Introduction
By the end of the 20th century, Enron had become one of the world’s largest and most successful energy trading companies. Enron’s stock rose by 56 percent in 1999, while the Standard & Poor’s (S&P) 500 index increased only by 20 percent. Enron’s results in 2000 were even more impressive, as the company’s stock increased by 87 percent, whereas S&P 500 fell by 10 percent. By December 31, 2000, Enron’s stock reached an $83,13 price, and its market capitalization exceeded $60 billion. In addition, the famous Fortune magazine rated Enron America’s most innovative large company (Healy & Palepu, 2003). However, the illusion of success had shattered within a single year.
Once the true nature of Enron’s success was revealed, the seemingly thriving company collapsed like a house of cards. Unethical business practices, such as fraudulent accounting and Enron’s executives’ engagement in insider trading, led the industry leader to an unprecedented downfall. Enron’s stock price fell from $83 to $0.67; stockholders lost $63 billion of value as the company’s market capitalization vanished (Petra & Spieler, 2020). In this regard, the Enron scandal is a perfect case of unethical business practices leading to the company’s demise.
Ethical and Social Consequences of Decision-Making
Enron was known for its ambitious and aggressive business approach. Since the early 1990s, the company pursued a diversification strategy, becoming a financial and market maker in electric power, coal, steel, and other goods and resources. Before its scandalous downfall in 2001, Enron had become a large international conglomerate (Healy & Palepu, 2003). However, Enron’s expansion largely depended on aggressive market trading and risky moves that required debt financing. As a consequence, Enron’s executives fell into the temptation to manipulate financial records and report false, overly optimistic business results (Kabeyi, 2020). While this fateful step helped Enron attract investors and partners by faking profitability and success, such decision-making’s eventual ethical and social consequences were disastrous.
From an ethical perspective, Enron descended into a culture of fraud and hypocrisy. According to Rashid (2020), Enron’s corporate culture was aggressive and arrogant yet prideful in adhering to values. However, these values existed only in name, as Enron’s executives were willing to put stakeholders at risk in order to expand the company and enrich themselves. For instance, Andrew Fastow, Enron’s Chief Financial Officer, was responsible for making $30 million from kickbacks (Rashid, 2020). Ken Lay, the late Enron’s Chief Executive Officer, had suddenly begun selling his $80 million stock at the end of 2000 (Rashid, 2020). These examples show how unethical business practices tend to permeate an organization if left unchallenged.
From a social standpoint, unethical business decision-making in Enron resulted in unethical, irresponsible behaviors toward the company’s employees and customers. Over twenty thousand Enron employees had lost their jobs when the company filed for bankruptcy. In addition, the Enron scandal led to the collapse of Arthur Andersen, one of America’s biggest accounting firms (Kabeyi, 2020). Furthermore, millions of Enron’s customers in California suffered from power blackouts once Enron became unable to operate its electricity plants (Kabeyi, 2020). In the end, unethical decision-making resulted in Enron’s betrayal of employees’ and customers’ trust.
Business Practices of Enron
The business practices of Enron cannot be called ethical since the company’s business strategy largely depended on funds attracted through false financial reporting. Fraudulent accounting was the most outrageous practice, as it took a massive scale. Andrew Fastow acted as the mastermind behind the scheme — his actions allowed Enron to conceal a $1 billion debt and keep the shareholders and partners unaware of the actual situation (Rashid, 2020). The fraud was committed through three primary tactics — unlawful use of special purpose entities (SPEs), conspiracy with the well-respected Arthur Andersen accounting firm, and overestimation of the contracts’ market value.
Firstly, Enron did not consolidate the SPEs in the way required by the generally accepted accounting principles (GAAP). As a result, the company was able to write billions of dollars of debt off its balance sheet as the debt was shifted to SPEs. In total, Enron overstated its net income by $500 million; Enron’s stockholder equity was overstated by more than $1 billion (Petra & Spieler, 2020). As a result, Enron’s executives managed to create an illusion of a successful, highly profitable business.
Secondly, Enron exploited a conflict of interest with Arthur Andersen, which helped add trustworthiness to Enron’s impressive financial results. According to Healy and Palepu (2003), Enron’s audit fees accounted for 27 percent of the public clients’ audit fees for Arthur Andersen’s Houston office. In 2000 alone, Enron paid Arthur Andersen $25 million in audit fees and $27 million in consulting fees (Healy & Palepu, 2003). In return, Arthur Andersen assisted Enron in covering the actual state of its business. Arthur Andersen’s Houston office even tried to shred supporting documents that could have revealed the audit improprieties (Healy & Palepu, 2003). Due to this mutually beneficial partnership, Enron’s executives managed to avoid detection of their unethical practices for several years.
