Enron’s scandal is famous for its irregular accounting practices, which lead to its collapse. The scandal involved manipulating accounting information, corporate fraud and unethical practices by the executives. Enron’s Bankruptcy in 2001 was the greatest in U.S history and continues to draw attention to corporate fraud and ethical accounting procedures. The scandal has resulted in the legislation of new accounting practices and regulations to control the accounting reporting practices of publicly traded companies. A worldly and biblical analysis of the Enron scandal will help discover decision-making alternatives that the executives could have considered to avoid the scandal.
Enron’s Ethical Culture, Stakeholders, and how it contributed to its Bankruptcy
The collapse of Enron in 2001 exposed the moral ethics in the corporate set-up. Enron’s corporate culture openly disregarded the code of ethics in the industry in chasing profits (Ferrell et al., 2021). The executive compensation plan only concentrated on enriching the executives while paying no attention to shareholders. Jeffrey Skilling adopted a system of ranking employees every six months; the bottom 20 employees were forced out of the company. Despite having ethical values and vision statements that encouraged employees to observe high moral values and ethical standards to attain maximum potential. The ethical values were not implemented, leading to unfair ethical practices within and outside the organization. The organization’s culture rewarded innovative employees who generated financial gains and dismissed employees with did not add financial value to the organization.
The executives’ disregard for ethical business operations was the main contributing factor to the collapse of Enron. The company executives replaced business ethics with the need to generate profits using whatever means. The unethical practices resulted in the report of huge profits, making Enron attractive to Wall Street investors. Later, an audit revealed that Enron’s success was based on an apathetic and exacting culture that allowed the executives to abuse and use excess power for self-gains (Rashid, 2020). The executive manipulated the reward system in the organization to allow abuse of power by executives as an avenue to instil fear among employees.
The greed to generate profits and focus on a compensation plan to benefit only the executives resulted in the use of unfair accounting and business operations to attract more investors. The focus was not on the shareholder’s well-being but on generating revenues for the executives. The focus shifted from achieving the organization’s overall values to rewarding executives and creating extra revenues using manipulative business operations. The organization’s culture only recognized the performers, regardless of the method used to arrive at the results. Corporate misconduct resulted in the use of dubious accounting practices, thus resulting in Bankruptcy. Greed and focus by the executives to accumulate wealth resulted in disregarding shareholders’ interests and the general purpose of the business.
Evaluation and Implications of Enron’s Unethical Behaviors
Enron scandal involved several ethical issues that made the organization generate revenues and grow rapidly. As a result, many investors were attracted to being part of America’s fast-growing company. The main ethical issues in the Enron case study are manipulative practices, taking advantage of legal loopholes, and the self-interest of the executives.
Enron utilized manipulative accounting practices that allowed it to post supernormal profits while concealing losses. Special Purpose Entities (SPE) allowed the entity to create a positive financial picture by replacing assets and debts from the balance sheet with a high cash flow value (Ferrell et al., 2021). The financial statements created a false picture for investors about the company’s future potential, resulting in a wrong investment decision. Business entities should use accurate accounting practices and follow ethical financial reporting to allow investors to make informed financial decisions (Pandey, 2017). The General Accepted Accounting Practices (GAAP) provides an asset of accounting procedures and standards that business entities should follow to avoid the manipulation of accounting records by business entities.
Enron executives took advantage of existing legal gaps and loopholes to execute unethical accounting practices. The company took advantage of the market-to-market accounting principles to report unrealized future profits in the current accounting period, thus creating a false profit picture. The executives colluded with the Authur Andersen accounting firm to manipulate the market-to-market accounting principle in the investment schemes that Enron had initiated. The market-to-market accounting principle allows business entities to present a fair value of the business accounts that fluctuate with time, such as assets and liabilities. The discovery of corporate accounting malpractices in the Enron scandal resulted in several regulations and internal controls to ensure that publicly traded companies use accurate accounting reporting practices.
Enron executives acted to safeguard self-interests while disregarding the interests of employees and shareholders. The executives encouraged employees to invest heavily in the company shares without disclosure inside information and the actual value of the entity. Before Bankruptcy, executives disposed of their investments and rejected the request by employees to dispose of their shares. Moral and ethical values should guide the actions of a leader in different instances. The act of Enron executives in duping employees into purchasing shares and blocking them from selling indicates self-centred leadership with no disregard for the interests of others. The unethical conduct of the executives resulted in violating employees’ rights, exposing them to worse financial conditions.
