Case Study-Ethics - Grade: Distinction PDF

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Case Study of Ethical Issues at Enron...

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Ca s eSt u dy -a na na l y s i so fe t h i c a li s s ue sa tEnr on .

Ethics is described as what is morally good or bad for individuals and society (BBC UK 2014). Ethics are important because they provide guidelines on what is right or wrong especially in decision-making. Throughout the essay, an overview of Enron will be discussed, the ethical issues that rose will be identified, the impacts it had on its stakeholders will be evaluated and how my perspective has changed as a results of my findings will be explained. Enron Corporation is a Gas, Electric Utilities and Energy Company that is based in Houston, Texas who employed about 21,000 people and for six years remained one of America’s most innovative company as its profits was more than $100 billion just before it went bankrupt in 2001 (Stein and Pinto, 2011). It also operated internationally in China and India, where some of its power plants are built. Due to unethical management practices such as fraudulent accounting and equivocation of taxes, Enron faced bankruptcy in 2001. The main players in Enron’s corporate fraud were Enron’s Founder, Ken Lay, Chief Financial Officer, Andrew Fastow and the Chief Executive Officer, Jeffrey Skilling, according to Carroll and Buchholtz (2008). The ethical issue that emerged at Enron was when all players committed fraud and conspired to inflating profit. Consequently in 2001, they went bankrupt because of their inconsistent accounting bookkeeping procedures (Tadros 2017). They sold the companies shares, manipulated their debts and lied to investors and employees about their financial position. Arthur Anderson (AA), Enron’s auditor and consultant also assisted in disguising its financial losses and debts. The ethical dilemma faced by Ken and Andrew was whether to reveal to its stakeholders about its disastrous financial situation or keep covering up its debts and as they sold the company’s shares for their own greed. AA’s dilemma was either to properly review Enron’s profits, special entities, derivatives and accounting practices or assist in disguising Enron’s financial losses and debts.

Enron’s scandal impacted it stakeholders negatively as it failed to serve its stakeholders with integrity. Whilst encouraging their employees to keep their stock, they were plunging into

lucrative stock for their own interest. According to Carroll & Buchholtz (2008 p.256) the scandal left 5,600 employees’ jobless. Its employee’s lost their retirement savings and their jobs. Investors and Shareholders such as individuals and businesses lost millions of dollars as well. Shareholders nearly lost $11 billion when Enron’s share was a high of US$90 per share in mid2000 and decreased to a low of less than $1 towards the end of 2001 (Stein and Pinto, 2011). The United States was also impacted after 30%-50% of California’s energy industry was shut down. This meant that the country’s economy was in jeopardy. The contributions made to the bush administration were donated to charities and to the company. Ethics goes beyond what is wrong and right, it is also about thinking about how one’s decision can negatively or positively impact a business. The decisions taking by the involved parties were not ethical. Under the deontological theory an action to do the right thing is important, rather than the final outcome (Reference for business 2018). Contrary the actions taken by the individuals weren’t right because they considered their needs instead of the future of the company. Under the Teleogical theory, (Birt Et.al 2014) the consequences of every decision taken should be considered. Enron seem to have being positively impacted as their profits maximized, but the outcome of their fraudulent act wasn’t considered, they failed to access whether the company would benefit from their decision or not. In assessing the outcome of ones decision, there are three different approaches to making decisions: ethical egoism, utilitarianism and altruism (Northouse, 2016, p. 334). Ethical egoism states that people ought to do what will be beneficial to them. Most of the Enron executes decided to achieve their goal of maximizing profits. Under the APES code of ethics, (APESB 2010) professional behaviour has being breached. The business has being negatively impacted because the parties involved did not comply with the relevant laws and regulations as they accustomed to committing fraudulent act, which was only beneficial to them but not to the stakeholders. They weren’t sincere in their profession and business relationships. Ethics of objectivity were breached as AA became a conflict of interest between the two roles they played for Enron as an auditor and a consultant (Stein and Pinto, 2011). By developing and knowingly engaging in these deals, he placed his financial need and greed above his responsibility to his position. It can also be deduced that under ethical requirement, AA did not possess an independent mindset; they comprised their professional judgment and allowed Jeffrey and Andrew to influence them. They were

professionally incompetent as they failed to be diligent throughout their auditing processes. Andersen’s method of auditing became questionable as it was either they completed audits so Enron can pay them annually or they weren’t experts in reviewing Enron’s revenue and other accounting practices. As a result, many of their losses were not reported in their financial statement. In November 2001, Enron and its stakeholder’s loss $586 million from revised financial statements from the previous five years (Stein and Pinto, 2011); it became bankrupt, leaving it stakeholders with no credibility and returns. Ethics to me was about giving to charity and basically being sociably responsible. There are still similarities in my original view about ethics, which is ethics is still about doing what is right. All the same, I have learnt that being ethical is also about identifying and taking care of any ethical issues that arise in the work place before they become legally problematic. I have come to understand that it is important for me to know what code of ethics applies to my profession so that I can maintain the highest form of integrity. Unethical issues can be avoided if the management takes a closer look at the quality of ethical culture at the workplace and also apply them throughout corporate cultures as well as into their definition as success. The culture and management of Enron focused on their financial goals more than their ethical goals. Hence the scandal occurred because of the unethical actions taken by its board of directors in attempt to generate personal profits for themselves. Employees lost their jobs, shareholders lost their investment the directors themselves were convicted of fraud and ended up in jail. Positively, due to the scandal there has being significant reforms in accounting and corporate governance in the United States and the rest of the world.

REFERENCE LIST: APESB. 2010. APES 110 Codes of Ethics for Professional Accountants. Available at: http://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf. Viewed 31 March 2018. BBC UK. 2014. Ethics-A general Introduction. Available at: http://www.bbc.co.uk/ethics/introduction/intro_1.shtml. Viewed 15 March 2018 Birt, J., Chalmers., Maloney, S., Brooks, A. & Oliver, J., 2014. Accounting: Business Reporting for Decision Making. 5th ed. Milton, Qld.: Wiley, 2014.pp.52-63 Carroll, A. & Buchholtz, A., 2008. Business and Society: Ethics and Stakeholder Management, pp. 256-301, Cengage Learning, 2008 Edmund Tadros, E.D, 2017. 'Appalling' audit quality could lead to next Enron: ASIC's Greg Medcraft. The Australian Financial Review, 31 October 2017. p.10. Accessed from Black town library.

Micheal David Fry. 2016. ENRON, ETHICS, & THE DARK SIDE OF LEADERSHIP. Available at: http://sites.psu.edu/leadership/2016/07/03/enron-ethics-the-dark-side-of-leadership/. Viewed 20 March 2018.

Northouse, P. G. 2016. Leadership: Theory and practice. Thousand Oaks, pp.330-335, CA: Sage. Reference for business. 2018. Company Profile, Information, Business Description, History, Background Information on Enron Corporation. Available at: http://www.referenceforbusiness.com/history2/57/Enron-Corporation.html. Viewed 25 March 2018 Stein, M. & Pinto, J., 2011. The Dark Side of Groups. Group & Organization Management, vol 36 no, 6, pp.692–721....