Enron’s (USA) and Parmalat’s (Italy) ‘Scandals’ of 2003/2004: Ethical Issues and Criticisms Report

Introduction

The recent global economic crisis left on its wake a number of bankrupt business organisations. These were
especially those business organisations that were poorly structured or poorly managed such that they were unable
to withstand the effects of the crisis.

However, there are some organisations which filed for bankruptcy within the same period but whose downfall
cannot be fully attributed to the global economic meltdown. Those were for example the firms that were
embroiled in financial and other forms of scandals whose effects might have made it hard for them to withstand
the crisis.

An example of companies or business organisations that reported poor performance and filed for bankruptcy in the
21st century is Enron Corporation and Parmalat SpA. The former used to operate from Houston, Texas, with more
than 20,000 employees. The company filed for bankruptcy late 2001.

Prior to this, it was considered to be one of the leading organisations in the energy, communications and pulp
paper industries. In 2000, this organisation’s revenues were approximated to be more than 100 billion US dollars.
However, the company came crumbling down by the end of 2001 after it emerged that the financial records filed
by the management were fraudulent and misleading. This is where the infamous Enron scandal emerged from.

This was more or less the same for Parmalat SpA by the end of 2003. Before then, the company was hailed as one
of the leading dairy firms in the world. Operating from Italy, the organisation has operations in various cities
around the world. Apart from dairy products, the company is also known for its production and distribution of fruit
juices through its various subsidiaries and outlets all over the world.

The organisation has more than 140 production plants scattered all over the world. These (together with the other
business operations) engage approximately 36000 members of staff. The collapse of this company and the
reported financial fraud associated with the fraud made analysts term this as one of the biggest bankruptcies in the
continent. It was likened to the Enron scandal mentioned earlier in this paper, with parallels drawn on how the two
organisations misrepresented their financial reports prior to their collapse.

In this report, the author will critically analyse the ethical issues revolving around the two financial scandals
mentioned above. In the report, the author will set out the main issues and criticisms surrounding the two
scandals. The extent to which these scandals could be considered as ethical and legal violations will also be
analysed.

The author will also analyse the impact of the two events on the general public’s views of business operations in
USA and Italy. This is in addition to a critical analysis of the extent to which the two events reflect their respective
national contexts. Finally, the author will provide informed recommendations on how such scandals can be averted
in the future.

The Main Issues

Enron’s Financial ‘Scandal’: The Main Issues

Enron was established in 1985 and emerged to be one of the largest public investment companies in America. This
was before its bankruptcy in 2001 as mentioned earlier. The company had invested in more than 30 products in
various economic sectors around the world. It was widely associated with its enormous investment in the
profitable energy industry (Petrick & Scherer 2003).

Enron had operated as a successful company for decades. It was one of the most profitable investment companies
in America. Thus, many business persons invested in Enron. The company had employed thousands of employees
and collaborated with dozens of American companies in its operations.

However, the company operated in a fraudulent and unethical manner. One of the key issues that led to the failure
and bankruptcy of Enron was the lack of transparency and the dishonesty of Enron’s key top management team
and partners. The accounting, auditing and consulting firm- Arthur Andersen- was implicated in the scandal for its
dishonest business dealings with Enron (Cramton 2004).

The inflation of accounting book records and assets held by Enron evidenced the greediness of the top
management in their attempts to enrich themselves by embezzling the shareholders’ assets. The management was
involved in inflation of the value of the company’s assets. They intentionally misled the shareholders to believe that
the company had stable assets.

This also persuaded more investors to entrust their money with the company. Its financial statements were not
transparent at all. They were tampered with and manoeuvred to depict a stable performance even when the
company was making huge losses (Jennings & Marianne 2002).

The illegal and unethical behaviour of the management had significant impacts on the American economy and the
global economy in extension. Members of the executive awarded themselves with huge compensation packages
that seemed to be targeted at enriching them instead of fairly compensating them.

The compensation in terms of bonuses and stock option for the top management was directly linked to the practice
of deal making that disregarded quality accounting practices. This in turn led to a misguided and unhealthy
corporate culture within the firm. The employees were encouraged to focus on high, short term returns by the
system (Rhode & Paton 2002).

