Business Ethics in Enron: Analytical Essay

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Business Ethics in Enron: Analytical Essay

Enron, at its zenith, was the largest energy trading company worldwide and the seventh largest corporation in the United States of America. Kenneth Lay founded the company during the 1980’s in Houston, Texas, and he, alongside Jeffrey Skilling, are recognized as the figures behind the company’s growth and success. From 1996 to 2000, company sales increased nearly eight-fold from $13.3 billion to a whopping $100.8 billion. In August 2000, Enron shares reached its peak with a value of $90.56, and the company had a market value of $70 Billion.

The company was unprecedented in terms of rapid growth and, as it was, all they had achieved was truly too good to be true. Within a year from accomplishing this impressive feat, the company was in shambles. Their CEO resigned, misleading reports were published, incriminating documents were destroyed, share value fell to $1.00, a desperate buy-out failed, and the company filed for bankruptcy.

The downfall of the Enron executives was rooted in their insatiable greed. They could have grown their company slowly and organically, but instead, they chose a hasty but unethical expansion. Enron had a proclivity for practicing a myriad of unethical practices which include embezzlement, unfair wages, exploitation of a deregulated market, and obstruction of justice. The chief issue that led to their downfall was their questionable accounting practices that massively overstated company revenue to lure investors under the guise of profitability.

First and foremost, Enron executives were involved in embezzlement. Embezzlement is a white-collar crime wherein funds entrusted to an employee are misappropriated. The two CEOs took advantage of Enron’s profits, when it was still in its heyday, and pocketed a substantial amount of company earnings. Company CEOs Jeffrey Skilling and Kenneth Lay were both charged with embezzlement due to fraudulent transactions. Skilling’s accounts showed multiple fund wire transfers to Raptor, a financial structure backed by Enron stock. Lay, in addition to also being found guilty of wire fraud, was charged with making false statements to banks that netted him a hefty cut of $75 million.

In terms of unfair wages, Enron utilized a flawed compensation and performance management system wherein the most valuable employees earned an unreasonable amount more in salaries and bonuses than average performing employees. This prompted the establishment of a dysfunctional corporate culture that prioritized short-term earnings since it maximized bonuses. Enron employees would close whatever deals they could, regardless of quality, in order to attain better performance ratings and qualify for large cash bonuses and stock options. Enron awarded these top employees with unreasonable salaries. Their wages were as much as twice of those with the same position in rival companies. In the year 2000, the two hundred top employees of Enron were awarded a collective $1.4 billion in the form of salaries, bonuses, and stock.

The obstruction of justice case in question was not against Enron; it was directed towards Arthur Andersen whose firm was in charge of auditing Enron. Andersen was found guilty of obstruction of justice because he deleted thousands of emails, documents, and company files related to the auditing of Enron. This felony resulted in the loss of the company’s CPA license which in turn, caused 85,000 people their jobs.

In 1999, California deregulated its energy market. Tim Belden, head of Enron’s West Coast Trading Desk in Portland Oregon, exploited this deregulation by congesting California power lines which caused an energy crisis in the state. This raised electricity prices which put more in the pockets of Enron executives, but at the same time, it caused California a loss of $ 7 million. Moreover, due to Enron executives having strong connections with powerful people in the White House, Enron as a whole was deregulated. The implication of this was that Enron was free to operate without scrutiny from the government. This is largely how the company escaped incarceration for any of its countless illegal acts.

Another questionable practice that further cements the lack of ethicalness of Enron CEOs is when in 1988, a group of stock analysts were invited to tour the Enron Energy Services office. They were deceived into believing Enron was a much larger company than it actually was because Skilling instructed employees from other offices to act as if they were workers in that office. This was done to convince the analysts that the company was much larger and successful than it actually was which would help improve stock prices.

Lastly, the most well-known and documented of Enron’s unethical acts was its questionable accounting practices.

