Enron Scandal And Business Ethics

Importance of Business Ethics

Question:

Discuss about the Corporate Responsibility of Enron.

“Many critics of the concept of corporate responsibility have criticized business interests for their lack of ethics throughout their operations.”

Business ethics is set of rules that tell how business operates, how business decisions are made, how people (employees, competitors, suppliers, stakeholders, shareholders & customers) are treated. Ethical business behaviour improves productivity & living standards (Crane & Matten, 2016). Business ethics is all about doing good things & ignoring bad things at work place. Business ethics includes all ethics related issues that come while we conduct business activities. Corporate social responsibility (CSR) is subset of business ethics. It is company’s responsibility towards the environment, in which it operates. Once a person go through the CSR of company, can know the mission & responsibility of organisation towards society & economy. It takes care of human rights & environment protection. It is important to increase competitive advantage & to build trust with customers & employees (Schmitz & Schrader, 2015). It aims to ensure that a company operates it’s activities in an ethical way. Many companies publish their information on their CSR activity on their website. In this assignment ethical issue of Enron is taken. Enron was an American energy, commodities & services company. The practices & scandal that led to the issue are explained. Impact on shareholders, employees & government is also discussed as a result of ethical issue.

Enron was America’s seventh largest corporation. The company was established in 1985, by the merger of Houston natural gas & Inter North. Initially Enron started as Pipeline Company, expanded with launching broadband services & online website for trading commodities in 1999. It was the largest business online site & the company was getting 90% of income from the transactions over Enron online. In 2000 the growth of the company was fast & the annual profits reached to $100 billion. The stock price peaked at $90. But in 2001, the company’s condition started deteriorating. In the October the company revealed a loss of $618 million. The company become bankrupted on December 2, 2001. It was the biggest case of bankruptcy in US and revealed that it’s financial condition was sustained by well-planned accounting fraud, known as Enron scandal. Around 5600 employees lost their job. The company ended it’s bankruptcy in Nov, 2004.

Accounting scandals arises from manipulation of financial statements. Accounting practices are intention manipulation of accounting records in order to make a company’s financial condition better. They always have adverse effect on the business. Accounting policies are implemented by accounting practices. These are illegal activities & include misusing funds, understating expenses, overstating revenue, under recording liabilities, misappropriation of assets & not taking book keeping seriously enough (Hoàng V?n, 2014). Mark to market accounting and special purpose vehicle are some techniques used to conduct such illegal activities. In the mark to market accounting, assets & liabilities are valued at current price instead of book value. At the end of financial year, business estimates how much the assets worth is. Special purpose vehicle is subsidiary of company & protects even when the parental company goes bankrupt. Financial gain is the aim of such scandals & practices. It includes involvement of employees, financial advisor or the organisation itself to mislead investors & shareholders. When an organisation practices such activities then that is charged to loss of reputation, civil & criminal penalties and loss of human capital (Qi-he, 2013). Enron & it’s accounting firm Arthur Andersen were involved in the financial scandal, that is known as Enron scandal revealed at the end of 2001. The chief financial officer Andrew Fastow tried to fake the record of company, made it look like the company was growing with huge profits and made the future value accounting. Future value accounting was used to predict the future of Enron that the company was going to make in future & was considered to be the part of profits of shareholders. As a result, people started to take interest in company & started buying the shares. In 1990 the company hired Jeffrey Skilling to a new division Enron finance corp. He involved practices such as, mark to market accounting and special purpose vehicles to hide huge debt & assets from investors. Special purpose vehicle (SPVs) is a subsidiary company that makes it’s obligation protected even when the parent company goes bankrupt. The purpose of this practice was to mislead financial statements rather than operating results. The company used SPV’s to reduce risks & hide debt to make company’s financial statements look better. As the scandal progressed, share prices of Enron decreased from $90.56 to just $1. The company believed that it’s stock price will keep on increasing but it declined. The value of SPVs also declined and then the guarantees were forced to play. So, the company disclosed financial statements and balance sheets of the company. The U.S. Securities and Exchange Commission initiated an investigation & the rivalry player Dynergy gave an offer to purchase the company (Nascimento, 2014). The deal failed on December 2, 2001 because the price offered was very low. Enron filed for bankruptcy under U.S. Bankruptcy Code. It was the largest bankruptcy case in the U.S. history.      

Corporate Social Responsibility

Andrew Fastow & many other executives of company were charged for different allegations, some were punished & sent to prison. Andrew Fastow was the main defaulter of Enron scandal along with the Arthur Andersen who was Enron’s auditor, oversaw the matter. Arthur Andersen was pressurised to ignore the issue. Arthur Andersen was charged guilty of destroying documents by the U.S. District Court. The company lost the majority of clients, employees & shareholders received limited returns even though losing pension funds and life time savings. 

Stakeholders are the key persons of the executive of management. They have stake in the company. Stakeholders are the persons who have interest in the company (Rowley, 2017). They can be employees, stockholders, customers, local community, government and regulatory agencies. Basically there are two types of stakeholders- internal & external stakeholders. Internal shareholders are the members of the organisation. Managers, directors, employees & shareholders are part of it. External stakeholders have direct interest & involvement in the action of organisation. There are dormant stakeholders also in the company. They are the persons who have nothing to do with company, but have share from long time and they have right in profits. These dormant stakeholders are similar to silent partners in the business. The first important stakeholder is shareholders. Owners of the business invested the money believing on the false financial statements. Company’s financial statements were not clear to shareholders. They did not only lose money on stock investment, also put money into the Enron retirement plan with full confidence. Investors lost 60 billion dollars within a few days. Enron holdings became worthless when the company declared bankrupt. Bankrupt of company affected people badly. Shareholders who purchased shares between September 1997 & December 2001 were eligible for a pay-out. But when the company went bankrupt, no one was eligible for pay-out. The persons, who bought common stock, received an average of $6.79 per share.  