Recommended Plan of Action
According to the secular worldview, the executives and board of directors could have avoided Enron’s scandal and ultimate failure if the executive and the board of management could have acted in good faith. The Ubrimae fides legal doctrine requires parties to an agreement or a contract to illustrate good faith and disclose all material information. From a secular point of view, the BOD and the executives could have prevented the scandal from happening in the following dimensions.
The BOD is elected into office by shareholders, who entrust them with the responsibility of safeguarding the shareholder’s interests in the organization. The fiduciary duty of the board of directors is to act according to standards of due care and loyalty in the execution of duties or tasks (Cahn & Donald, 2018). The board of directors could uncover the executives’ and auditors’ gross misconduct and ethical actions. The board of directors could have safeguarded the interests of shareholders by informing shareholders about risks and uncertainty in investments in the company.
The executives could have executed their duties according to the requirements of the Insider Trading Policy and code of ethics. The Insider Trading Policy prohibits executives or employees from using classified company information to make investment decisions. Executives, directors, and close family members are considered insiders of the organization and are not permitted by law to make investment decisions based on insider information. On the other hand, the code of ethics safeguards the decision-making process of employees and third parties associated with an organization. The executives could have an exercised code of ethics that guides their conduct and behaviours in the line of duty and decision-making.
Integration of Biblical Worldview and Value Judgments
According to biblical teachings and doctrines of Christianity, human beings can exercise ethics by recognizing the truth and moral behaviour. In addition, the Bible directs regard for the rights of others and is against using power to oppress the rights of the vulnerable in society. The behaviour of Enron executives and board of directors violates biblical teachings, as illustrated by the following biblical points of view.
A Christian should apply Christianity faith and Biblical teachings in deciding on ethical and moral behaviour at the workplace. Colossians 3:23-24 teaches that; ‘in whatever you do, work with all your heart, as working for the Lord, not for human masters, since you know that you will receive an inheritance (Bible Gateway, n.d). Enron’s board of directors and executives could have applied this doctrine in executing their roles and responsibilities with a high degree of ethics and moral standards.
The Bible’s teachings require believers to show compassion and regard for the rights of the weak and oppressed. In Psalms 82:3, those in authority should defend the widows and vulnerable in society; leaders should protect the right of the lowly and needy. The action of Enron executives to prioritize their self-interests before that of shareholders and employees contravenes biblical teachings. As good Christians, the directors could have put the interests of shareholders and employees at heart.
The Bible recognizes the fruits of hard labour and is against wealth obtained through false meanings. In Proverbs 22:16, those who oppress the poor to gain wealth and those who reward the wealthy will all become poor (Bible Gateway, n.d). The board of directors and Arthur Andersen acted to reward the Enron Corporation’s executives. The act of rewarding the executives is against the doctrines of Christianity, and the reward is poverty. In Proverbs 13:11, wealth acquired through dishonesty slowly vanishes away, but the reward for hard work is prosperity.
The fate and rewards of the masterminds of the Enron scandal are related to wages for sins in Bible. In the book of Romans 6:23, the wages of sin is death, but God’s gift is eternal life (Bible Gateway, n.d). Arthur Andersen Company was closed due to its role in facilitating fraud. Enron executives were indicted with different charges for their role in misconduct and unethical practices; the executives were convicted of a felony and sentenced to additional jail terms.
Conclusion
Business ethics serve to influence public confidence and trust in business entities. Ethical business operations establish good client relationships and trust. Clients illustrate a high level of confidence when dealing with a business that upholds high moral and ethical values in its operations. The Enron scandal is an example of manipulation, greed, and unethical actions with the aim of fraud. The scandal is considered one of the biggest in American history, involving accounting and corporate fraud. Executives of Enron liaised with the accounting firm to manipulate accounting records to defraud potential investors. Both secular and biblical world views agree that the executives and board of directors acted contrary to the responsibilities entrusted to them by the shareholders and the general public.
References
Bible Gateway (n.d.). Retrieved from https://www.biblegateway.com/versions/King-James-Version-KJV-Bible/#booklist
Cahn, A., & Donald, D. C. (2018). Directors’ duties of loyalty, good faith and care. Comparative Company Law, pp. 10, 393–443. https://doi.org/10.1017/9781316888971.016
Ferrell, O. C., Fraedrich, J., & Ferrell. (2021). Business ethics: Ethical decision making & cases (13th ed.). Cengage Learning.
Pandey, A. (2017). Ethical Issues of Financial Reporting. https://www.researchgate.net/publication/320187705_ETHICAL_ISSUES_OF_FINANCIAL_REPORTING
Rashid, M. M. (2020). Case analysis: Enron; Ethics, social responsibility, and ethical accounting as inferior goods? SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3550618
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