Technically, the accounting method they utilized, mark-to-market accounting, is legal, but it is practiced mostly by Finance companies. Enron was the first energy company to adopt this method which was entirely unsuitable for a company in that industry. Their rationale for utilizing this method was unethical and greedy. They exploited this method as a loophole to misrepresent company revenue. Mark-to-market accounting involves automatically listing income from long-term contracts at present value. In other words, income expected in the far future can be recorded at present instead of when it is actually earned. This resulted in a misrepresentation of revenue since large sums of money the company has not earned were already listed as present profit. Moreover, since the profit was already recorded in the present, it could no longer be counted when it is actually earned; therefore, Enron needed to continuously sign for new projects and close deals to include in their reports for the appeasement of their investors. Furthermore, this method is also known for having large discrepancies since much guesswork is done to estimate profits and cash. Consequently, reports given to investors were often misleading or entirely false.

Another unethical habit Enron practiced was declaring cancelled projects as assets. This was a method known as “the snowball” which legally allowed booking costs of cancelled projects worth up to $200 million to be considered assets, as long as there is no official letter marking the project as cancelled. Enron exploited this loophole to an unreasonable extent. For instance, in July 2000, Enron closed a deal with Blockbuster Video to bring on-demand entertainment to US Cities. This agreement was set for 20 years and Enron recognized an estimated $110 million from the first projects of the deal; however, the network soon failed and Blockbuster withdrew. Overall, this resulted in negative profits for Enron, but they continued to recognize future profits from the failed deal.

Another case of questionable accounting was Enron’s creation of “special purpose entities”. These were limited partnerships or companies that existed to fund or manage risks of certain assets. Enron used hundreds of these shell companies to conceal their debt and circumvent accounting conventions, resulting in lowered liabilities and overstated income. An example of this was Whitewing. Enron contributed $579 million for its creation in December 1997. Whitewing was then used to purchase $2 billion worth of Enron assets with Enron stock as its collateral. This transaction was recorded as sales for Enron when, in fact, it was an asset transfer that should have been considered a loan.

Filipino values at work in the Enron scandal are corruption, poorly distributed wealth, delikadesa, exploiting connections, and primacy on the name.

Corruption is evident in the actions of the Enron executives. Skilling and Lay were found guilty of multiple counts of fraud. They practiced corruption by taking cuts from company profits and awarding themselves excessive and large sums of bonuses.

The poor distribution of wealth was clear in the compensation system of the company. There was a large discrepancy between the salaries of the few top performing employees and the rest of the employees. The distribution of salaries was unfair and heavily favored the few who were on top much like the colossal gap of wealth between the tens of millions of poverty-stricken Filipinos and the small population of rich Filipinos.

Another Filipino value at work is delikadesa. There was a complete lack of this on the side of Enron who thrived on misrepresentation. Delikadesa was exhibited by Sherron Watkins, the whistleblower who exposed Enron for its unethical actions. Watkins was an Enron executive who had the propriety and hiya to reveal Enron’s shameful sins. She braved the backlash from her co-workers because she had the decency and bravery to be the whistleblower.

Exploiting connections is another trademark of Filipinos. Most often seen in politics, exploiting connections is a common practice powerful Filipinos use to further their own agendas. In this case, the Enron executives exploited connections by using their close ties to the White House to conceal their actions. Being closely connected to powerful officials swayed the government into turning a blind eye towards Enron’s questionable acts.

Primacy on the name was most evident on the part of Arthur Andersen, the auditing firm affiliated with Enron. Arthur Andersen himself was guilty of obstruction of justice because he erased emails, documents, and files that tied their accounting firm to Enron. Andersen’s name and honor was on the line because of their connection to the disgraced Enron and in attempt to rectify this, he obliterated any evidence of his firm’s role in Enron’s misleading reports.

The primary ethical dilemma in the Enron narrative is the executives choosing between running a business with lower revenues but honestly or with high profit margins but dishonestly.