Employees struggled to meet their ends. Those who were working from years lost their job in a movement plus the rewards which were pending. Employees invested their money in Enron shares, expecting higher prices in future. The price of share was $90.75 but after the bankruptcy the price of share falls down to $0.67. They did not only lose the job, they lose health care, life savings & also the old age security (Schermer & Pinxten, 2014). The only mistake that employees committed was being loyal to their company & wanting their own share & return in future. Employees had faith in company’s growth & increasing shares of prices (Snellman, 2015). Most of the employees were given just thirty minutes to empty desk and leave the company. Most of the employees used to take part in Enron 401 k plan, absolutely got nothing. They move to their old farmhouse. Employees give up their income to think company will resolve the matter soon (Petit, 2014). Company’s auditor Arthur Andersen lost it’s accreditation. The board of directors were also not attentive to company’s book of accounts created by Enron. Directors did not paid attention to employees because they don’t consider any responsibility towards employees. They found themselves representatives of shareholders only (Turner, 2015). This thing affected greatly the long term value of the shareholder’s investment. Workers did not even receive any notice of lock down, they could not even sell the stock. A worker of the company wanted to sell the shares, but told that they had been locked out. In 2004, employees of Enron won a suit case of $85 million from their pension fund. By this agreement, an employee received almost $3100 (Preuss, 2013). In the next year shareholders received a wholesome amount of $4.2 billion from banks. In 2008, shareholders amount reached to $7.2 billion from $40 billion lawsuit.

Enron Scandal: Background and Impact

The government set out the regulations & need of the business to do well to keep the economy healthy (Trevino & Nelson, 2016). The interest of citizens destroyed in American economic system. They had to face certain economic challenges. Inflation began to rise & it was hard for them to survive. The livelihood of many individuals affected in the society. It cost the economy by raising the cost of goods & services. Andersen’s firm was considered with no intention of providing financial services.

From the above incident government announced that high level management employees will be held responsible for the workings of the company (McMillan, 2017). This incident changed the relationship between American corporations & the American public. One post Enron plan was also announced by the president. This plan was to make financial statements more clear & representative by the management. This plan also included high level of corporate social responsibility also financial responsibility for accountants, CEO’s & auditors (Muller, 2014). The aim of government was to take strict action but not to put pressure on honest accountants of the economy. When federal & state laws deal with fraud & other practices, then they don’t follow ABA model rules rather they adopt culpable & reckless conduct. Culpable & reckless conduct deals according to the situation & stands for criminal acts. Minimum requirements of culpability are defined in section 305 that is limitations on scope of culpability requirements. Under federal securities, there are criminal liability & civil liability which could alter the situation while investigation.

Conclusion

The practices done by Andrew Fastow, Jeffrey Skilling and Arthur Andersen once gave them financial gain. But ultimately these manipulative practices led to the failure of organisation. Bankruptcy of organisation shook the entire system. Not only financial advisor & auditor, bankers also contribute to the downfall of Enron. Financial statements & profits were over shown by the organisation, which helped organisation to gain customer’s interest & attracted many investors. But bankruptcy of organisation could not give the return expected by them.  The employees lost their job & retirement savings & affected badly.

References

Crane, A. and Matten, D., 2016. Business ethics: Managing corporate citizenship and sustainability in the age of globalization. Oxford University Press.

Hoàng V?n, T., 2014. Accounting Ethics And Its Important Role For Reduction Of Accounting Fraud: An Empirical Study In Hanoi (Doctoral dissertation).

McMillan, C., 2017. Exploring the Strategic Business Processes Senior Leadership use to Enable Successful Ethical Practice within Their Organization (Doctoral dissertation, Colorado Technical University).

Muller, A., 2014. Corporate social responsibility. Wiley Encyclopedia of Management.

Nascimento, A., 2014. Ethics and Social Responsability-An agenda for interdisciplinary and international research on borderless net business ethics. Revista de EDUCAÇÃO do Cogeime, 17(32/33), pp.235-244.law

Petit, E., 2014. The Ethics of Care and Pro-Environmental Behavior. REVUE D ECONOMIE POLITIQUE, 124(2), pp.243-267.

Preuss, L., 2013. Corporate social responsibility. In Encyclopedia of corporate social responsibility (pp. 579-587). Springer Berlin Heidelberg.

Qi-he, H.U.A., 2013. Climate Responsibility: What Responsibility. Journal of Huazhong University of Science and Technology (Social Science Edition), 3, p.021.

Rowley, T.J., 2017. The Power of and in Stakeholder Networks. In Stakeholder Management (pp. 101-122). Emerald Publishing Limited.

Schermer, M. and Pinxten, W. eds., 2014. Ethics, health policy and (anti-) aging: mixed blessings (Vol. 1). Springer Science & Business Media.

Schmitz, J. and Schrader, J., 2015. Corporate social responsibility: A microeconomic review of the literature. Journal of Economic Surveys, 29(1), pp.27-45.

Snellman, C.L., 2015. Ethics ManagEMEnt: how to achiEvE Ethical organizations and ManagEMEnt?. Business, Management and Education, 13(2), p.336.

Trevino, L.K. and Nelson, K.A., 2016. Managing business ethics: Straight talk about how to do it right. John Wiley & Sons.

Turner, O.D., 2015. Outsourcing decision making: A case study of a small marketing company’s decision to outsource(Doctoral dissertation, University of Phoenix).