Background of the case
Enron was one of the largest companies in America dealing mainly with the distribution of power but also diversifying into numerous other interests. Enron, despite its phenomenal success occasion by the unprecedented growth of the subsidiaries it acquired, became a name synonymous with ‘fraud’ and ‘ethical disaster’.
The genesis of the Enron ethical menace began when federal regulators permitted Enron to employ an accounting method known as “mark to market” which allows recording of price of a security on a daily basis in calculation of profits and losses. Enron was therefore able to count earning it had not made and might not make in long term projects in their current income calculations. This practice enabled Enron to maintain high prices of its stock by portraying a profitability outlook while in fact; the company was collecting much less earnings. Further, Enron used its stock to insure against loans it sought to invest in its ventures. This is the equivalent of a person taking a loan and then proceeding to be his or her own guarantor (Jonsen, 1998).
The company enlisted the services of a then reputable auditing firm, Arthur Andersen. These auditors carried out both external and internal auditing work for Enron, which is to imply that Enron paid a private tutor who doubles up as the examiner in another capacity, and whose employment hinges on the ‘passing’ of Enron.
The Ethical Dilemmas raised in the Enron scandal
Factors that contributed to unethical behaviors
Enron culture
Ethical dilemma question asked is,
- Is it appropriate for businesses to focus on making profits at all costs at the expense of due procedure and accountability?
Enron insisted on a culture of competition where the output of workers was measured by their financial performance. This culture led to the development of a culture of deceit where workers lied about their productiveness in order to avoid the sack.
Margaret Ceconi, an employee with Enron Energy Service, once wrote a memo about the truth of accounting issues of Enron; she was later counseled on employee morale (Jennings, 2009, p.290). Actions like these discouraged workers from reporting irregularities and promoted the perpetuation of improprieties in the company. Additionally, Enron deceived its investors by taking up loans to grow the business insured against its own stock. This practice transferred the risk to the investors in Enron without their knowledge (Jonsen, 1998). A fall in the prices of the Enron stock resulted in massive losses to the stockholders While Enron sought growth, it was in violation of an important ethical tenet of total disclosure.
- Is it appropriate to employ the same individual in enforcing both internal and external controls? When can interests in the two parties be said to conflict?
Enron employed the Arthur Andersen firm to conduct its internal audits while at the same time acted as the external auditor for the firm. This scenario was arrived at where Enron started taking in former employees of the auditing firm Arthur Andersen. This led to the e auditors seeking to protect their interests in Enron by covering up on the actual financial health of Enron. The continued success of Enron stocks was beneficial to the Arthur Andersen auditors as the too held stock in Enron.
The decision making process in Enron
People involved in the decision-making
Decision making responsibility in Enron was left to the privileged hands of a few individuals. The chief financial officer(C F O), the chief executive officer (C E O), the chief auditor and the chairperson were at the same wavelength in deciding the way Enron ought to conduct its affairs. The decision making process was influenced by the chances of money making where the benefit intended was personal to the chief officers while the company lost value in stocks.
Once the chiefs were satisfied that the venture was worthwhile in investing in, the engaged another level of decision making where a number of strategies of deceiving people were evaluated. The founder managed to do this effectively by getting the people’s representative, the government out of the internal regulations of the company. This happened when he convinced the government to allow Enron to use the “mark to market” system of accounting where share evaluations are done on a daily basis and included in revenue calculation. Using this method, Enron was able to deceive people by manipulating growth forecasts and revenue statements, which gave the firm a positive outlook on paper while it was actually collapsing (Jonsen, 1998).
This case study rules against decision making by a select group of people where there is a public interest involved. The decision making of Enron would have been better managed by the setting up of a board chosen by the shareholders (Bierman, 2008). A board of directors is not easily compromised as they are in a larger group than the few handfuls that managed Enron. Further, the board of directors term expire in set times wher a new board takes over, under these conditions it would have been hard to behave unethically for all those years without being discovered.
An alternate model of ethical decision making in the interest of all parties following the Enron scandal
Enron would have employed an alternate approach in the management of its affairs that would have took care of all the interests of the parties involved by following the following simple model in its decision making.
- Ensure that all decisions take into considerations of other’s interests.
Enron, through its top management completely ignored the interests of all the investors and employees who held their faith in company. The losses occasioned by the bankruptcy of Enron by the investors and the employees would have been avoided had Enron instituted a decision making model that incorporated the genuine representative views of the shareholders, for instance, through non-partisan board.
The ‘golden rule’ which requires the avoidance of harm at any costs applies here as the decision to leverage Enron stock without adequately informing the investors of the risks involved, and the management with full knowledge of them, would have never happened. (Bierman, 2008)
- An institutional policy that emphasizes on ethics taking precedence over non-ethics
This action would require that all the officials at Enron had no doubts regarding the action to take as when faced by an un-ethical scenario as policy would dictate the overcoming of Ethical decision making over a potentially ‘beneficial’ but un-ethical alternative
- Violation of ethics should only happen if the alternative is in advancement of a more beneficial ethical choice in the long term
While the executives involved in the Enron scandal proposed that they made decisions in the best interests of the company, the decision to invest company stock to secure loans without disclosure to the stockholders is in violation of the ethical requirement of disclosure. While the acquired portfolios had the potential to growth, failure to disclose the activity rendered the intention unethical.
Works Cited
Bierman, Harold. Accounting/finance Lessons of Enron: A Case Study. Hackensack, NJ: World Scientific, 2008. Print.
Jonsen, Albert R, Mark Siegler, and William J. Winslade. Clinical Ethics: A Practical Approach to Ethical Decisions in Clinical Medicine. New York: McGraw-Hill, Health Professions Division, 1998. Print.
