopped this fraud early. Instead, AAA chose to act illegally to earn profits.
Secondly, AAA provided Enron external auditing, internal auditing and consulting services at the same time, violating accounting and auditing standards because there are conflicts of interests among these services. “There was a fluid atmosphere of transfers back and forth between those working for AAA doing Enron consulting or audit work and those working for Enron who went with Andersen” Innings, 2009, p. 354). This conflict of responsibilities of AAA didn’t follow auditing standards and were illegal.
In addition to the conflict of responsibilities, the violation of independence also existed because there were close relationships and interest conflicts between AS employees and Enron’s executives. David Duncan, the audit partner who was in charge of the Enron account, was a close personal friend of Enron’s chief accounting officer. Meanwhile, there were many high level executives of Enron from AAA. For example, in 2000, seven AAA auditors Joined Enron Innings, 2009, p. 355). Additionally, many AAA employees had permanent offices at Enron and kept close relationships with the employees in Enron.
All of these affected the independence of auditors from AAA. Fourthly, AAA destroyed many papers and documents of Enron after Enron’s scandal was disclosed. Without those papers and documents, SEC encountered many difficulties when they investigated the fraud of Enron. Nancy Temple, AAAS in-house counsel, advised the destruction of documents Innings, 2009, p. 358). This action is both unethical and illegal. The Important People in the Enron Scandal In the case of Enron, some persons performed ethically and the others did not.
For example, John Olson, Margaret Second, and Clayton Vernon, three employees in Enron chose the right things to do and performed ethically. However, there are also many other people who Just kept silent or even did the things which are obviously unethical or even illegal, such as the executives in Enron, Ken Lay, Jeffrey Killing and Andrew Fast, as well as the auditors from Arthur Andersen, David Duncan . In the following paragraph, I will talk about the persons involved in this case. Kenneth Lay is Lay is a person who is dishonest and lacks integrity.
Under his leadership, Enron was involved in fraud, causing investors to lose billions of dollars. In 2001, although known the risky financial condition of Enron, Lay still announced to employees and investors that the future growth of the company has never been more certain and urged them to invest in Enron stock further. Meanwhile, in the August of 2001, he sold a substantial amount of his own shares of stock Innings, 2009, p. 293). His announcement increased the price of Enron’s stock further and accelerated the bankruptcy of Enron. At last, Lay destroyed the companies he built.
The second person we need to mention in Enron’s case is Jeffrey Killing. He was the president COO, and also served as CEO from Feb.. To Gag. 2001. Mr.. Killing said in his testimony, “We are on the side of angels” Innings, 2009, p. 295). But obviously, they were not. In August 14 2001, he left the company without disclosing any financial problems of Enron. He Just said that he wanted to spend more time with his family. However, he sold 500,000 shares on September 17, 2011 Innings, 2009, p. 293). Before his departure, he also did many things which seem unethical.
For example, Betray Mclean, a Fortune reporter, asked Killing some questions about profit margin. And Jeffrey Killing refused to answer that question although at that time he knew about the financial condition of Enron. He never disclosed the problems to the public. Additionally, before the Congress, he denied any knowledge of the financial manipulations until the bankruptcy of Enron. He waived Enron’s Code of Ethic and led Enron too death. The third person who played an important role in Enron is the SCOFF, Andrew Fast. He was directly responsible for Enron’s disaster.
He was the person who manipulated the financial numbers for Enron. He said, “Within the culture of corruption that Enron had, that valued financial reporting rather than economic value, I believe I was being a hero. I thought I was a hero for Enron. At the time, I thought I was helping myself and helping Enron to make its numbers” Innings, 2009, p. 293). He was a principal in many of the off-the-book entities and earned a lot of money from these entities. In the whole case, he is dishonest. The fourth person I want to mention is David Duncan, the audit partner who was in charge of the Enron account.
The story and ethical issues about him have been introduced in the previous part. Facing business dilemmas, he chose profit and violated the auditing standards and contributed to the cheat of Enron. The last person is an ethical model. She is Sharron Watkins, the vice president for corporate development at Enron. She brought the financial situation of Enron to public light by preparing a memo which disclosed the financial situation of Enron. Although she knows she would lose her Enron Job, she continued preparing the reports and Just looked for a new Job.
In the dilemmas, she was one of the few people who chose to disclose the truth even if put herself in the risk of losing her Job. ETHICAL BEHAVIOR Factors contributed to unethical behaviors Enron’s culture contributed much to the ethic scandal. Enron was a harsh and condescending company, who emphasized competition and financial goals. For example, it had a rating system which required that 20 percent of all the employees had to be rated as below requirements every year and then were encouraged to leave Enron Innings, 2009, p. 288). Although Enron hoped this rating system could Enron than benefits.
Firstly, Enron’s competitive environments and rigorous performance evaluation standards caused a culture of deception. Since employees ere nervous about losing their Jobs, they only focused on how to make their performances look good. They ignored the ethical standards, and only focused on the achievement of their financial goal. After a few employees began cheating on their works, the only way to beat these persons was to cheat more. Gradually, no persons felt shame about cheating because they had no other choices and all their co-workers surrounding them were cheating.
This caused a culture of deception. Employees were measured on their abilities to cheat. In such an environment, the people who never cheated were regarded as odd. For example, Margaret Second, an employee with Enron Energy Service, once wrote memo about the truth of accounting issues of Enron; she was later counseled on employee morale Innings, 2009, p. 290). Secondly, this competitive environment contributed to the covering of the errors and cheating because employees tended to be uncooperative and seldom communicated with each other.