Parmalat’s Financial Scandal: Main Issues

Parmalat was one of the leading multinational food and dairy producers based and founded in Italy before its
bankruptcy and collapse in 2003. The company had engaged thousands of employees and thousands of dairy
farmers in Italy depended solely on it. Investors had also heavily engaged themselves with the company through
the Milan Stock Exchange where it was publicly trading. With its operations in dozens of countries, Parmalat was a
major employer and business partner (Coffee 2005).

Some of the key ethical issues at Parmalat included the fraudulent financial practices that the company was
involved in. Members of the top management team intentionally failed to provide the correct financial information
including the status of the company’s debts and losses.

The company was making losses and covering them up. The top management kept it a secret and whoever came
close to learning about it was fired including, the chief accounting Officer Fausto Tonna. The cover up, forgery and
non-disclosure were directly linked to its bank. Upon its collapse, thousands lost their jobs and investments.
The figure below shows the indirect and direct control that one large shareholder (the Tanzi family) had in terms of
voting rights. This indicates the extent of unethical control of organisations by some shareholders.

The structure provides adequate avenues for a shareholder who was also the chairperson and C.E.O to
inappropriately pursue his own interests disregarding those of the other stakeholders. The minority shareholders
who had little or no power at Parmalat Corporation were exploited at the expense of the majority shareholder
(Melis 2005).

Figure 1: Direct and Indirect Control of One Shareholder over Parmalat

Direct and Indirect Control of One Shareholder over Parmalat.

Adapted from: Madsen & Vance 2009

Criticisms, Ethical, and Legal Aspects of the Scandals

The fall of this Italian giant led to the loss of public confidence on financial reporting. The Italian public and the
investing community was largely made to distrust the system of accounting, auditing, and financial reporting that
seemed to have worked for ages before. The loss of jobs worldwide made employees of many multinationals to
lose confidence and trust of their parent companies.

The accounting and auditing professionals all over the world were enormously affected. Ethical questions and
concerns were raised as far as their profession was concerned. It is one of the most trusted professions that are
supposed to appropriately guide the investors, creditors, members of public, and other stakeholders. But instead, it
was implicated in the scandal (Coffee 2005).

The Enron scandal brought to fore significant legal concerns. Some of them included the concern whether the
banks had enough legal frameworks to prevent the occurrence of such scandals in the future. It also proved that
the American investors’ legal protection was not fully effective in this changing market.

The legal structures and mechanisms of preventing such scandals were downplayed. This is an indication of the fact
that the legal system needs to catch up with the changing markets and investment environment. The state’s role in
corporate investigations was also challenged. The state’s failure to put in place enough measures to protect the
investors, creditors, and employees made them lose trust in state mechanisms and systems (Wearing 2005).

Parmalat and Enron scandals raised major ethical issues touching on marketing and conflict of interest that existed
between the companies and their main partners. For example, the illegal collaboration that existed between the
Bank of America, Parmalat, Arthur Andersen and Enron in defrauding the investors was unacceptable and
unethical. People who had trusted these companies with their pension lost everything.

The public lost faith in the American and Italian investment markets. The failure of the American and Italian
regulatory authorities to prevent the occurrence of these scandals had far reaching implications on members of the
public who for years depended on these stock markets as an investment channel (Wearing 2005).

Impacts on the Public’s View of Business Behaviour in USA and Italy

The American education system- especially the standards set in business, accounting and law schools in teaching
ethics- was highly questioned. Ethical concerns were raised on the level, standard, and quality of ethical education
and training of business and accounting students.

Education- which is highly regarded as the absolute remedy for unfair and unjust business practices- was viewed as
having failed. This is especially so given that most of these executives were highly educated and experienced in
their respective professions (Berndt 2000).

Key Issues

Corruption was endemic at Enron and Parmalat organisations. At Enron, the top management used shareholders’
assets to improve their financial standing. Derivatives and stock option bonuses that the top management provided
themselves with were illegal, unfair and unjustified.

These are the people who the shareholders entrusted with their assets to protect their financial interests. Instead
they were stealing from the company and shareholders’ assets. At Parmalat, the influence of family businesses on
voting rights was noted. The ownership and control structure at Parmalat was largely characterised by one major
shareholder. This led to indirect and direct control over the company’s financial gains (Wearing 2005).

Non-disclosure of the correct accounting records characterised both firms. This lack of disclosure as far as the
correct accounting records such as book balances, asset portfolio and balance sheets was concerned misled all the
stakeholders. This unethical practice by the executives was intentional and aimed at harming not benefiting the
employees, creditors, shareholders, and the investing public (Madsen & Vance 2009).

