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College of Business, Liberty University
BUSI 472: Organizational Ethics
Dr. John Obradovich
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Enron Corporation and Highway to Failure

Enron’s scandal affected not only the company and its employees but also the entire economy. By being dishonest in its actions regarding financials, Enron shook the country’s economic stability. Hosmer’s Analytical Process Model provides a process to evaluate the ethical portion of the Enron scandal and determine a way to fix the issue.

Understand Different Standards

According to Hosmer, moral standards “are our intuitive gages for decisions and actions” (2011, p. 3) which can vary based on individual goals, norms, beliefs and values. Every company establishes a moral standard either formally or informally through the way it consistently conducts its business.
Personal goals are “the things we want out of life and the things we expect others probably want out of life as well” (Hosmer, 2011, p. 3). In the case of Enron, company executives set very aggressive goals. Enron not only pushed to be an industry leader, but a world leader in the energy industry using highly complex accounting formulas to hedge against future derivatives.
While the focus was to drive the company further up the ladder of success, employees often compromised their personal morals to accomplish company goals. Enron focused on weeding out employees who did not meet up to the company’s goals or standards through a “semi-annual weeding out process that was formally termed the Peer Review Committee” (Hosmer, 2011, p. 173).
Personal beliefs are “expectations of thought” (Hosmer, 2011, p. 4) used to support personal norms. Skewed personal beliefs caused CEO Kenneth Lay to dismiss warnings from VP Sherron Watkins. The personal beliefs of Enron’s lawyers, Vinson and Elkins, caused them to endorse and help establish the guidelines for their unacceptable accounting practices and secure funding that furthered the company’s debt.
Lastly, Enron compromised its personal values, which are the “priorities among the goals, norms and beliefs” (Hosmer, 2011, p. 4). Top-level executives valued company growth over everything else, including ethical practices. These misplaced values led to the use of “mark-to-market” financial practices “despite their delivery of a physical product” (Hosmer, 2011, p. 176). The most unfortunate takeaway of all is that Enron’s stated company values included respect, integrity, communication and excellence. However, when misplaced values, skewed beliefs, and unrealistic goals became reality, Enron lost sight of what it could have been.

Recognize Varying Impacts

Enron’s leadership did not think about the repercussions that would come from how they ran the company, and they did not stop to think if what they were doing was ethically correct. “Ethics is all matters relating to morality, right, wrong, good and evil according to the prevailing more tradition, and may not depart from it in to preserve civilization and well-being of society” (Idiab, Haron, & Ahmand, 2012, p. 916).
One of the biggest impacts made by Enron’s business decisions was to the economy. This happened mainly because Enron did not include all of its debt on its financial statements, which benefited the company by getting more investors interested in its stocks. Enron’s executives believed that it was their right to withhold information from the financial statements because of the accounting principles that they were using.
There were also negative impacts on Enron’s employees, investors, and customers. Some of Enron’s employees did not know what was really happening, so they continued to work hard and trust that the company they worked for had their best interest in mind and wanted to see them succeed. Enron’s leadership did not care about the people involved in the company because they were making so much money.
Many companies used the price decline as an opportunity to make a gain from Enron’s bankruptcy. Two days before Enron filed for bankruptcy, Alliance sold 7.5 million shares of Enron (Sridharan, Dickes, & Caines, 2002). Alliance was the asset management firm with the largest exposure to Enron. The American Federation of State, County and Municipal Employees, one of the largest public employee unions in the US, is currently investigating why the Florida State Board permitted Alliance to continue ing Enron shares even after the SEC investigation into Enron was announced in October 2001 (Sridharan, Dickes, & Caines, 2002). 
As the value of Enron stock plunged in value, many Enron employees lost their jobs and nearly all of their retirement savings (Sridharan, Dickes, & Caines, 2002). Enron employees were not the only ones who lost jobs during this time. Over 28,000 employees at Andersen U.S. Operations lost jobs, and many of them were not involved with the Enron audit. In March of 2002, the Justice department indicted Andersen’s entire firm for obstruction of justice when it shredded documents relating to the Enron audit (Sridharan, Dickes, & Caines, 2002).  
Several billion in shareholder value were destroyed, thousands of employees throughout the sector lost their jobs, and Enron’s workers have no pensions. Yet, natural gas continued to flow through the North American pipeline network and electricity traversed the grid (“Enron’s Impact Resonates”, 2006). The hard assets Enron so scorned kept the gas flowing and the lights on (“Enron’s Impact Resonates”, 2006). 

