BE Research Paper

Running Head: ENRON'S COLLAPSE Enron's Collapse: Ethical Considerations [Name of the Student] [Name of the instructor] [Date] Table of Contents  TOC \o "1-3" \h \z \u HYPERLINK \l "_Toc358466743"1. Introduction  PAGEREF _Toc358466743 \h
3 HYPERLINK \l "_Toc358466744"2. Background and Ethical Issues  PAGEREF _Toc358466744 \h
4 HYPERLINK \l "_Toc358466745"2.1 Background and Events Leading to the Scandal  PAGEREF _Toc358466745 \h
4 HYPERLINK \l "_Toc358466746"2.2 Arthur Andersen and Enron  PAGEREF _Toc358466746 \h
7 HYPERLINK \l "_Toc358466747"2.3 The Important people in the Enron Scandal  PAGEREF _Toc358466747 \h
9 HYPERLINK \l "_Toc358466748"3. Ethical Dilemmas  PAGEREF _Toc358466748 \h
10 HYPERLINK \l "_Toc358466749"3.1 Factors contributed to unethical behaviors  PAGEREF _Toc358466749 \h
10 HYPERLINK \l "_Toc358466750"3.2 What should we do in this scenario?  PAGEREF _Toc358466750 \h
11 HYPERLINK \l "_Toc358466751"4. Conclusion  PAGEREF _Toc358466751 \h
12 HYPERLINK \l "_Toc358466752"References  PAGEREF _Toc358466752 \h
13  Enron's Collapse: Ethical considerations Introduction Enron has become synonymous with corporate fraud and unethical practices by top level executives in a corporation and is taught as a case study for business ethics the world over. Although, the company went bankrupt over eleven years ago the, the impact it had on ethical and unethical practices have not diminished. The company went from one of the most flourishing and successful companies to one of the most hated companies at the time of its demise. The company was the seventh largest company in Fortune 500 and Fortune also named the company as America’s most innovative company six years in a row (Asthana, Balsam, & Kim, 2009). The Enron scandal is one of the most notorious cases of corporate fraud and unethical practices where the company’s share prices which were once at a highest level of $90 went down to less than $1. The bankruptcy filed by the company in late 2001 resulted in billions of dollars lost by investors while thousands of employees not only lost their jobs but also had no pensions left (Cernusca, 2011). The company was continuously reporting huge profits, had a very high credit rating and was attractive not only to investors but also to employees as it was included in the 2000 list of 100 best companies to work for by Fortune. By 2001, the company’s actual position which was being creatively window dressed by top executives was exposed and it became apparent that the financial state of the company was not so stable and that the executives had very creatively, cunningly and systematically reported strong financial figures by using loopholes in the accounting framework and this has since been referred to as the notorious Enron Scandal (Catanach, Anthony, & Ketz, 2012). Much to the surprise of the general public and the regulators, Enron was just a start in a series of financial scandals which were to follow Enron were regulators starting questioning activities and practices of various companies such as WorldCom, Tyco, Global Crossing, Quest, Adelphia and AOL Time Warner. The Enron scandal was the primary cause of the enactment of Sarbanes-Oxley Act in 2001 and considerably affected the global business and accounting context as it led to the dissolution of one of the Big Five accounting and auditing firms Arthur Andersen (Carnegie & Napier, 2010). The primary objective of this research paper is to analyze the ethical issues of Enron and review the various factors that led to the scandal. The paper provides an analysis of the events in Enron, the responsibility of Arthur Andersen accounting company in the scandal, the culture and key decision makers in Enron and the primary ethical considerations of the scandal. 2. Background and Ethical Issues 2.1 Background and Events Leading to the Scandal Enron was one of the fastest growing and attractive energy, services and commodities company based in Houston, Texas and there were more than 20,000 employees working for the company when it filed for bankruptcy in late 2001. The company was established in 1985 as a power supplier and pipeline enterprise and came into being with the merger of Omaha based company Inter-North with Houston Natural Gas. Within the proceeding 20 years it witnessed rapid growth and became one of the largest energy trading companies in the world. At the turn of the century, Enron received a substantial amount of excellent reviews such as one of the best companies to work for, the most innovative company and world’s largest energy trading company. Apart from that it became very attractive for employees and investors along with creditors (Wade, 2012). In the last few years of the company, the