Enron and ethical systems in corporate governance

Enron

Identify one of the examples of financial reporting misconduct associated with the Enron scandal

In the wake of the stratospheric success and subsequent fall of Enron, many were compelled to ask: how could this be possible, namely how could a firm which seemed so successful on the surface be so corrupt at its core? The answer, although not simple, can be boiled down to this: creative financial accounting. While Enron deployed many techniques to hide its falling profits, one of its most successful was the creation of "special purpose entities [or vehicles] -- subsidiaries that have a single purpose and that did not need to be included in Enron's balance sheet" and "were used to hide risky investment activities and financial losses" (Folger 2011).

It should be noted that not all SPV lack legitimacy, but rather that Enron used them for fraudulent, misleading, and therefore illegal purposes. "A corporation can use such a vehicle to finance a large project without putting the entire firm at risk. Problem is, due to accounting loopholes, these vehicles became a way for CFOs to hide debt. Essentially, it looks like the company doesn't have a liability when they really do. As we saw with the Enron bankruptcy, if things go wrong, the results can be devastating" ("SPV," 2014). An SPV is not supposed to be specifically created to hide troubled assets or a lack of profits but that is what precisely Enron did. This was symptomatic of all of the types of financial reporting misconduct of Enron: using what seemed to be legitimate economic techniques to hide fraud. "Offshoring" unprofitable entities was also commonly used

Q2. Identify the stakeholders likely to be affected by that misconduct (including those who may have benefitted) and explain the likely impact it had on them.

The individuals hardest-hit by the Enron fraud were those who had invested their savings with the company. Seduced by escalating profits, and looking at financial statements that seemed legitimate, signed off by a well-regarded accounting firm, many invested considerable savings with Enron. These not only included individuals outside the firm but also employees who had retirement funds invested in Enron or who had purchased stock as a result of the options extended to them. Of course, employees were also hard-hit as stakeholders, given that when the company folded, so did their source of revenue.

However, there were also stakeholders more indirectly affected by the fraud. All persons with money invested in the stock market were "hit" given that general distrust of the financial industry can cause people to withdraw their money from the stock market, even if they were not invested in Enron. Also, because of the nature of the Enron corporation, as an energy company, its operations had an effect on the price of energy in a manner which directly affected consumers both through their purchasing of the commodity on the open market and also the contribution high energy prices make to rising costs of others goods and services.

The management of Enron, in contrast, had a considerable incentive to hide all losses. This protected their jobs on the board of directors and their bonuses. To a lesser extent, the accountants did as well -- they wanted to keep Enron's business for their firm, even though the ethical revelations later resulted in long-term losses which were not really worth the short-term gains.

Q3. From a deontological as well as a utilitarian perspective, what would have been the more ethical course of action?

Deontology suggests that principles, more so than anticipated consequences, are what matter when judging the moral value of an action. From a deontological perspective, the possibility of enhancing the appearance of the company' finances should never have been an issue in the first place. All that matters is doing what is right according to moral principles. This means that even creating the appearance that a company is more profitable than it is, is wrong, despite the fact that this might theoretically increase share prices and enrich the company.