From a subjectivism standpoint, one can argue that the Enron executives personally believed they were in the right. In subjectivism, determining whether an act is moral or not depends solely on the one making the decision. If Lay and Skilling feel that their actions are justified, then from their views it is acceptable. In the view of objectivism, one would need to examine the culture wherein Enron is immersed. As one of the top Fortune 500 companies, Enron thrived in the cutthroat Wall Street environment where morals and values can be slim to none. Other business cultures may be less forgiving in regards to ignoble acts, but in a place like Wall Street, questionable practices are commonplace and acceptable to a certain extent. In relativism, one could argue that the actions of Enron will always be wrong. In this theory, there is only one right or wrong and fraud and dishonesty should always be unacceptable regardless of the situation at the time.

From the view of utilitarianism, the decisions made by Enron can be considered a failure. This is because regardless of the means, the end result was failure. The actions of Enron resulted in their bankruptcy, the loss of employment of tens of thousands, and jail time for a number of Enron executives. Furthermore, their decisions are wrong because they caused substantial harm to other parties as well. Investors and stockholders lost billions in value and California residents suffered immensely from the energy crisis caused by the greedy and intentional congesting of power lines.

In Kantian Ethics, Enron was also still wrong. In Kantian Ethics, the most important factor when identifying if an action is ethical or unethical is goodwill. Enron demonstrated a complete lack of this. As evinced by their greedy actions towards investors, their company had no care for the welfare of others, only themselves.

In considering Ethics of care, it is evident that Enron did in fact, not care. They took no actions to fulfill their corporate social responsibility. They showed no empathy for the hundreds of thousands affected by their actions. They indicated no remorse for all the sins and atrocities they committed against humanity. The executive especially only cared about pocketing more money.

In virtue ethics, the unethicalness of their actions can be attributed to poor character and failure to observe the mean. Their business model was immoral because it was too greedy. It focused too much on profit and did not balance with goodwill and charity. The character of the executive, and the subsequent decisions they made, wrote Enron off as another selfish company with no regard for its employees or the masses.

One of the major ways Enron erred was in their impatience. The Enron CEOs, Skilling especially, were unsatisfied with the regular pace of company growth. Hence, they resorted to misleading the market and investors into believing their profits were much more than they actually were. Through exercising patience and growing their company organically, Enron could have stayed a viable business.

To rectify the issue of public mistrust, Enron should have been less deceitful. Enron misled the public and the business community into believing a number of their lies. For instance, they fooled analysts into believing the company had much more employees than there actually were. They also released many misleading financial reports which massively overstated their revenues. Lies of any sort ruin the credibility of a company, and as such must always be avoided to preserve a business’ reputation. The correct course of action of a business in any industry should be transparency. Enron was labeled the darling of Wall Street for a time but it was built on lies so it did not last. Truly, fake reputations are only temporary and the truth is bound to reveal itself at some point. Consequently, the safest choice for sustainable growth is to be transparent. After all, it is better to build a company slowly but surely than have one grow quickly but crash and burn just as fast.

The Enron scandal is the proverbial tale of how unethical business practices such as fraud, unfair wages, exploitation, obstruction of justice, and misleading reports can lead to the complete and abrupt decimation of a company that in its prime was even once named the most innovative large company in America in Fortune magazine’s survey of Most Admired Companies. In the Enron narrative the Filipino qualities of corruption, poorly distributed wealth, delikadesa, exploiting connections, and primacy on the name shined through. From the standpoint of nearly every ethical theory, the actions of Enron were wrong. Their means was questionable, and their end was a failure. They showed no remorse, and their character was poor. In the end, they failed due to their greed and penchant for misleading the public. Enron should have been more patient and grown their company in a sustainable fashion. They should have been less deceitful with their decision-making because in the end, their lies only brought them temporary success. True success cannot be cheated; it is earned through years of tireless honest work.

References

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