executives at Enron decided to diversify their portfolio along with investments abroad due to increased competition in the industry. Albeit, this decision would have proved to be successful if investments had been made wisely but on the contrary they proved to be quite unsuccessful as they resulted in considerable losses. By 1999, Enron was financially quite weaker than its previous conditions but the top executives decided not to declare any information regarding these and previous loses until late 2001. On the contrary, Enron reported exceptional profits by concealing losses and liabilities in offshore investments or limited liability special purpose entities which were a norm in the energy industry and by overstating revenues. The company reported phenomenally high and inflated revenue figures and the revenue streams were $40, $60 and $101 billion for 1998, 1999 and 2000 respectively (Wilson & Key, 2012). Additionally, Enron executives did not disclose any risks to shareholders which should have been disclosed ethically and professionally but on the contrary they encouraged and motivated investors to buy Enron shares by projecting exceptionally high profits through media reports. The executives also recommended that the pension of employees should also be invested in the shares and stock options of Enron. A very noticeable role was also played by the Arthur Andersen in the Enron scandal which assisted the company’s executives in veiling the fraud and losses for an alleged period of five years. It is not a surprise that various employees and analysts had voiced their doubts and concerns regarding the company’s true financial position but executives managed to quiet them down and employees were also fired later on to ensure they would not voice their opinions again. In the meantime, the executives were busy driving up the share prices of the company through inflated revenues and hiding liabilities which would eventually benefit them through high level of bonuses and trading in shares of the company (Liu, Rowe, & Ya-Fang, 2012). The share price of Enron had risen to its highest level at $90 due to inflated profits and significant growth forecasts by the executives during the period of three years from 1998 to 2001. The company’s share price had already reached a level of $85 by 2000 and the employees had profoundly invested their 401 (k)s in the company’s shares and this investment was equalized by further shares to retirement plans and saving when the employees had opted to finance them through shares (Jennings, 2011). This is the primary reason why the employees not only suffered by losing their jobs but they lost a lot of their savings and pensions when the company subsided. The problems became apparent in 2001 and Jeffrey Skilling who was serving as chief executive officer at that time left the company in August 2001 and after just two months in October, 2001a loss of $618 million was reported by Enron. The misleading forecasts by the executives caved in and the company was in a dire crisis. Andrew Fastow who was the chief financial officer of the company at that time was removed and the Securities and Exchange Company started investigations into the company’s activities. Within one month the investigations conducted by the SEC revealed in November 2001 that there were several entities which were not reported on the books and the revenues were highly overstated. The share price of the company plummeted to a level of less than $1 and investors lost billions of dollars while the company filed for bankruptcy on December 2, 2001 (Bozec & Dia, 2010). 2.2 Arthur Andersen and Enron Arthur Andersen was one of the Big Five accounting firms and had been working with Enron as an external auditor since 1985. An international accounting firm with partners and assets around the world with over 35,000 employees, Arthur Andersen went bankrupt and vanished in a mere period of two years after the demise of Enron. Apart from providing services as an external auditor, Arthur Andersen also served Enron in internal auditing capacity and consultancy services during its lengthy professional relationship with Enron which lasted a period of 16 years. Arthur Andersen supported Enron in concealing manipulation of revenues and profits by unethical and fraudulent means over a period of four years from 1997 to 2001 where Enron overstated its profits by $568 million which were a 20 percent of the company’s earnings during that period (Edelman & Nicholson, 2011). Arthur Andersen played a significant role in the Enron scandal and there were several aspects where the firm assisted Enron in unethical and fraudulent activities. Arthur Andersen never reported or disclosed that Enron ...