Abstract
The case of Enron is one of the cases that give essential insight into the role of accounting professionals in the upholding of organizational credibility. Through the description of the case, it is clear that Enron could have been salvaged had the accountants in place acted according to their professional ethics. The ability to trade professional capability and demands for purpose of self gain is the key undoing of professionalism in accounting. Although it is crucial for professionals to act based on primacy to client demands, it is also important for the same professionals to draw a line where giving priority to client demands ends. Through intensive research into existing literature concerning unethical business practices such as those at Enron, I realized that although inappropriate business practices may result in short term benefits for an individual and for accounting companies, it does not provide sustainable professional growth to an individual. In addition to this, the case of Enron brings out other dangers of unethical business practice such as potential for reduced stock value, bankruptcy, loss of reputation, loss of respect from subordinates, potential for law suits for individuals and companies as well as de-registration of professionals and their companies. It is therefore recommended for companies and individuals engaged in professional accounting and auditing roles to act within the confines of professional conduct in order to maintain the honor of the accounting profession.
Introduction
Enron was founded back in 1985 as an oil and gas company dealing with piping and sale operations. Through its operational years, the company enjoyed wide corporate recognition as a result of its prolific growth tendencies. In addition to this, the company enjoyed great profitability through the 15 years that preceded its collapse hence was a darling to many investors who wished to invest in the industry. Through the years, the company went ahead to acquire as well as to partner with other companies in different sectors. For instance, the company extended its operations to the electric power sector in 1997 through acquisition of Portland General Electronics. The collapse of Enron came therefore as a surprise to the stakeholders in 2001 following the company’s filing for bankruptcy. The factors that led to the company bankruptcy included unethical business conducts under the direction of the company’s managers, conflicts of interest among several stakeholders and great accounting mishaps in the company’s financials. On realizing the potential for failure due to the many unethical practices in the organization, the managers decided to dissolve some of the company partnerships. This eventually led to the reduction of the company prices by more than 98% in a few months and subsequent collapse of the giant company.
Initially, Enron operated in a highly profitable business environment. This was prior to the government’s decision to restrict pipeline business structures and exposure of the consumers to market volatility. Because of this, other players in the market faced great challenges in maintaining their market positions. Under the guidance of McKinsey and Company consultants, Enron was able to take advantage of the situation by taking customers into long term fixed price trading agreements (Healy and Palepu 2016). Through the years, the company focused on innovation as the core of their operations, always seeking new opportunities for growth. The business model was profitable and commendable and would have helped the company to avoid failure if it had been used with due respect for the organizational code of ethics. Other factors that contributed to Enron’s problems include a permissive organizational corporate culture and accounting and auditing practices which concealed rather than revealed pertinent information to the investors. The conflicts of interest held by most of the players in the company’s issues also contributed greatly to the failure of the company.
When considering the factors that led to organizational collapse, it is crucial to mention that the key parties to the failure included the company’s managers, auditing firms, analysts and investment bankers. The actions of each of these parties went contrary to organizational and professional code of ethics leading to failure to conduct business in a recommended profitable manner. Because of the actions of these parties, the company faced challenges such as reduced stock prices, poor productivity, legal issues and lost credibility. These issues eventually led to the bankruptcy of the company. The key challenge i.e. reduced stock prices was however caused by the inaccurate reports presented by the auditors and the analysts.
Case Questions
Question 1: Describe the factors that influenced Enron and led to its collapse in 2000.
According to the case description as given by Nanda (2003a), the collapse of Enron was inevitable based on various internal and external factors. From its inception, the operations of the company had revolved around various key players. Internally, Enron was influenced by some key weaknesses and threats to its growth. First, the company had a corporate code of ethics yet did not provide redress alternatives. While the code of ethics stressed on the importance of reporting any violations, the culture that was in place in the organization did not support this as most of the perpetrators were the organizational managers. Each of the leaders had vested interests in the performance of the organization. As such, all tried to conceal the accounting practices which were marred in the organization in order to benefit individually.
The accounting and auditing practices in the company also led to its collapse. Through false presentations, the accounting firm managed to convince investors that the company was worth investing in, only for them to realize their mistake much later. This was encouraged also by the self interests of the auditing firm, which was doubling as an independent auditor as well as an internal auditor. The two roles should not be combined. Other players that acted contrary to professional ethics leading to the collapse of the company include lawyers, consultants and analysts. Externally, the industry dynamics also played a role in the failure of the company, especially due to the reduction in market demands after 2000. The condition of the stock market as well as the role of investors shifted with the reduction in company stock prices leading to decrease in potential for success. It can thus be argued that Enron’s failure was primarily a result of the many internal conflicts of interest among key players in the company.
