Enron scandal and corporate fraud

Enron

Bounded ethicality is a psychological concept wherein a person is unable to fully understand the ethical consequences of their actions. The general idea is that there are times when a person is not capable of fully rational thinking with respect to ethics. People using different types of framing for issues, for example, and this allows them to put on the blinkers. It sounds a bit like an excuse for sloppy decision making, and for making unethical choices, and thankfully the law tends to frown on that type of excuse-making. "I didn't know" might be real, but it's weak. Cops don't let you off your speeding ticket for that stuff.

Chugh, Bazerman and Banaji (2005) point out that in practice, "unchecked psychological processes work against an objective assessment and allow us to act against personal, professional and normative expectations when conflicts of interest arise. Applied to the Enron case, the interesting application is not with Enron but with its auditor, Arthur Andersen. Enron, of course, was breaking the law they knew it. The executives at Enron were flat out criminals and never once were engaged in a moral dilemma. They just made stuff up, robbed and stole, and then they went to jail for it, like all criminals should. They actively sought to hide their crimes -- so there was no bounded ethicality here -- they knew exactly what they were doing and it was consistent with their personal and professional ethics.

Arthur Andersen, though, is a classic case of bounded ethicality. Bazerman and Tenbrunsel (2011) note that one sign of bounded ethicality is when a person has the innate ability to maintain a belief while acting contrary to it. Arthur Andersen, as the auditor of Enron, had a duty of care to report accurately and truthfully about the quality of Enron's financial statements. Specially, it had to certify that the financial statements adequately reflected Enron's financial condition. They did that. The problem is that there was clear conflict of interest because Arthur Andersen was also a consultant for Enron. The consulting income that it earned far exceeded the auditing income. The conflict here is obvious -- if Andersen states what it knows to be true about the quality of Enron's financial statements it will bring down the company. The result would mean a reduction of consulting income for AA as Enron would no longer be a customer. By whitewashing the audit, AA positioned itself to gain more lucrative consulting work from Enron.