Ethical Analysis and Evaluation

Enron Corporation Scandal

In partial fulfillment of the

Enron was one of the largest electricity, natural gas, communications, and pulp and paper
companies in the world (although it was considered to be mainly serving the energy industry). It
was a very large corporation that employed more than 20,000 individuals, but also a company
that participated in extremely unethical financial practices. Throughout their financial statements,
Enron reported financial conditions and earnings that were sustained primarily through wilful
accounting fraud. When it was revealed to the press and the public that that the company had
participated in this heavy corporate fraud, the entire scandal and court cases following the
incident have come to be known as the Enron Scandal. As a result, this scandal brought into
question the various accounting practices and activities of many large corporations within the
United States, particularly those with heavy self-interest regarding investments.
The companys failure in 2001 represents the largest business bankruptcy to ever occur,
while also highlighting corporate Americas moral failings through its litigation process. The
Enron Scandal is a glaring reminder and example of the repercussions of being seduced by
charming leaders and business executives, or more specifically, the individuals who sought
excess returns and benefits at the expense of their adjacent communities and their fellow
employees. Ultimately, the misplaced morals, brought to light in the court cases, devastated the
company all the while injuring all of the individuals who had no choice but to go along with the
practices of the company since they did not know what fraud was taking place. Now considered
to be one of the most notorious scandals to ever take place in American history, there were,
unfortunately, various warning signs that hinted toward the potential failure of Enron, dating
back to the first quarter financial statements produced in 1995. Hiding in plain site, indications of
potential failure could be seen in annually audited company reports, which included the immense
number of contract losses that Enron was facing. The companys stock, despite the large losses

reported by Enron, continued to climb and climb, illustrating misguided optimism within the
marketplace that believed Enron would recover quickly and continue to outperform. However,
Enron recorded significant losses in certain foreign operations during the same time period. The
firm made notable investments in public utilities in countries like India, South America, and the
United Kingdom, hoping that these investments would generate profit in newly deregulated
markets. But, despite this, each investment saw the influence of local politics blocking the sharp
price increases for these securities that Enron had earlier anticipated.
Nevertheless, a company should never hide behind market speculation, whether
intentional or not companies have a moral obligation to make sure that any problems that
directly effect the integrity of the enterprise are addressed and transparent to all stakeholders.
According to Richard Rudden, managing partner at Target Rock Advisors in New York, Ethics
and integrity are at the core of sustainable long term success Without them, no strategy can
work and, as Enron has demonstrated, enterprises will fail. Thats despite having some of the
smartest guys in the room. (Silverstein, 2). A clear-cut mission and a corporate code of ethics
is crucial. Its the foundation to which boards, managers and workers rely when they reach a fork
in the road. Its the principles they use when deciding whether to emphasize short-term gain or
long-term stability.
Altogether, 16 former Enron executives had been sentenced to prison after the litigation
process concluded. Its former chairman, Ken Lay, was convicted during his trial, but because he
passed away before his guilty verdict could be appealed, his particular case was thrown out. The
other parties responsible for the crimes that Enron committed were executives Jeffrey Skilling,
Michael Kopper, and Andres Fastow, whom Jeffrey Skilling hired due to his acquaintance and
superior knowledge of the energy market. The most interesting turn of events came about when

Kenneth Lay, the Chairman and Chief Executive, passed away before his case could be decided
on. His passing paved the way for stricter verdicts against those that were directly aiding in his
efforts to cover up company performance. The other major executives involved in individual
cases are highlighted in the table below.

Another party that was accused for aiding in the accounting fraud was an actual
accounting company by the name of Arthur Andersen, who helped to hide and contribute to
hiding potential areas of detectable fraud. However, just recently, an appeals court reviewed
Skillings particular case regarding Enron and has reduced the previously applied sentencing due
to the fact that the trial court had originally miscalculated the collected penalty against him. Due
to the actions of all the Enron executives involved, the company immediately went bankrupt
(though, as mentioned above, could be seen coming). The loss sustained by investors exceeded
$70 billion. Further, these actions cost both trustees and employees more than of $2 billion. The
totals presented are considered to be a result of embezzled investments, pension funds, stock
4

options, and savings plans that were found in Enron, and as a result of the government regulation
and the limited liability status of the Enron Corporation, only a small amount of the money lost
was ever paid or returned to those who once had rights to it (Silverstein, 5).
Moreover, it is easy to say that many people have suffered. Those that suffered most
directly were not only the shareholders and pensioners invested in Enron who lost it all, but the
20,000+ employees that became unemployed due to Enrons malpractices. According to a report
from Forbes, Economist Milton Friedman has argued that it is the social responsibility of
corporations within the United States to increase profits and put as many people to work as they
can, and pay more taxes to support programs that benefit the general public (Forbes, 4).
However, business ethicists have strongly warned against a narrow-minded pursuit toward
increased earnings. From what is known as the quarterly reporting syndrome that pressures
companies to meet earnings expectations (NPR, 3), there is a quiet temptation that can easily
push some individuals to distort the truth when it comes to the financial statements.
Nevertheless, the desire to satisfy shareholders should always be equally stable with the need to
address all corporate constituent concerns since they all contribute to a companys enterprise
value in some way. That structure must be reinforced with values that build trust, as well as by
more conscious oversight and penalties for misdeeds. At the time of Enron's collapse, it was the
biggest commercial bankruptcy ever to hit the financial world, particularly in the United States.
Since then, companies like WorldCom and Lehman Brothers have surpassed Enron as the largest
corporate bankruptcies (Folger, 8). The Sarbanes-Oxley Act, which was the main focus within
this case highlighting the actions taken by the executives, has been called a "mirror image of
Enron because the company's supposed corporate governance failure is matched virtually point
for point in the main provisions of the Act" (Folger, 8). For this reason, the United States has

imposed greater regulation and oversight on business practices and processes in order to help
prevent, and potentially eliminate, any future corporate scandals that might be similar to Enron's
magnitude.
According to Mark Jickling, Federal securities law requires that the accounting
statements of publicly traded corporations be certified by an independent auditor. Enrons
auditor, Arthur Andersen, not only turned a blind eye to improper accounting practices, but was
actively involved in devising complex financial structures and transactions that facilitated
deception (CRS Report for Congress, 5). The central issue raised by this entire Enron Scandal is
transparency how can a company improve the quality of all the information that is available to
the public about these public corporations. As firms become more and more transparent, the
ability and chances of corporate insiders to act on their own self-interests at the expense of basic
employees and stockholders diminishes severely. The Enron Scandal brought to light many
things, and in turn, strengthened policies that would otherwise have gone unnoticed or enforced.

Works Cited

Folger, Jean. "The Enron Collapse: A Look Back." Investopedia, 01 Dec. 2011. Web. 22 Nov.
2014.
Jickling, Mark. "The Enron Collapse: An Overview of Financial Issues." CRS Report for
Congress. CRS Web. 2003. Web. 21 Nov. 2014.
NPR. "Easy Guide to Understanding ENRON Scandal Summary." Enron Scandal Summary.
National Public Radio, n.d. Web. 21 Nov. 2014.
Silverstein, Ken. "Enron, Ethics And Today's Corporate Values." Forbes. Forbes Magazine, n.d.
Web. 21 Nov. 2014.