Question 2: Why did Enron’s internal checks and balances fail to prevent its demise?
As previously described, Enron had a 64 page document outlining the code of conduct in the organization. It would have been possible to use this document in guiding the actions of the key stakeholders at the company. However, this did not prevent the demise of the company due to one reason. Those who were tasked with the implementation of the checks and balances outlined by the company code of conduct were the same people who were involved in its violation. The company managers collaborated with others to violate the company code of conduct hence could not prevent the demise of the company through it. According to a report by Nanda (2013b), professionals acting in an organization should place priority on the client needs. Additionally, supervision is necessary where the professionals have been found to possess verifiable efforts and skills. This was the case for Arthur Andersen auditing firm and Enron. However, the auditing firm could not act within professional requirements as they were under instructions from the company management and had vested interests in the company due to the favors accorded to the firm by Enron. As such, they produced falsified reports which were presented to the investors.
The company could not use its checks and balances to prevent this as it is the same company’s management that facilitated this violation. The same issue also presented in the case of analysts as well as with investment bankers. In each case, the players acted contrary to the code of professional conduct yet could not be punished since the company managers supported the unprofessional conduct. The culture of negligence inculcated by the company’s management also made it difficult to prevent the company’s demise through its checks and balances since it was no longer perceived as strange for any of the stakeholders to portray negligence in professional performance.
Question 3: How did the top leadership/ Board of Directors at Enron undermine the foundational values of the Enron Code of Ethics?
The Enron code of Ethics was built around foundational values which comprised of respect, integrity, excellence and communication. Through their actions, the board of directors at Enron undermined these values through various ways. For instance, their actions such as failure to provide full and accurate disclosure of information to the investors of Enron violated respect, excellence and communication. It is the right of the investors to be fully aware of all the information pertaining to the finances of the company they desire to invest in. By collaborating with the auditing firm to provide false information to the investors, the company board of directors acted in disrespect to the investors as well as to the accounting profession through failure to recognize the essence of accounting principles. Failing to disclose pertinent information can also be described as undermining the value of communication since it is this information that is required by investors for informed decision making.
Apart from their dealings with the investors, the company board of directors also acted contrary to the company code of conduct through undermining integrity in a number of key areas. Through their dealings with the auditors as well as with the investment bankers, the board of directors indicated lack of regard for integrity. Their dealings with investment bankers portray a practice of offering incentives compensation as a way through which unethical behaviors are encouraged (Paine 1994). The investment bankers were to advice investors to invest in company stocks at a fee of 3 3-4% above the normal fee charged by the target companies (Nanda 2013a). In this way, the investment bankers failed to consider company finances and advised their customers wrongly. Any practice that went contrary to organizational code of ethics resulted in stock price losses and eventual demise of the company undermined excellence in performance.
Question 4: How did Enron’s corporate culture promote unethical decisions and actions?
According to a study by Graham (2013), corporate culture can promote ethical behavior through cooperation. It is also important to note that the wrong form of cooperation as practiced by Enron’s stakeholders can also promote unethical behaviors. For instance, the practice of presenting false information to the investors was only fostered through the collaboration that existed between the company’s board of directors and the auditing firms. Apart from this, cooperation between the company and the investment bankers also promoted unethical advice to potential investors. The board of directors at the company also encouraged a culture in which such behaviors were acceptable and in which no one could do anything to prevent negative outcomes. The company had a code of ethics that was not adhered to since the directors who could enact the code and act accordingly in case of any violations were the first ones to violate the code. Because of this, the company had a culture in which undermining the code of ethics was the norm. This explains why through the years, no one bothered to raise concern over the issue, and the only letter that was ever written to that effect came after the resignation of Skilling.
Another culture that encouraged violation of ethical conduct by the company was lack of communication and restricted communication with outsiders. Based on the reports of Nanda (2013a) and Healy and Palepo (2016), it is evident that there was a structured communication process in which consultants, investment bankers and the auditors only communicated directly with the company board of directors. The consultants such as McKinsey for instance, report that the company hoodwinked them through the board of directors into presenting false information. Similarly, Vinson and Elkins consultants also reported that their actions were constrained as they were limited in the number of people they could obtain their information from. During their analyses, the consultants could only communicate with the board of directors and the Arthur Andersen auditors hence received false information (Healy and Palepo 2016).
Question 5: If you were an accountant at Enron, how would have respondent to what was going on and why?