Define Complete Moral Problem

Enron employees were encouraged to engage in highly competitive and questionable accounting practices in to increase company revenue for which they were monetarily rewarded by Enron executives. While “the owners of a public corporation, its stockholders, have the responsibility to compensate its senior management fairly, and to grant incentives that unite the stockholders’ interests with the company’s profitability” (Jalil, 2003, p. 718), Enron executives took incentives to the extreme with lavish bonuses and premium stock options.  This lead to the need for Vinson and Elkins to help establish false companies to hide accounting indiscretions. What started as one company’s dishonesty spiraled into several companies’ dishonesty, all because of greed.
Instead of using the company’s resources to better the community, Enron hoped to be bigger and better than everyone else was and did whatever it took to get there. Enron completely lacked regard for anything besides the company. Its leaders put themselves above anything else, and their arrogance and greed is what started Enron down the road of destruction.

Determine Economic Outcomes

After the Enron scandal, many people discovered the need to reevaluate the quality and accuracy of financial reporting. In his article, O’Connel wrote, “The accounting scandals emanating from high-profile corporate collapses such as Enron and WorldCom have severely tarnished the standing of the accounting profession” (2004, p. 733). Doubtful reporting practices have been causing share prices to go down. Enron reported profits although their debt was rising, and confidence in the reliability of financial reporting has taken a big setback. “Enron bankruptcy sharply undermined confidence in corporate financial reporting and auditing as well as corporate regulations” (Gottschalk, 2011, p. 120).
Enron’s action had a huge effect not only on their shareholders but also employees. “The sharp and sudden decline in the value of Enron stock adversely affected the retirement savings of thousands of ordinary Americans who had no direct connection with the firm” (Sridharan, Dickes, & Caines, 2002, p. 11). However, the economic effects were not the only ones, which came after Enron scandal. There were multiple changes in legal requirements that affected American society.

Consider Legal Requirements

The Sarbanes-Oxley (SOX) legislation signed by President Bush on July 30, 2002 came as a direct response to corporate scandals involving companies like Enron, and resulted in major changes to corporate control and financial practices in the United States (Bottiglieri, Reville, & Grunewald, 2009). The Public Company Accounting Oversight Board (PCAOB) was created, which mandated that auditors of U.S. public companies be subject to external and independent oversight for the first time in history. In the past, the profession was self-controlled. Several additional changes followed, “both the Securities and Exchange Commission (SEC), and the US private-sector accounting standard-setter, the Financial Accounting Standards Board (FASB), have become far more receptive to the International Accounting Standards Board’s (IASB) efforts to harmonize accounting standards worldwide based on IFRS” (Eaton, 2005, p. 1).

Evaluate Ethical Duties

“Ethics or moral philosophy is a collective of philosophical principles that include defining, defending, and recommending concepts that are considered right and wrong behavior” (Les Montja, 2016, p. 52). Understanding what ethical principles are accepted by consumers will allow a company to gather what ethical duties they are obligated to uphold for their customers, employees, and all involved with their business. Ethical duties in moral analysis refers to the obligations owed by members of society to other members of that society (Hosmer, 2011, p. 10). According to Hosmer, there are eight ethical duties that a company should follow and uphold, and there are three prominent ones that Enron failed to maintain.
The first duty, long-term interests, is defined as “never taking any action that will bring immediate benefits to you now, but that is likely to provoke adverse reactions in the future” (Hosmer, 2011, p. 11). Enron, at the time, only seemed to care about making as much money as possible, giving its employees large salaries, bonuses, and stock options. The top leadership did not care what the effects would be in the future for their employees, customers, and the economy.
The next ethical duty that Enron failed to uphold is personal virtues. Personal virtues “never take any action that is not honest, open, and truthful, and that you would not feel pride to see reported widely in national newspapers and on network newscasts” (Hosmer, 2011, p. 12). Enron was not honest about its financial statements, hid its large amount of debt, and kept issues hidden from the board of directors, employees, and customers.
The third and final ethical duty that Enron was not able to uphold is utilitarian benefits. Utilitarian benefits “never take any action that does not result in greater good than harm for the society of which you are a part of” (Hosmer, 2011, p. 12). Enron’s actions hurt the economy by lying about its earnings, hurt relations with companies across the world, and hurt people within the country by causing people to be laid off and lose their money from the disastrous decrease in Enron’s stocks.

