Ethical Problem: Enron’s Accounting
- Introduction
Ethics is the key to a sustainable long term success.
Without it, no strategy can work, and firms will fail.
Enron best epitomizes this idea.
Enron took 16 years to have a $ 65 billion worth of assets.
But due to ethical accounting problems, the firm went bankrupt in 24 days (Silverstein, 2013).
- Enron Background
Enron was an Americanenergy firm founded in 1985.
It was formed through the merging of Omaha Based InterNorth and Houston Natural Gas.
In the next 15 years, the firm achieved remarkable feats.
Consequently, it made it receive honorable titles like being the 7thlargest company in the U.S.
Also, the 6th largest energy firm worldwide (Cameron, 2019).
- Enron Ethical Problem Antecedent
Enron’s fall began when the company wanted to gain a competitive advantage at the end of the century.
It used diversification and international investments.
However, its strategies failed and brought significant losses.
The executives, together with its auditing firm, manipulated the financialstatements.
They ultimately declared that the revenues had increased from $40 million to $ 101 billion from 1998-2000 (David, 2016).
- Involved Parties
Kenneth Lay
He was the CEO, chairman, and founder of Enron
He performed unethical behaviors like lying to the employees and investors about the losses.
Jeffrey Skilling
He was the president-COO and later in 2001 became the CEO of Enron.
His testament, “We are on the side of angels,” was among the many unethical behaviors.
- Involved Parties (part II)
Andrew Fastow
He was the CFO and directly liable to Enron’s catastrophe.
He manipulated the financial statements.
Enron’s Auditor: Arthur Anderson
This company significantly helped in the unethical practice of Enron.
It did not report the issue, helped with the cheating, and destroyed all the documents.
Accordingly, two years later, the company was closed and made 36,000 individuals jobless.
- Contributing factors
Company Policy
The firm had condescending and harsh policies,which stressed on competition
For instance, a rating system that demanded 20% of employees to be rated as underperforming.
Subsequently,the employees were expected to leave Enron (David, 2016).
It, in turn, made employees cheat to bolster their performances.
- Contributing factors (part II)
Leadership
The executives discouraged anyone from expressing suspicion on the financial situation.
For example, John Houston warned his friend from investing in the company and was fired (Silverstein, 2013).
Accounting System
At the start of the century, Enron changed its accounting method to the Market-to-Market (MTM) approach.
MTM is effective but is easily manipulated.
It is believed that Enron cooked its book through the use of this system (Cameron, 2019).
- Outcomes
The fall of Enron had dire consequences on society.
4,500 people lost their jobs and received meagre settlements.
They got an average of $13,500 (Cameron, 2019).
The investors lost their investments, which made Congress enact laws for protecting investors in such outcomes.
Arthur Anderson’s reputation was brutally damaged and led to its collapse.
- Outcomes (part II)
Kenneth Lay was convicted for engineering the unethical practice but died before his sentencing.
Jeffrey Skilling was arrested in 2004 and imprisoned for 14 years (Cameron, 2019).
Andrew Fastow was sentenced for five years but was shown leniency due to his acts of cooperating with the authorities.
- Resolving Ethical Dilemmas
One of the principles the involved parties should have used is utilitarianism.
This principle posits that dilemmas are best solved by maximizing the benefits and reducing the harm.
Another one that would have helped in the dilemma is categorical Imperative.
This one states that people should not use others to have a one-side benefit.
- Conclusion
This fall of Enron best describes the weakness of humans.
Although the executives are intelligent and professional, they lacked business ethics.
Resultantly, they destroyed the fortune they erected in 16 years in a matter of days.
Therefore, ethical business is one of the pillars of a successful organization.
- Recommendation
- Firms should deeply analyze their corporate culture as it substantially influences the workforce’s decision.
- There should be a written code of ethics and be communicated to the workforce.
- Firms must learn theories and models associated with ethical business as they will help in making informed decisions.
References
Silverstein, K. (2013, May 3). Enron, ethics and today’s corporate values. Forbes. https://www.forbes.com/sites/kensilverstein/2013/05/14/enron-ethics-and-todays-corporate-values/#3486f905ab81
Cameron, S. (2019, April 29). The Enron scandal & ethics. Bizfluent. https://bizfluent.com/info-7747847-enron-scandal-ethics.html
David, M. (2016, July 3). Enron, ethics, & the dark side of leadership. Sites at Penn State – WordPress | powered by WordPress. https://sites.psu.edu/leadership/2016/07/03/enron-ethics-the-dark-side-of-leadership/