The Enron scandal and organizational ethics failure

Organizational Ethics Issue Resolution a.

Issue clarification

The Enron scandal has probably been the most prominent of its kind in the history of wide scale business fraud. Enron's history before its downfall was impressive: in 15 years, it grew from a practically non-existent entity to the seventh largest company in the United States. By this time, it employed 21,000 staff and had a presence in more than 40 countries. There was a good reason for this appearance of prosperity: Enron was deceiving the world.

The company compiled its financial statements in such a way that huge debts were concealed, thus inflating the company's true value. In order to help them achieve this, the accounting company, Arthur Anderson, shredded documents that indicated the true state of affairs.

Furthermore, Enron was significantly affiliated with many legislators, also indicating some dishonesty on the part of the politicians involved. One of the issues this raised was the degree of appropriateness that could be ascribed to such a closeness between a large company and the political system.

The scam was sufficiently elaborate to keep the company in the top list of companies for years. Many asked questions relating to how many stakeholders and partners were involved in the scam, as it was so successful for so long. While the accounting firm without a doubt was complicit, the political angle was also questioned. Indeed, President Bush had very close ties to company during his election year during 2001.

Another factor is the company's corporate citizenship, which, after the revelation of fraud, it was also accused of falsely inflating and indeed using for its own fraudulent purposes. Indeed, the community and environmental programs they have instigated appeared to be as fraudulent as their apparent prosperity.

A b.

Stakeholder analysis

Every company has an ethical obligation to its stakeholders not only to be truthful, but also to do everything in its power to be as profitable as possible. It should do this without simply cultivating the appearance of profit. It should also be a responsible corporate and social citizen, using what profit it can to improve the world in which it operates. Enron did none of these things. The company's case in terms of stakeholders is also interesting, as it had two types of stakeholders: those who helped the company in its fraud, and those who invested in the company, but was unaware of any wrongdoing.

The most significant relationship occurred between Enron and Arthur Andersen. The latter helped Enron for years to inflate its earnings and hide its debts. It further schemed to hide this in turn for a mutually beneficial relationship: many of Andersen's employees attained managerial positions in Enron. Once Andersen's activities came to the light, it meant the downfall of both companies and all their associated stakeholders, including employees and investors.

Other questionable connections include political entities. Once example of these is CEO Kenneth Lay's personal relationship with President George Bush. While it is unclear that the President or indeed any other politicians were aware of Enron's fraudulent activities, the relationship was very convenient in terms of the Vice President's energy policy process.

Many of both companies' investors and employees were blissfully unaware of the fraud. As such, many employees were also investors, having tied up pension funds into Enron's stocks. Many such employees lost what constituted their life savings, as they were unable to sell their stocks before they became nearly worthless. Perhaps it is some justice that those who were involved lost even more: both their millions and their reputations.

A c.

Issue resolution

Unsurprisingly, the official reaction to the fraud was wide scale investigation. Congressional committees focused first on the key players involved in Enron's scandal. These include Andrew Fastow, Kenneth Lay, and David Duncan. Fastow was fired from his position as chief financial officer when the scandal became known. Lay was the company's former chief executive and chairman. Appearing involuntarily, he refused to testify, claiming that he had been pre-judged. Duncan was the chief auditor at Andersen who worked with Enron's document. It was on his order that Enron's documents were shredded.

The senior executives who did agree to testify include Joseph Berardino, chief executive of Andersen. He claimed no wrongdoing by his firm. Jeffrey Skilling was Enron's chief executive during 2001, and denied any knowledge of the fraud. Sherron Watkins was key in making the scandal public. She claimed that Lay was an innocent victim of deception by Jeffrey Skilling and Andrew Fastow. One insider, Michael Kopper, came to an agreement according to which he would plead guilty and reveal everything relating to Enron's finances.

In order to salvage what was left, Enron sold some assets and filed for Chapter 11 bankruptcy in order to protect the company from creditors during its reorganization efforts. Kenneth Lay handed in his resignation, and was replaced by the interim services of Stephen Cooper, the restructuring expert. Nancy Temple, the Chicago lawyer, was accused of persuading all involved in the scandal towards dishonest practices. She requested that David Duncan, the supervisor of Enron's account, remove her name from a file memo regarding a $1 billion loss.

Interestingly, C.E. Andrews defended Andersen to the bitter end, maintaining that the company did no wrong. After a verdict of guilty, however, Andersens was forced to essentially close a major part of its business, no longer auditing publicly held companies.

A e.

Addressing objections

The extent of Andersen and Enron's denial of wrongdoing is furthermore interesting. Duncan for example testified that Enron's $1 billion loss will not necessarily affect the overall future health of the company. The lower-level executives from Enron however are not affected so much by the overall health of the company as they are by the charges against them. Andersen's employees are furthermore negatively affected, as they have taken great losses in terms not only of the company's reputation, but also in terms of personal loss such as investments and jobs.

After the scandal and the verdict, neither Enron nor Andersen had any credibility or values left to speak of. This was exacerbated by the fact that they appeared to deny any wrongdoing. However, the actions committed by both companies denies the denials. Clearly destroying Enron's financial data meant that Andersen had something to hide. How many employees were aware of the fraud is a matter for further investigation. The assertions of those who deny wrongdoing however smacks of empty but self-righteous and guilty indignation.

Furthermore, if Enron and Anderson did not adhere to the principles of managing crisis, and in this way forever tarnished their respective reputations in the public eye: none of the most guilty admitted the truth. They all claimed never being aware of any wrongdoing and wishing to protect their companies' and their own reputation.

These actions resulted in disaster for millions of stakeholders. Surely the least that the most guilty perpetrators could do was to be honest about their actions. At least they could have been honest after the verdict, and after all was said and done. The fact that they remain in denial could not possibly feel well for any of the lower-level employees and innocent stakeholders who suffered as a result.

A f.

Resolution implementation

There were many implications and implementations resulting from the Andersen/Enron scandal. Arthur Anderson has collapsed after a guilty verdict resulting from the destruction of incriminating documents. The accounting industry was also directly affected in terms of its standards and procedures. There are hundreds of firms with methods to keep debts away from headline figures.

The president passed a bill that aimed at discouraging corporate fraud, while also ordering a review of the pension regulations at the country. This is the result of the losses suffered by pension holding employees at Enron. Other political reforms include how business funds are invested in political campaigning, the influence of energy companies on the energy policy in the United States, the conflict of interest between consultancy and auditing, and regulations on financial derivative trading.

Despite his personal friendship with Lay, President Bush was quick to distance himself from Enron as soon as the scandal came to light.

The government could however be implicated in the scandal as a result of Mr. Lay's communication with cabinet officers before Enron filed for bankruptcy, and meetings between Enron executives and Vice President Dick Cheney.

So far-reaching is the scandal, that it even affected British politics. The relationship of the Labor party with the company centers around whether this changed the government energy policy. The Conservatives and Liberal Democrats demanded an independent inquiry into the matter.

In conclusion, the Enron scandal remains one of the most devastating of corporate fraud cases. It has been studied not only for its prominence in the history of accounting, but also for lessons in how not to conduct business and accounting.

Sources

BBC News. (2002, Aug 22). Enron scandal at-a-glance. http://news.bbc.co.uk/1/hi/business/1780075.stm

Thomas, Cathy Booth. (2002, Jun 18). Called to Account. Time. http://news.bbc.co.uk/1/hi/business/1780075.stm