Corporate Social Responsibility Term Paper

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Corporate Social Responsibility

The purpose of this case study is close synopsis of the Enron case and its impact on consumers and corporate business practices alike. Prior to its collapse Enron had been named one of America's top 10 admired corporations, and its boards "was acclaimed one of the U.S.' best five" (Reed, 2004). Throughout the 1990s the company experienced tremendous growth and profits exceeding $180 billion, employing more than 30,000 people worldwide (Reed, 2004).

Enron collapsed however and went bankrupt, a process that "outraged and impacted stakeholders tremendously and resulted in numerous congressional investigations" (Reed, 2004). The "implosion" of the company "wreaked havoc on accounting like no other case in American history; the collapse of the system called into question the adequacy of U.S. disclosure practices and the integrity of independent audit processes" (Thomas, 2002).

Overview of the Case

In October of 2001 Enron executives announced they were taking a $544 million dollar after-tax "charge against earnings" related to transactions against a certain partnership with LJM2 Co-Investment, and announced it would be reducing shareholder's equity in the company by as much as $1.2 billion dollars (Powers, Troubh, & Winokur, 2002). This announcement was just the start of a revealing scandal that would unfold in a time frame of just two short months.

Within a short period of time Enron also announced that it would be re-stating financial records and statements dating from 1997 through 2001 because of "accounting errors relating to transactions with a different Fastow partnership" that with LJM Cayman, L.P. And Chewco Investments, which was managed by an Enron Global Finance employee (Powers et. al, 2002). The re-statement with these partners also resulted in a large reduction of shareholders' equity in the company and also reduced Enrons reported net income by almost $30 million in 1997 and by almost $100 million total in 2000 (Powers, et. al, 2002). Other changes included an increase in debt reported to offset any profits the company had claimed during that time period.

The reports of a "re-statement' of financial assets and liabilities resulted in a public outcry, and Enron subsequently within a time frame of 1 month filed for bankruptcy, which further destroyed market confidence and brought to light scandalous activity on the part of Enron executives (Powers, et. al, 2002).

Subsequent investigations into the activities and goings on an Enron revealed that top level executives had been involved in illegitimate partnerships and profited from the personally, receiving tens of millions of dollars; Fastow corporation for example received $30 million, other employees between $1 and $10 million (Powers, et. al, 2002). Further partnerships created between Chewco, LJM1 and LJM2 were used by members of Enron management teams to enter into transactions that were unrelated to "commercial entities" and designed to "accomplish favorable financial statement results" rather than achieve "bona fide economic objectives" (Powers, et. al, 2002: 10).

Transactions were falsely recorded and implemented to offset losses and allow Enron executives to conceal their large losses from the public and from market share holders, creating an appearance that investments were valid (Powers, et. al, 2002). The accounting re-statements were determined with participation of an outside management company, Anderson, which was shown to receive $5.7 million above regular audit fees for advice related to the partnership companies involved in the scandal (Powers, et. al, 2002).

Discussion of the Case

Once the seventh largest company in the United States, Enron collapsed in 2001, and is now considered "one of the largest corporate failures in the United States" (Veryard, 2004). What happened? Corporate executives violated the principles of moral leadership and governance, resulting in a collapse of business ethics and a scandal that would impact corporations and auditing agencies the world over (McLean & Elkind, 2003).

Who was most impacted by the illegitimate activities of Enron top executives and their association with Anderson?

The shareholders were very much affected by the Enron scandal. Ken Lay, the chief executive chairman of Enron profited off of shareholders by "pocketing millions of dollars from offloaded shares over the period of a few short years" (Veryard, 2004). Employees and other stakeholders in the company lost a majority of their life savings that had been allocated in Enron shares. People who had built up years of retirement funds found themselves without anything once the scandal broke. The moral injustice of the situation is inexcusable.

Stakeholders initially benefited from the illusion that they were getting shares at a bargain, and since there was no regulation there was nothing to prove to them otherwise (Veryard, 2004). Until the fall of Enron, there was little assumption that 'auditing' of 'auditors' in the business world might be required to maintain the morality of corporate transactions and seemingly legitimate business partnerships.

Current State of Case

Stakeholders are still whirling from the fall out of Enron, and will likely never recover fully from the devastating impact the bankruptcy had on their personal livelihood. The reputation of similar companies is also called into question because of the high profile nature of the case.

Enron has revealed to political and other corporate leaders that many problems are still inherent with in the corporate governance system, leaving the door wide open for poor implementation, oversight, accounting errors, overreaching and inadequately designed controls in a corporate culture that encourages leaders to push the limits of what they can do (Powers, et. al. 2002).

Congress is now interested in debating and has enacted legislation that could more closely monitor auditing practices and prevent accounting firms from offering consultation services to clients that they audit (Farrell, 2002). Many high profile companies including WorldCom have suffered similar fates as Enron, as investors have lost confidence in capital markets (Hoops, 2004).

Today the accounting profession is considered with a skeptical eye. Congress did pass the Sarbanes-Oxley act in July of 2002 which impacts audit committees (Hoops, 2004). There has subsequently been a renewed interest in auditing quality and the reputation of auditors, and many auditors have subsequently took it upon themselves to make sure that their companies are now sound and have undergone extensive reviews (Hoops, 2004).

A few companies have also established audit quality centers for firms that audit public companies and government organizations, in an attempt to detect fraud and establish a uniform international auditing standard (Hoops, 2004).

Long-Term Effects

The reputation of big business is permanently tarnished and the very nature of capitalism called into question as a result of the Enron debacle.

One of the foundations of law and economics and business in general is that for the most part people behave rationally, including a belief that for the most part companies will "fully and honestly disclose all relevant financial information" because by doing so they can raise capital inexpensively and effectively (Prentice, 2003). For some time people have assumed that auditors would simply act honesty to maintain their reputation, as "honesty is their most valuable asset" (Prentice, 2003: 417). Obviously the Enron scandal has tarnished this belief, because it goes against moral principle and assumptions that auditors and major corporate representatives will simply do the right thing (Lowenstein, 2003).

Prior to Enron their was a belief regarding behavior from an economic standpoint that Enron and other major corporations would act rationally and would voluntarily act honestly with officers working toward preventing derailment of a corporation by engaging in financial fraud (Prentice, 2003). However, people are now more conscious of the idea that people regardless of their position and status are likely to act or at minimum be heavily influenced by the unconscious desire to maintain their self-interests (Prentice, 2003).

Alternatives

There are many lessons to be learned from the Enron case. Enron executives shunned their corporate social responsibility or at least paid no attention to it when the time came to benefit personally. This isn't a case of one executive acting deceitfully, but several. The companies executives should have considered enlisting the assistance of public relations counsel at the start of their decision making processes rather than at the end, which may have prevented the company from "overextending itself" from an image perspective (Lordan, 2002).

Business ethics need to be more ingrained into corporations and CEO executives and public awareness of business ethics principles need be more firmly grounded in order to prevent another scandal such as this from occurring. However business ethics concentrations need focus on moral issues in business rather than simple political corrected ness (Berlau & Spun, 2002) teaching individuals why it is important to do the right thing not simply how to do the right thing.

Business ethics has more to do with just good leadership and management. It has to do with teaching people about social responsibility, and the fact that their actions have consequences on others and that leaders have obligations including making money for shareholders and supporting the good name and reputation of the major corporations that they work for (Berlau & Spun, 2002).

There is some criticism that up until this time business ethics courses teaching young entrepreneurs about…[continue]

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