Propose Convincing Moral Solution

According to Hosmer, it is imperative to know “exactly who is going to be benefited and who is going to be harmed, and then who is going to be able to freely exercise their rights and who is going to be prevented from an equally free exercise of their rights” (Hosmer, 2011, p. 6).  In this case, the apparent beneficiaries of Enron’s financial gains were the executives and employees who received premium stock options and monetary bonuses. Likewise, the stockholders and general public suffered great financial harm through the company’s actions. As proven by the fall out of the company, “shareholders in the Enron era did not have the power to assure that their interests were fully taken into account by senior management” (Heath & Norman, 2004, p. 248).  An ethical turning point was reached when Vice President, Sherron Watkins, testified before Congress about the inner-workings of Enron and exposed the company’s improprieties.
            With Enron’s final collapse, the executives were forced to admit the company’s falsified records and deceitful practices. Top executives were compelled to face criminal and civil actions, including testifying before Congress. Congress utilized the testimonies of Sherron Watkins and others to create better regulations to prevent another company engaging in the same unethical practices such as strengthening the regulations for insider trading through Section 5 of the Securities Act and reexamining the use of Rule 144.
In conclusion, the Enron scandal, one of the biggest of its time, has given new significance to the word “partnership” and shined light, not only on controversial accounting procedures which helped the company look more profitable than it really was, but also raised questions of morals and values of its corporate culture. It made the public inquire about the safety of their investments and lose faith in the American system. Enron controversy influenced market conditions in the energy and natural gas industry, as well as legal requirements that have been put into effect after the scandal.

References

Bottiglieri, W. A., Reville, P. J., & Grunewald, D. (2009). The enron collapse – the aftershocks. Journal of Leadership, Accountability and Ethics , 1-9. Retrieved from http://ezproxy.liberty.edu:2048/login?url=http://search.proquest.com/docview/197546816?accountid=12085

Eaton, S. B. (2005). Crisis and the consolidation of international accounting standards: Enron, the IASB, and America. Business and Politics , 7(3), 1-18. Retrieved from http://search.ebscohost.com.ezproxy.liberty.edu:2048/login.aspx?direct=true&db=eoh&AN=0862116&site=ehost-live&scope=site

Ferrell, O.C., Fraedrich, J., & Ferrell, L. (2015). Business ethics: ethical decision making and cases, 10th edition. Stamford: Cengage Learning.
Five years later: Enron’s impact resonates. (2006). Petroleum Intelligence Weekly, 1. Retrieved from http://ezproxy.liberty.edu:2048/login? url=http://search.proquest.com/docview/200013955? accountid=12085

Gottschalk, P. (2011). Corporate social responsibility, governance and corporate reputation. World Scientific.
Hosmer, L. T. (2011). The ethics of management: a multidisciplinary approach 7th edition. New York: McGraw-Hill Companies, Inc.
Idiab, A. I. M., Haron, M. S. B., & Ahmand, S. B. H. (2012). Morals and ethics of auditing, Advances in Natural and Applied Sciences, 6(6), 916+. Retrieved from http://go.galegroup.com.ezproxy.liberty.edu:2048/ps/i.do?p=AONE&u=vic_liberty&id=GALE|A366866416&v=2.1&it=r&sid=summon&userGroup=vic_liberty&authCount=1

Les Montja, M. (2016). Definition of ‘ethics’ deconstructed. Accountancy SA, 52-53 Retrieved From http://search.proquest.com.ezproxy.liberty.edu:2048/docview/1780967766?pq-origsite=summon

O’Connel, B. T. (2004). Enron. Con: “He that filches from me my good name … makes me poor indeed. Critical Perspectives on Accounting, 15, 733-749. Retrieved from http://dx.doi.org/10.1016/j.cpa.2004.02.002

Sridharan, U. V., Dickes, L., & Caines, W. R. (2002). The social impact of business failure: Enron. Mid – American Journal of Business, 17(2), 11-21. Retrieved from http://search.proquest.com.ezproxy.liberty.edu:2048/docview/214182074?pq-origsite=summon&accountid=12085