Lastly, the company routinely overestimated the market value of its contracts, thus creating unrealistic positive expectations among the shareholders. For example, in July 2000, Enron estimated its net profit from the deal with Blockbuster Video at $110 million, despite the serious concerns about the project’s technical viability and market demand (Healy & Palepu, 2003). The optimistic predictions were used to fuel the expectations and drive the stock price upwards. However, the system built on unethical business practices collapsed and dragged its creators down, as their fraudulent schemes were eventually exposed.
Actions Regarding Business Ethics Violations
Considering the extent of unethical practices at Enron and the direct participation of senior-level executives in business ethics violations, one should not be surprised that questionable behaviors were actively encouraged in this organization. According to de Colle and Freeman (2020), Enron’s corporate culture was aggressively focused on one key value: excellence. Enron rewarded its managers for being bold and smart, which included their ability to circumvent the rules (de Colle & Freeman, 2020). Under this policy, Enron’s employees were pushed to the limit by the harshest internal ranking system in the United States. An Enron manager was expected to “make the numbers” regardless of risks and negative consequences for the stakeholders. Otherwise, they were bound to fall victim to Darwinian “natural selection”, since the employee turnover rate at Enron reached 15 percent (de Colle & Freeman, 2020). In this regard, one can claim that Enron’s executives forced their subordinates to act unethically by constantly threatening them with termination.
Furthermore, Enron’s system of top management compensation based on heavy use of stock options incentivized business practices that artificially increased stock prices. According to Healy and Palepu (2003), Enron had 96 million shares outstanding under stock option plans by December 31, 2000, which comprised almost 13 percent of total shares. Enron’s top-level executives encouraged their subordinates to work hard in order to increase the company’s market capitalization by any means necessary. At the same time, they were secretly selling their shares, knowing that the company might implode and its stock might become worthless (Petra & Spieler, 2020). Eventually, Enron collapsed under the weight of false reports, non-existent profits, and real debts. This outcome directly stemmed from Enron’s executives’ greed and irresponsibility, which encouraged unethical practices.
Conclusion
In summary, one can state that Enron was an embodiment of unethical business conduct. The company’s executives — Ken Lay, Jeff Skilling, and Andrew Fastow- actively encouraged business ethics violations. Moreover, the lower-rank managers were expected to act unethically in order to bring profit to the company and increase its market capitalization. In the end, this approach led Enron to a catastrophe and caused immense harm to all stakeholders.
Firstly, shareholders lost all value of their investment, as Enron’s artificially bloated capitalization plummeted to zero in a few days. Secondly, over twenty thousand Enron employees lost their jobs and pensions (Kabeyi, 2020). Thirdly, Enron let down its customers who had experienced electricity blackouts. Finally, the scandal undermined public trust in business, financial, and economic institutions since the system let such an unethical organization as Enron exist and thrive for a long time. The only positive outcome of the scandal was a 24-year prison sentence for Enron’s CEO, Jeff Skilling; Skilling was also obligated to pay a $42 million compensation to the victims of his fraud (Kabeyi, 2020). Overall, the case of Enron teaches a valuable lesson — the benefits of unethical conduct are likely to be short-lived. A company that violates business ethics might pay dearly for its transgressions. Therefore, temporary gains achieved by questionable means are not worth potential reputational damage.
References
de Colle, S., & Freeman, R. E. (2020). Unethical, neurotic, or both? A psychoanalytic account of ethical failures within organizations. Business Ethics: A European Review, 29(1), 167-179.
Healy, P. M., & Palepu, K. G. (2003). The fall of Enron. Journal of Economic Perspectives, 17(2), 3-26.
Kabeyi, M. J. B. (2020). Corporate governance in manufacturing and management with analysis of governance failures at Enron and Volkswagen Corporations. American Journal of Operations Management and Information Systems, 4(4), 109-123.
Petra, S., & Spieler, A. C. (2020). Accounting scandals: Enron, Worldcom, and global crossing. In H.K Baker, L. Purda-Heeler & S. Saadi (Eds.), Corporate fraud exposed (pp. 343-360). Emerald.
Rashid, M. M. (2020). Case analysis: Enron; Ethics, social responsibility, and ethical accounting as inferior goods? Journal of Economics Library, 7(2), 97-105. Web.