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Ethics Issues at Enron

Ethics Issues at Enron

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Published by saurabh

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Published by: saurabh on Nov 04, 2009
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08/17/2013

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Business ethics and corporategovernance Assignment“An ethical analysis of the
ENRON
scandal and learning’s from it.”
 
Submitted by-:
Saurabh SinghEnrollment No: 08BS003021
Introduction
 
Corporate managers are expected to maximize investor returns while complying with regulatorystandards, avoiding principal-agent conflicts of interest, and enhancing the reputational capital of their firms. The recent arrests and resignations of top U.S. managers, however, indicate anincreasing level of managerial negligence and corporate irresponsibility on Main Street and onWall Street that has eroded domestic and global trust in U.S. markets. The U.S. stock marketvolatility has added to the political pressure to bring 1930s-style regulatory reform to businesses.Corporate irresponsibility in the Enron scandal, for example, has provoked multiple lawsuits andunprecedented outrage from a range of stakeholders with demands for democratizing structuresof corporate power, improving managerial accountability, and legislating regulatory reform .The Enron scandal involves both illegal and unethical activity and the courts of law willdetermine the precise extent of civil and criminal liability that accrues to the perpetrators. Peoplecommit fraud, for instance, for a wide range of motives including perceived lack of effectivedeterrent punishment and rationalization of acceptability of illegal activity (Albrecht and Searcy2001). To control fraud by focusing on only one dimension, such as more effective deterrent punishments, is like trying to put out a skyscraper fire with a garden hose. In addition, peopleharbor myths, such as organizations cannot proactively detect or prevent fraud, which only resultin disempowered resignation to the inevitability of corruption and more future Enron’s.The Enron scandal is one that left a deep and ugly scar on the face of modern business. As aresult of the scandal, thousands of people lost their jobs, some people lost their entire pensions,and all of the shareholders lost the money that they had invested in the corporation after it went bankrupt. I believe that Kenneth Lay, former Enron CEO, and Jeffrey Skilling behaved in anunethical manner without any form of justification, but the whistleblower, former Enron vice president Sherron Watkins, acted in a way that upheld moral principles.There are many causes of the Enron collapse. Among them are the conflict of interest betweenthe two roles played by Arthur Andersen, as auditor but also as consultant to Enron; the lack of attention shown by members of the Enron board of directors to the off-books financial entitieswith which Enron did business; and the lack of truthfulness by management about the health of the company and its business operations. In some ways, the culture of Enron was the primarycause of the collapse. The senior executives believed Enron had to be the best at everything it didand that they had to protect their reputations and their compensation as the most successfulexecutives in the U.S. When some of their business and trading ventures began to perform poorly, they tried to cover up their own failures
Failure of the Market to Perform and Professional Dilemmas
 
In reality, there is nothing wrong with markets failing to fulfill their task of leveling the playingfield between buyer and seller. Such market failures are in fact how many organizations maketheir money—through patents (temporary monopolies) and the use of expertise that is notuniversally available (competitive advantage). Yet there are certain forms of this type of marketfailure that are so egregious that they unreasonably interfere with the rights of others andendanger the credibility of all legitimate transactions.The most common form of market failure is information asymmetries—the business decision-maker knows something that the person at the other end of the transaction does not. Most of thetime this is fine but there are circumstances where the unfairness of this asymmetry exceedssimple competitive advantage and is a threat to the rights of others and to the effective operationof the free market as a whole. This appears to be the case at Enron. Insider trading is one of theindefensible exploitations of information asymmetries. In due course, we will have a legaldetermination regarding whether or not Enron officers or directors engaged in this practice. Butlegal determinations aside, Enron officers should have been far more alert to the perception thatthey might benefit from exploitation of information asymmetry.Again ethical literacy is all about recognizing
 potential 
ethical issues before they become legal problems. And incidentally, since the U.S. Supreme Court’s
Texas Gulf 
 
and Sulfur 
case in 1969it has been unlawful for directors, as the Enron chairman was, who have inside price sensitiveinformation to trade in that stock.
The Neglect of Integrity Capacity by Managers
The neglect of managerial integrity capacity is at the moral root of Enron’s legal and financial problems. What is legally permissible today, but morally questionable, may well become legally proscribed tomorrow. Thus, it is important for managers to proactively understand and attend tothe multiple dimensions and moral antecedents of illegal activity (Paine 1994).
 Integrity capacity
is the individual and collective capability for the repeated process alignment of moral awareness,deliberation, character, and conduct that demonstrates balanced judgment, enhances ongoingmoral development, and promotes supportive systems for moral decision making (Petrick andQuinn 2000). It is one key intangible asset that acts as a catalyst for reputational capital and itserosion can jeopardize the survival and credibility of organizations and markets (Petrick,Scherer, Brodzinski, Quinn, and Ainina 1999). The spectacle of top Enron executives “pleadingthe Fifth” in Congressional hearings about managerial immoral and illegal conduct is a vividexample of the consequences of the neglect of individual and organizational integrity capacity.Furthermore, the frantic effort of Arthur Andersen, LLP, one of Enron’s critical stakeholderswhose integrity capacity and reputation were shattered by their unprofessional auditing services,to stem the tide of fleeing clients while negotiating with other “Big Five” accounting firms for sale of parts of its business, is another dramatic example of the costs of integrity capacity neglect(Toffler and Reingold 2003).The Enron scandal’s adverse moral impact on the primary stakeholders is evident in . Enron’stop managers chose stakeholder deception and short-term financial gains for themselves, which

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