Working professionals in every field place a high emphasis on ethics and principles. The consequences of unethical operations can be devastating, as seen in the Enron scandal of Enron Corporation. The controversy broke in October 2001, resulting in the company’s insolvency and the de facto collapse of Arthur Andersen, a globally renowned audit and accounting company. Ultimately, it became the worst audit failure and bankruptcy restructuring in U.S. history. In light of Enron, corporate board members must understand that even the smallest sign of ineptitude or misconduct could have disastrous effects on a corporation.
The Ethical Issue
Enron utilized mark-to-market bookkeeping to inflate their earnings and abused special purpose entities (SPEs/SPVs), which led to an ethical accounting controversy in 2001. Enron sought to cook the books to make their revenue seem considerably greater than it was and to keep their losses appear significantly minimal. (Benke, 2021). The major objective of these SPEs was to conceal accounting facts, not operational outcomes. The typical Enron-to-SPE trade would look like this: In return for a note or cash, the firm would disburse a portion of its quickly appreciating shares to SPE. Ultimately, the SPE would utilize the shares to offset an investment on Enron’s balance sheet. Consequently, the firm would ensure the SPE’s value, mitigating its perceived credit risk.
The Impact on Stakeholders
Once the story reached the public, the price of Enron shares fell, and the SEC opened an inquiry. According to Luke (2018), Enron’s stock price fell from $90 per share in the middle of 2000 to below $1 by the following year-end. Approximately $74 billion was lost by the shareholders, of which over $30 billion was ascribed to financial misconduct. Enron sacked 4500 workers without pay when the company went bankrupt (Bhaskar & Flower, 2019). Several big shareholders incurred financial losses, including Janus Fund, whose shares at Enron were approximately 11 million when the scandal peaked. According to Janus spokeswoman Shelley, the vast majority of these holdings were liquidated at a loss (Luke, 2018). As a consequence, the company suffered a loss of 26.1% (Bhaskar & Flower, 2019). Others were JAGIX with about 3 million shares, JAMRX with approximately 4 million shares, and Alliance Capital with over $40 million shares (Bhaskar & Flower, 2019). There was an ethical consequence of the Enron crisis for both primary and secondary stakeholders.
The company’s senior executives were disgraced in their social and professional lives due to their complicity in Enron’s deceit of shareholders for quick monetary benefit. Former officials like Ken Lay and Jeffrey Skilling were charged in 2004, and those found guilty received prison terms (Luke, 2018). Michael Kopper spent 23 months of a 37-month term, while Fastow’s wife, Lea, received one-year imprisonment (Luke, 2018). Another major stakeholder that was affected was the government. Given that Enron was supposed to serve consumers, the government provided a license that, in practice, favored the firm’s wealthy elite and stakeholder groups.
The Enron crisis claimed lives, the most devastating of which was John Clifford Baxter. The firm’s former vice-chairman killed himself, ostensibly due to his participation in the scam (Bhaskar & Flower, 2019). More than 4000 others lost their careers due to the irresponsible actions of a few people (Luke, 2018). Similarly, secondary stakeholders were impacted by the Enron debacle. Enron led other firms to lose confidence in their clientele. Through engaging in dubious accounting practices, Arthur Anderson’s consultancy business lost its reputation (Bhaskar & Flower, 2019). Another company whose credibility was damaged by its involvement with Enron in perpetrating deception against workers and stockholders was Vinson & Elkins. Ultimately, the Enron crisis sparked worldwide concern about American corporate practices.
How the Situation Should Have Been Handled
Profits decreased as a result of Enron’s failure to fulfill its ravenous need for cash to finance its commodities trading businesses. As a consequence, the company’s financial status began to deteriorate. This series of incidents prompted the company’s leadership to begin cooking the books. Unquestionably, some board members were aware that Enron was attempting to remove failing assets and prospective venture losses from its balance sheet since the business lacked both cash and profitability. Instead of remaining quiet, the board should have issued a warning and taken action to avoid additional infractions of accounting principles and regulations. The board members forgot that even the slightest indication of incompetence or malfeasance might be catastrophic for a business.