Parmalat’s misguiding and misleading information was intended for the shareholders and other stakeholders. The
falsified financial information and doctored accounting records made the American and the investing public lose
trust and respect for the auditing and accounting profession.

These dishonest and fraudulent acts shattered the trust the public had on the American securities’ exchange
market as well as the trust of employees and shareholders as far as the protection of their interests by top
leadership is concerned (Madsen & Vance 2009).

Other major ethical issues of concern in the organisations include the relationship with the suppliers, customers,
competitors and marketers. Ethical concerns for the customers include the quality and safety of the product.
Conflict of interest and illegal business practices existed in both firms. At Enron, the consulting and auditing firm-
Arthur Andersen- was at the centre of the unethical business practices (Crane & Matten 2010).

According to investigations carried out at Enron and Parmalat, the top leadership had adequate remuneration
packages. In spite of this, they used improper mechanisms- such as the use of unfair derivatives and stock options-
to enrich themselves using the shareholders’ assets (Berndt 2000).

This is an indication of the extent of corporate greed among top managers and leaders. They also supported a
greedy corporate culture that focused on short-term benefits. At Enron, the top leadership seemed to support the
culture of “get returns quick, no matter the means, and don’t get caught”.

Enron and Parmalat had loyal shareholders and hardworking employees. Top leaders in every organisation are
expected to safeguard the interests of these stakeholders. This is vital for the success of the organisation. However,
the leadership in both organisations sacrificed shareholders’ interests and employees’ rights for their own personal
interests (Melis 2005).

Measures to Avoid such Scandals in the Future and Recommendations

Internal Investigation and Prevention

It is a requirement for every company to have mechanisms such as internal auditing to detect flaws and prevent or
correct them on time. However, it is not enough to simply assume that all organisations have proper internal
systems.

Research has shown that with proper internal mechanisms, companies are less likely to experience fraud,
dishonesty and other unethical business practices. It is therefore necessary for organisations to put in place proper
internal auditing, accounting and overall business investigation mechanisms (Coburn 2006).

Whistle Blowing

Whistle blowing is done by the bold and courageous individuals in an organisation. The support and
encouragement accorded to whistle blowers at Parmalat and Enron could have prevented the scandals. Whistle
blowers could have observed and disclosed the unethical, immoral, and illegal business practices at the
organisation at an earlier stage. This could have saved many parties from losing their jobs and investment.

Organisations from all over the world should encourage whistle blowing at every level of the business entity.
Employees and managers cannot be effective whistleblowers and cannot raise the alarm if they are not accorded
proper training in expected organisational ethical practices (Crane & Matten 2010).

The Amendment and Enactment of Laws

National and international laws are vital in regulating the conduct of multinationals such as Parmalat and Enron.
The American and Italian laws on unfair business practices, unethical behaviours by the executives and laws on
corporate governance were not adequate. Although the concerned parties were legally charged in a court of law-
and some of the cases are still ongoing in the legal system- there is need to enact more laws that properly address
key modern unethical and illegal business practices (Coburn 2006).

Government policies, measures and laws should be adjusted to include the changes taking place due to
globalisation. The American employment laws were questioned after the occurrence of the Enron scandal which
left thousands jobless. The American public and workforce lost faith in employee’s protection and rights laws. It
was therefore an appropriate measure to amend and adjust some of the key American employment laws.

These laws should be updated in tandem with the changing workplace environment especially due to globalisation.
The US Securities Exchange and New York Stock Exchange need to adjust to the changing investment environment
and the changes in corporate crime and investment frauds (Coburn 2006).

The community should play the vital role of rewarding ethical standards. It is the role of the society to embrace
acceptable values, standards, and behaviour as well as punish the unacceptable ones. As a result of this, individuals
such as managers and employees will feel obligated to do what is acceptable and right in their operations. This will
help in building communities that are morally and ethically sound, conducive for the mutual coexistence among
individuals (Melis 2005).
Education and Training

Business, accounting, auditing and legal professions are inextricably intertwined with business operations of an
organisation. It is important for individuals in these professions to be highly qualified in their field and have
adequate business ethics education.