As an accountant, my actions are to be guided by the professional code of ethics for the accounting profession. The code of ethics is provided by the American Institute of Certified Public Accountants. As part of the team working with Enron, I could have tried my best to act within the provisions of the professional code of conduct. The accounting profession, especially if carrying out roles such as independent auditing is supposed to be for the benefit of the larger community. As much as the professional gives primacy to the needs of the client, it would be essential to consider the impacts of prioritizing these needs to the general public. As a public accountant, I would ensure that I do not jeopardize my certification by engaging in dishonest presentations or compromising the public good for the sake of self gratification. I believe that respect for professional values is a virtue that should not be traded for any other.
Based on my stand on the issue of respect for professional ethics, I believe the management at Arthur Andersen may not have agreed to continue having me on board due to my potential to destroy their prospects for gaining from Enron. On this note, I believe that it is always better to stay at a position in a company where the growth rate is low yet one is assured of continued professional growth and sustainable accreditation. Working for a company like Enron would place my certification as a public accountant on balance and also make it easy to lose my credibility as a public accountant. Any mishap in the operations of the company could backfire on the individual accountant, the auditing firm as well as the national accountants’ professional association. I would thus prefer to stay in a smaller organization, practice with integrity and follow the code of ethics and grow sustainably.
Question 6: Using the lessons learnt from the Enron case; describe the implications of unethical business practices on the society.
One of the most clear impacts of unethical business practice as evidenced from the case of Enron and which is also presented by Zeiger (2016) is the drop in stock sales. Following Enron’s dissociation of key partnerships and subsequent reported financial problems, the company recorded a drop in stock price from a high of $90 to $0.94 in a few months. This can be linked to unethical practices which saw the company acquire more businesses than they had financial capacity for. Unethical business practices such as falsifying financial reports and exchanging incentives compensation can cause this. If unchecked, such practices can lead a company from high stock values to bankruptcy as was the case of Enron.
Moreover, unethical business practices can also result in reduced respect among employees. This is critical in an organization where productivity is dependent on employees as they interact with customers. Lost respect can also result in inability to give instructions to employees or their failure to report any mishaps to the ones in charge of operational efficiency. At Enron, this loss of respect could be related to the lack of any reports over the years. Additionally, such practices can result in credibility. For companies, reduction in productivity, reduced stock prices and negative media representation all result in reduced credibility of a company. The management at a company in which unethical behavior is rampant also loses their credibility and reputation. When this happens, the professional bodies that harbor such managers are also questioned over the authenticity of their evaluations (Zeiger 2016). As such, unethical business practices affect not only individuals who engage in them but also the companies they belong to, the industries they operate in and the individuals they employ among others.
Conclusion
Enron could have prevented the negative eventuality that befell the company in the long run. Being a greatly reputed company, Enron should have engaged the services of professionals in the running of its objectives. The key challenge that the company faced after diversifying its business model was conflict of interest among various participants in the company operations. From the managers, the auditing firm, investment bankers and consultants, the conflict of interest led to lack of professionalism in conduct of business dealings. The auditors failed to give accurate information to the investors due to their interests in the company. Similarly, the investment bankers provided false information based on an agreement to be rewarded through incentives compensation. The lawyers and consultants were hoodwinked or constrained by their contractual agreements with the company board of directors. In their dealings, the company board of directors undermined the company core values of integrity, communication, respect and excellence.
Through their actions, the company’s board of directors managed to inculcate a culture in which lack of communication and violation of the company code of ethics was the norm. Because of this culture, the company could not use its checks and balances in order to prevent the eventual fall of the company. As an accountant, I would have worked with the objective of adhering to the professional code of conduct. Through the case of Enron, I have learnt lessons on how unethical business practices can result in the destruction of a company. Such practices can result in loss of credibility of professionals and their associated professional bodies. Moreover, I have learnt that unethical business practices may take long to be discovered but the eventual outcomes such as reduction in stock prices and bankruptcy in some cases are noticeable and cannot be ignored. It is therefore critical for professionals and organizations to operate ethically in their conducts.
Bibliography
Graham, J 2013. The role of corporate culture in business ethics. Paper presented at the Management Challenges in the 21st Century Conference, Bratislava, Slovakia.
Healy, P and Palepu, K 2016. The fall of Enron. Harvard Business School.
Nanda, A 2003. Broken trust: role of professionals in the Enron debacle. Harvard Business School.
Nanda, A 2003. The essence of professionalism: managing conflict of interest. Harvard Business School.
Paine, L 1994. Managing for organizational integrity. Harvard Business Review.
Zeiger, S 2016. Effects of a lack of ethics on a business environment. Hearst Newspapers.