More significantly, there ought to have been more professional standards and stronger adherence to ethical governance. Enron was supposed to treat its shareholders and affiliates with respect and honesty. It became apparent that there were insufficient reports, accountability, and openness. Enron gave its shareholders false earnings reports, which quickly became a habit. Staff members must be aware of the required ethical standards and work to maintain a stronger understanding of company culture. Personnel at Enron prioritized and favored their interests above those of the organization’s shareholders. In other words, Enron would not have ended up in such a humiliating mess if it had a strong ethical culture that all stakeholders upheld.
Above all, the company’s top leadership should have taken responsibility for minimizing negative publicity. Executives at Enron committed irresponsible behavior by declining to take the necessary steps, exercising sufficient supervision, and accepting accountability for the unethical practices of their company. The company CEO completely ignored indications of financial irregularities. Staff was generally left to act as they pleased by firm bosses, who encouraged them to increase their numbers by whatever means imaginable (Bhaskar & Flower, 2019). There should have been a whistleblower at this time, but nobody came forward to take responsibility. When questioned by congressional committees, Fastow and Lay used their Fifth Amendment rights against self-incrimination, while Skilling cooperated yet maintained he was unaware of any wrongdoing (Luke, 2018). In sum, the organization handled the situation poorly from its onset to the end.
The above response is an example of proactive ethics. If a company is practicing proactive business ethics, it is ahead of its competitors in terms of how its internal perspective compares to the external viewpoint (Rim & Ferguson, 2020). If the company is practicing reactive business ethics, it is falling behind the norms of society when it comes to acting responsibly (Rim & Ferguson, 2020). Enron executives practiced reactive ethics because they prioritized selfish ambitions above corporate social responsibility.
Enron could have produced better guidelines for all accounting periods on connected party transactions, SPVs, and economic risks for commodities, including leases. Furthermore, the corporation could have upgraded its financial reporting method to render it more current and valuable by integrating additional non-fiscal data on corporate performance. Enron could have optimized its bookkeeping standard-setting procedure to be more sensitive to the rapid developments in a technology-oriented market.
Companies in this predicament may also use toolkits for accounting professionals to uncover and analyze transactions involving affiliated firms. Such tool kits offer a summary of the auditing and accounting publications, SEC rules, and best practice recommendations. In addition, auditors have access to several checklists and other resources that may aid in the documentation and disclosure of transactions involving related parties. These tools and resources would have made it difficult for Enron to hide its fraudulent accounting practices.
Ultimately, the above that independent auditors were another potential intervening party. Independent auditors, nonetheless, reaped much more financial rewards from consultancy than they gained from the audit itself. There was a likelihood that a lot of influence from inside the company to keep things as they were rather than risk losing money over technicalities. This means that the corporation either did not use independent auditors or that the auditors they did use were corrupted.
The Enron crisis left negative repercussions for many American corporations. Many Enron executives were sentenced to prison due to subsequent ethical inquiry, and Arthur Anderson, their accounting company, finally lost all of its customers and was shut down. New legislation was passed to prevent incidences like this in response to the Enron affair. In this situation, corporate ethics dictate that customers and firms should demand honesty and complete openness. More can be learned from Enron than only the accounting and market changes that followed the incident. The ethical failings of Enron’s senior executives provide valuable lessons for leadership instructors and coaches on how to approach the study of ethics and values in the school context.
Benke, G. (2021). Twenty years later, Enron’s business tactics still haunt us. The Washington Post. Web.
Bhaskar, K. N., Flower, J. (2019). Financial Failures and Scandals: From Enron to Carillion. United Kingdom: Routledge.
Luke, M. (2018). The Enron Scandal. Main Reasons for the Downfall of the Company. Germany: GRIN Verlag.
Rim, H., & Ferguson, M. A. T. (2020). Proactive versus reactive CSR in a crisis: An impression management perspective. International Journal of Business Communication, 57(4), 545-568.