The Enron Scandal: An Ethical Analysis

In October of 2011 a corporate scandal was revealed that led to the bankruptcy of Enron, an energy company based in Houston, Texas. Considered one of America’s most innovative companies in the late 1990’s, Enron’s collapse came as a shock to the public. Aside from the company’s great success financially, it was also heralded as a paragon of corporate responsibility and ethics. What caused the collapse of such a powerful and respected corporation? Essentially, the answer is unethical behavior on behalf of executive management allowed by a lack of transparency and failure on the part of external auditing. Enron’s external auditor, Arthur Anderson, “approved several accounting measurement issues in apparent violation of sound accounting principles. This allowed Enron to significantly overstate their earnings from 1997-2001. “At some point in the bending of ethical guidelines for the good of the company, Enron’s executives also began to bend the rules for personal gain."



Stakeholder Analysis

Key stakeholders affected by this scandal were the executive management, Enron employees, third parties affiliated with the company such as the international accounting firm of Arthur Anderson, stockholders, and to a great extent the economy as a whole. According to Li Yuhao, Enron’s executive management "believed that Enron had to be the best at everything it did and that they had to protect their reputations and their compensation as the most successful executives in the U.S." The result of their secrecy was short-term financial gain at the expense of the litigation to follow as well as an unforgettable reputation that will haunt them indefinitely. Enron’s employees lost their job as well as their retirement savings with the company. The scandal resulted in the dissolution of Arthur Anderson, which was one of the five largest audit and accountancy partnerships in the world. Shareholders obviously lost their investment as Enron’s stock plummeted and the economy felt the shock of the collapse of a massive enterprise.

Analysis Based on Ethical Theories

This scandal clearly illustrates the need for transparency and thorough auditing within organizations. The deontologist could insist that it is the duty of executive management to offer this transparency to the stakeholders that they serve. This duty corresponds to the positional rights granted through the position as an executive. Stakeholders invested in an organization expect executive management to fulfill their positional duties of serving the best interests of the company in an ethical and transparent manner. This scandal could have been prevented if Arthur Anderson had fulfilled their duty to audit the company’s financial statements accurately. Executive management may have rationalized their decisions as serving the best interest of the company but it is clear that their motives were not aimed exclusively towards benefiting the organization. Kant’s categorical imperative clearly illustrates their behavior as unethical because if they were acting “according to that maxim whereby [they could] at the same time will that it should become a universal law,” then secret manipulation of organizational matters would be permissible throughout the entire organization. Since an organization cannot operate as such, transparency throughout is the ethical answer.

Conclusion

According to Jerry Hays and Donald Ariall, “fraudulent accounting is a high priority risk, and whistle-blowing is the number one method of fraud detection." Despite Enron’s thorough ethics policy, a massive financial scandal took place that could have been prevented by encouraging whistle-blowing throughout the organization. The auditing system that the company had in place failed to serve its purpose in the detection of fraudulent activity which shows a need for more comprehensive accountability. An organization is not an individual but a collection of individuals working towards a common goal. Because of this, companies need transparency as well as the means at all levels to be able to report unethical activity on behalf of any held position regardless of hierarchical status. A company’s ethics program should not be assessed based solely on how it looks on paper, but rather how it is integrated into the culture of the organization and the amount of transparency and ethical autonomy that is granted at all positional levels of the company.

References

Sims, R. R., & Brinkmann, J. (2003). Enron Ethics (Or: Culture Matters More than Codes). Journal Of Business Ethics, 45(3), 243-256.

Hays, J. B., & Ariail, D. L. (2013). Enron Should Not Have Been a Surprise and the Next Major Fraud Should Not Be Either. Journal Of Accounting & Finance (2158-3625), 13(3).

Wilson, A. C., & Key, K. G. (2013). Enron Audit Failures: A Compromise of Ethics?. Feature Edition, 2013(3), 50-68.

Yuhao, L. (2010). The Case Analysis of the Scandal of Enron. International Journal Of Business & Management, 5(10), 37-41.

Gilbert, J. (2012). Ethics for managers: Philosophical foundations and business realities. New York, NY: Routledge.