The employees were unwilling to ask questions because asking questions was regarded as humiliating. Besides that, they were also less willing to share resources and information because they competed with each other. So in Enron, no persons asking questions as well as no one want to answer questions. Because of this working environment, few employees at Enron actually understood their Jobs. As a result, they Just tried to hide errors and made their work look good. Additionally, they ignored the errors and cheating of others. They never mentioned their doubts about others’ works.
Because they thought if others were not actually wrong, the person who mentioned questions would be laugh at. So employees at Enron were quiet. Additionally, the culture of Enron emphasized too much on the financial goals. The person who can achieve the budget numbers would be the hero f the company. Both executives and most of employees focused on making profits for themselves through making good financial numbers instead of a real increase of the company’s economic value. Enron also was concerned less about the needs, values, desires and also the well-being of the employees.
From the ethical aspect, employers should respond to their employees and keep the goal of benefiting them. In such a company, ethical standards were Just window dressing. No one followed them. For example, the conflict of interest policy was waived to let the officers of Enron served as officers in off-the-book entities. Fourthly, Enron tried to keep its employees and outside parties quiet. Employees were discouraged from expressing doubts about the financial condition of the company as well as decisions made by the executives.
In these years when it committed fraud in its financial statement, Enron hurt both people inside and outside of Enron, who doubted Enron’s financial conditions. For example, John Olson, an analyst with a Houston company, lost his Job because Olson advised his client not to invest in Enron since he had questions about how Enron was making money. Another example was that Clayton Vernon, a former employee of Enron, was fired in November 2001 for posting his comments about “overstating profits” in an employee chat room Innings, 2009, p. 91). Therefore, employees in Enron were pressured to work blindly, keep silent, protect their own short-term interests, and try to achieve their goals even if it was an obvious cheat of employees behaved unethically when they encountered conflicts of interests. They were greedy and self-interested.. What Should You Do? If you were one of these persons, what would you do? You have many questions about the condition of the company, and depending on your business intuition, you eel there must be some problems at Enron.
But if you ask questions or mention your opinions, you will be hurt right now, such as lose your Job, or receive unfair reviews. In the Utilitarian Theory, Philosophers Remy Beneath and John Stuart Mill argued that “resolution of ethical dilemmas requires a balancing effort in which we minimize the harms that result from a decision even as we maximize the benefits” Innings, 2009, p. 6). In this theory, when we make decisions, we should consider the interest of all the parties who are affected by our decision and choose the actions which can maximize the benefits. We can Just do the most good that we can.
It is an ethical dilemma-?protecting our own interest with a predicted harm to all the investors, or Just protecting most of stakeholders interest and give up our own short-term interest. According to the Utilitarian Theory, the answer is obvious. The Categorical Imperative and Emmanuel Kant theories stated a standard “you cannot use others in a way that gives you a one-side benefit” Innings, 2009, p. 6). Furthermore, we can apply the test mentioned in The One Minute Manager. Ask ourselves the following three questions: Is it legal? Is it balanced? How does it make me feel?
If I were an employee of Enron, I would think about the answers for the three questions above. Firstly, according to my business intuition or some threads, I feel the company may commit fraud. It’s illegal to help the company hide fraud. Secondly, if I disclose this information to public, I may lose my Job. Otherwise, if I hide the information, more people will suffer, such as the investors and stockholders of Enron. Thirdly, I need to disclose these to public and try best to stop the fraud of Enron although I may lose my Job. Hiding the facts I know and letting others suffered from that facts, make me feel guilty.
CONCLUSION In the case of Enron, we saw the weakness of human beings. The executives of Enron are really smart guys, but they destroyed the fortune they built in 16 years and also hurt many investors. The fundamental cause of this disaster is that they lack the idea of the business ethic. Therefore, when the executives encounter dilemmas, they chose the wrong way. To avoid another Enron, I have three suggestions for companies in today’s business world. Firstly, companies should think about their reporter culture carefully because companies’ culture will impact the decision of both the employees and employers when they face ethical dilemmas.
As discussed fraud and bankruptcy. Enron had competitive environments and rigorous performance evaluation standards. Besides that, Enron only focused on its financial goals. If Enron gave more Job securities to their employees, there might be less cheating on work. Additionally, employers could not make so many decisions if they cared about the interests of their employees and other stakeholders. Therefore, companies should build a healthy corporate culture. Secondly, companies need to build a robust ethics infrastructure and follow it in the daily business. Only having ethical codes is far from enough.
Enron had a well written code of ethics, but many unethical behaviors still happened. So companies should write a code of ethic and communicate it to all the employees. If you have an ethical code, you should try your best to follow it. Don’t make your code of ethics be window dressing. Instead, companies should make ethical standards common sense in every person’s mind. Thirdly, companies need to learn business ethics theories and models because they re the ethical basis in all the situations. For example, in these theories and models, the impacts of your decisions and the interests of related parties are emphasized.
These ethics and models give out good ways of balancing the interests of all the related parties, so they can help you make the right decisions when you face ethical dilemmas. Executives of business should have a good knowledge of business ethics. Then when they encounter dilemmas, they can know what to do. Therefore, to avoid another Enron, companies should consider whether they have a healthy business ultra, whether they have a well-written code of ethics and also follow the code, and whether the employers and employees have enough knowledge about business ethics.