The occurrence of the scandals at both Enron and Parmalat does not necessarily mean that the executives did not
have enough education on ethics. However, it may imply that although they did have the knowledge of what was
expected of them, they decided to be arrogant for their own personal gains. It is therefore critical to introduce
courses on ethics at all levels for employees and managers in an organisation (Giovanni 2005).

Ethical decision-making processes should be supported at all levels in an organisation. At Enron, this vital role was
supported but was not adequately effective due to top leadership’s structure and secrecy. Employees were hard-
working and gave positive results. They also engaged in collective and individual ethical decision making
mechanisms.

For example, the former vice president indicated that the management had interactive board meetings to solve
organisational or departmental problems. However, there were certain issues that these meetings could not
address. He cited that he once questioned the fact that he did not have complete access to financial records which
was vital in making decisions for the development of the firm (Madsen & Vance 2009).

Therefore, there was lack of support for ethical decision-making mechanisms. Every organisation should embrace
ethical decision-making processes among employees and managers. It helps create and sustain ethical relationships
with key stakeholders. Ethical decisions help an organisation to identify its risks, prevent, avoid and solve them. It
enhances accountability, efficiency, and transparency which are necessary in today’s global markets (Crane &
Matten 2010).

Code of ethics in an organisation serves as a cornerstone and check point for ethical standards of behaviour. Every
organisation sets its codes of ethics expected to be followed in the workplace. Designing ethically sound code of
ethics, implementing them and sustaining them in an organisation is crucial for its success. They should be well
communicated to employees and other members of the organisation. Enron had a strong code of ethics and code
of conduct.

Nevertheless, it did little to prevent the unethical behaviours of top leadership in the organisation (Rhode & Paton
2002). Codes of ethics without proper communication, implementation and continued revision can do little in
maintaining ethical standards of behaviour. It is everyone’s role in the organisation to understand, implement and
translate these codes of conducts and ethics at the workplace (Guorevitch & Shinn 2005).

Conclusion

There is no amount of regulations or legislations that will ultimately prevent or stop executives, managers and
employees from engaging in unethical organisational practices. It is the responsibility of individuals to learn and
adopt ethics at their respective positions in the organisation.

Organisations on the other hand must change and adopt codes of conducts or ethics to act as ethical guidelines.
Due to globalisation, various core aspects of organisational business activities have changed. Ethical decision-
making processes should be supported to enhance accountability, effectiveness, transparency, and corporate
image as well improved relationships among key stakeholders.
Enhanced transparency and accountability leads to enhanced overall efficiency and organisational performance. It
helps organisations to conduct their activities in an ethically acceptable manner that ensures economic stability
worldwide.

References

Berndt, M 2000, Global differences in corporate governance systems: theory and implications for reforms, Harvard
Law School, Harvard.

Coburn, NF 2006, ‘Corporate investigations’, Journal of Financial Crime, vol. 13 no. 1, pp. 32-38.

Coffee, JC 2005, A theory of corporate scandals: why the United States and Europe differ, Oxford University Press,
Oxford.

Cramton, RC 2004, Enron and the corporate lawyer: a primer on legal and ethical issues, Free Press, New York.

Crane, A & Matten, D 2010, Business ethics, 3rd edn, Oxford University Press, Oxford.

Giovanni, D 2005, ‘Investors trust after Parmalat scandal: the role of corporate governance’, Journal of Business
Management, vol. 4 no. 4, pp. 34-49.

Guorevitch, PA & Shinn, J 2005, Political power and corporate control: the new global politics of corporate
governance, Princeton University Press, New York.

Jennings, A & Marianne, M 2002, ‘Primer on Enron: lessons from a perfect storm of financial reporting, corporate
governance and ethical culture failures’, Journal of International Business Management, vol. 5 no. 2, pp. 23-39.

Madsen, S & Vance, C 2009, ‘Unlearned lessons from the past: an insider’s view of Enron’s Downfall’, Corporate
Governance, vol. 9 no. 2, pp. 216-227.

Melis, A 2005, Corporate ownership & control, 2nd edn, Winter, New York.

Petrick, JA & Scherer, RF 2003, ‘The Enron scandal and the neglect of management integrity capacity’, American
Journal of Business, vol. 18 no. 4, pp. 53-58.

Rhode, DL & Paton, PD 2002, ‘Lawyers ethics and Enron’, Journal of Business Ethics, vol. 3 no. 2, pp. 34-38.

Wearing, R 2005, Cases in corporate governance, Sage Publishers, London