The Ethics of Enron
Reading Enron’s code of ethics, on first impression, you would expect nothing but excellence from a respectable company. Their code of ethics relied heavily on effective communication, a high level of integrity, and nothing but excellence. Through this code they portrayed a business that was capable of exceeding greatness to the highest standard. This soon to be eluded fact jaded by the deception with Enron’s unethical actions, which would ultimately lead to its untimely demise. Enron, at one point, was the seventh largest company within the Fortune 500. Careful accounting strategies allowed it to be listed as the seventh largest company in America, and it was expected to dominate the trading it had virtually invented in communications, power and weather securities. Instead it became the biggest corporate failure in history.
Enron was formed in 1985, by Kenneth Lay, CEO. Lay graduated from the University of Missouri with a degree in economics. He then went on to get his Ph.D. from the University of Houston. With his extensive background in economics, Lay began to work for Exxon Mobil, and thus began his life in the energy business. He soon began to get involved in the natural gas market, which led him to propose the idea of the deregulating energy. Lay merged his company, Houston Natural Gas, with Omaha, Nebraska’s InterNorth to form Enron (Briefing 2012).
In addition to traditional sales and transportation of natural gas, Enron, under Lay’s direction, invested into, what at the time was, future markets. From around 1983-1987, oil prices fell drastically. Buyers of natural gas switched to newly cheap alternatives such as fuel oil. Gas producers, led by Enron, lobbied vigorously for deregulation (Briefing 2012). Once-stable gas prices began to fluctuate, spooking buyers. That’s when Enron started marketing futures contracts guaranteeing a price for delivery of gas sometime in the future (Briefing 2012). The government, again lobbied by Enron and others, deregulated electricity markets over the next several years, creating a similar opportunity for Enron to trade futures in electric power. With this, Enron began to grow at a rapid pace, having their assets grow by $50 billion in the matter of a short fifteen years.
Being seen as a powerful company was undermining motive that lead to Enron’s one main goal that they continuously strove to achieve. Who would not enjoy having a superior image for as long as this company did. Enron, before its collapse, was one of the worlds leading electrical, natural gas, and communication companies (NPR 2012). The company, with profit of $101 billion in 2000, markets electricity and natural gas, delivers physical commodities and financial and risk management services around the world, and has developed an intelligent network platform online business (NPR 2012). However, all so called good things for Enron came to an end.
Despite Enron’s perceptual display of ethical standards in its transactions, social conduct, environmental and financial reports, evidence of unethical behaviors such as engaging in massive corporate fraud, misleading its investors and employees about its financial status bloated out when it collapsed in 2001. By excluding its partnerships with Chewco and Joint Energy Development Investments (JEDI) from its financial statements, Enron was able to hide its $600 million debt from the balance sheet. For about eight years, Enron used complex and unethical accounting schemes to reduce its tax payments, overstate income and profits, inflate stock price and credit rating, hide losses, transfer the company’s money to themselves, and fraudulently misrepresent its financial condition in public reports. Enron Senior Management did perform a job well done until it fell apart when Enron’s share price started to drop in 2000.
Before Enron filed for bankruptcy protection, the Securities & Exchange Commission (SEC) already found out these accounting irregularities where Enron clearly misled its shareholders, analysts and creditors. By the end of 2001, it left thousands of employees who have invested their savings and pensions in the company and small shareholders maintaining their investments; while members of Enron management sold their shares knowing the falling performance of the company. Enron was not protecting the interest of its stakeholders at all. Thousands of employees lost their jobs and significant amount of retirement savings, while investors were left with worthless stocks. These further affected their families and their community as a whole.
Enron’s scandal damaged public trust on corporate leaders. The behavior of Enron’s leaders were far from the good leadership behavior we know of, where leaders should demonstrate integrity. What’s worse was that, the Auditors of Enron who should have been the one to report their accounting malpractices long time before, accepted the accounting practices and remained silent. This was most probably because of the conflict of interest because these auditors earned high revenues from audit and non-audit works with Enron. In the most basic sense, lack of management integrity and the resulting impact on corporate culture was the root cause of Enron’s downfall and the fundamental ethical issue. Enron’s management chose ego gratification, power maximization, stakeholder deception and short-term financial gains for themselves, while destroying their personal and business reputations and hurting literally tens of thousands of stakeholders.
Enron’s scandal called for the need of significant change in accounting and corporate governance in the U.S. This is why the Sarbanes-Oxley Act (SOX) of 2002 was introduced. It was officially signed into law july 30th, 2002 to protect investors by imporoving the reliability and accuracy of disclosures made pursuant to securities laws. Sarbanes-Oxley developed the Public Company Accounting Oversight Board, a private, nonprofit corporation, to ensure that financial statements are audited according to independent standards. The legislation also mandates that companies listed on stock exchanges have completely independent audit committees to oversee the relationship between the companies and their auditors.
Sarbanes-Oxley further banned most personal loans to any executive officer or director, accelerated reporting of trades by insiders, and stiffened penalties for violations of securities laws. SOX is generally applicable to all companies, regardless of size, who require to file reports with the SEC. SOX established the creation of the Public Company Accounting Oversight Board to oversee the audit of public companies that are subject to the securities laws. The PCAOB establishes auditing, quality control, ethics, independence and other standards relating to the preparation of audit reports. They are also responsible for conducting inspections of registered public accounting firms, as well as conducting investigations and disciplinary proceedings, where, justified, concerning registered public accounting firms.
The Enron case will forever stand as the ultimate reflection of an era of near madness in finance, a time in the late 1990’s when self-certitude and spin became a substitute for financial analysis and coherent business models. Controls broke down and management deteriorated as arrogance overrode careful judgment, allowing senior executives to blithely push aside their critics. Indeed, it could be argued that the most significant lesson from the trial had nothing to do with whether the defendants, both former Enron chief executives, committed the crimes charged in their indictments. Instead, the testimony and the documents admitted during the case painted a broad and disturbing portrait of a corporate culture poisoned by hubris, leading ultimately to a recklessness that placed the business’s survival at risk.
The ethical lesson that can be learned front the Enron scandal is that, no success is important enough to be achieved at the price of dishonesty and illegal activities. Not only did the scandal tarnish the reputation of Enron but it ruined the lives of the people who belonged to the name, People who have invested time and money into the company. It goes without saying, corporate values is far more important than unethically scheming in order to make profits.