Corporate Fraud: Two Major Executives Of Enron Case Studies Examples
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The collapse of the financial world few years back herald a greater and deeper problem in the corporate world – ethical conduct of businessmen and corporate leaders or managers. Large companies from the First World have illustrated a collapse not just in finances but more of their ethical groundings. This lead us to contemplate on why business leaders and global corporations commit such crimes.
This paper tries to personify examples of great business executives who committed fraudulent activities and how it affected the business world, internall and externally. This paper also reflects on the ethical theories behind these actions and motives. It identifies the unethical behaviors and misconduct and how it relates to the foundations of business ethics and where the lapses came from. The paper hopes to show the distinct relationship between the unethical behaviors and misconduct and its consequences. Hopefully, by this exploration, ethical conduct in business is emphasized over the short term gains and the long term negative impact business frauds bring.
Enron’s Kenneth L. Lay and Jeffrey K. Skilling are two of the most popular examples of corporate frauds (Li, p. 2). Mr. Lay, the founder of Enron was the public face of the financial company (p. 2). He established the company as America’s symbol of civic pride as it rose from a local Houston trading company to a global name in the financial world. Meanwhile, Mr. Skilling was the company’s visionary. He was Enron’s CEO. He came from the world of management consultancy and he led Enron to its quick growth by pushing commodities such as gas and electricity into attractive financial instruments (p. 2). Both of these two Enron executives were convicted and have been made responsible for the Enron scandal.
Enron is an American company engaged in energy trading. It was based in Houston, Texas. Prior to its demise, it has been one of America’s biggest companies and was one of the world's number one traders of natural gas, electricity, pulp, and paper. It was also involved in the business of communications (p. 3). In 2000, Enron posted a general income of about $101 billion (p. 3). For six successive years prior to its scandal, Enron has been named as "America's Most Innovative Company" by Forbes (p. 3). However, by the end of 2001, it was shown that the financial performance of the company was primarily sustained by institutionalized, systematic, and innovatively planned business fraud called the “Enron scandal.” Thus, the collapse of Enron was the world’s biggest bankruptcy in 2001 (p. 3). The scandal also led to the demise of Arthur Andersen, one of the top accounting consultancy firms in the world. The bankruptcy also led to the biggest shake-up of corporate policies in America and it was promulgated as the Sarbanes-Oxley law (p. 3).
Corporate and Ethical Ramifications
Since the 1990’s, Enron has been a financial icon as its stock price got higher and higher (p. 2). However, it suddenly collapsed in 2001 and became a symbol of corporate scandal (p. 2). By unethical accounting practices, Enron assumed strong and impressive financial performance despite its losses. Made up business entities were included in the company’s balance sheet in order to hide the financial losses and risky investments the company got into (p. 3). It turned out that many of the company assets and income were inflated. In some extreme cases, the accounting reports showed fraudaulent and even fake entities. Some of Enron’s payables and losses were transferred into offshore entities, hidden from the main financial picture (p. 4).
At the tail of the 1990s and the beginning of the 2000s, different fake accounting entities were made up by Enron to hide its huge debts and mask its assets (p. 4). By employing accounting loopholes and poor financial reporting, the company was able to hide billions of debts from its risky deals and projects (p. 4). It was only in August, 2001, when the company’s CEO, Mr. Skilling resigned, that the public began to investigate. Wall Street initiated the investigation while Mr. Skilling and Mr. Lay (and other Enron executives) began to sell their voluminous shares (p. 4). This was because the stock price of the company has been declining. From a peak of $90.00 per share, Enron stock prices went down to less than a dollar (p. 4). By then, the U.S. Securities and Exchange Commission officially investigated Enron (p. 4). Enron filed for bankruptcy as it incurred over $38 billion in outstanding debts (p. 4). From the investigation, the company’s auditing firm, Arthur Andersen, has also been indicted. Other executives have been sentenced to imprisonment.
The Enron controversy shed light to the various corporate anomalies and accounting frauds not just in the United States but around the world (Velasquez, p. 15). It actually robbed a total of $74 billion from its shareholders, four years before it was found to be bankrupt (Li, p. 3). The Enron employees also lost billions in terms of pension benefits. Because of Enron, the U.S. government was prompted to enact a corporate governance act called Sarbanes-Oxley Act (p. 2). Several measures contained in this act will prevent further fraud like that of Enron.
In retrospect, business or corporate ethics policies are mainly founded in utilitarian concerns and they are instituted to generally limit the company's legal liability and promote corporate social ethics. In theory, the company shall avoid a lawsuit since its managers and staff will comply with the corporate rules (Velasquez, p. 15). However, there is a discrepancy in the corporate and legal identity of the company and the actual conduct of its members. Hence, whether or not such conduct is overtly penalized by management, the corporate policies are mere duplications (p. 16). It is also relegated to a marketing practice of the corporate social responsibility (p. 16).
According to Kirk Hanson, the head of the Markkula Center for Applied Ethics, the fall of Enron was due to the managers’ lack of truthfulness (Li, p. 6). They did not tell the true health of the company. Mr. Lay and Mr. Skilling wanted to sustain the performance and reputation of the company and their also wanted to maintain their salaries and incentives (p. 5). Business ethics demand that there must be good faith and complete disclosure (Velasquez, p. 21). There was a fraudulent sale of the management’s stocks since they knew of the upcoming bankruptcy.
Another major flaw is the management’s conflicts of interest and a lack of independent oversight of Enron’s management (p. 22). Because of the very attractive salaries and incentives, the managers and executives of Enron have been glued to their personal interests and individual shares. This led to the company’s bankruptcy. Their accounting system and reporting also geared towards enhancing the performance of their stocks (p. 21).
The third party auditor, Andersen Company, should have played a vital role in the prevention of fraud yet it became an accomplice. The auditing firm played as both auditor and consultant to Enron and this was very unethical (p. 23). Investigations also showed that the company’s main business, energy trading, has been linked with a complex deal with UBS Warburg (Li, p. 3). It turned out that the bank has not bought the trading unit yet it will share its income with Enron (p. 4).
Some scholars posit that the extent by which the misconduct of the company’s leaders or managers greatly affect the status and reputation of a corporate entity (Velasquez, p. 50). Enron executives like Lay and Skilling were very influential in the commission of corporate and white collar crimes (Mahdavi, S. Mokhtari, & K. Parhizgar, p. 2). It can be cited that the lack of ethics and moral responsibility of a company’s leader largely determine the success or failure of a company (p. 2).
The major argument against the likes of executives such as Mr. Lay and Mr. Skilling is the notion that their executive management led Enron to commit accounting fraud and white collar crimes (p. 2). If they did not allow the irregularities and misconduct or if they themselves prevented it, then, Enron would not have been led to its bankruptcy. Aside from their commission of the said crimes, they also collaborated with third parties such as Andersen firm and the other executives. If corporate leaders would act as the gatekeeper, then, business frauds would be very hard to commit. Hence, the unethical behavior of a corproate leader is paramount in corporate crimes (Velasquez, p. 37).
In any criminal case, the leaders or those who have knowledge of the crime must be made accountable for the damages and the consequences. According to Mahdavi, Mokhtari, & Parhizgar (p. 3), there are two factors why companies protect individuals from corporate responsibility. This is because of 1.) the moral and legal culpability for wrongdoing and 2.) financial responsibility (p. 3).
On the financial aspect, a leader of a company like Mr. Lay is still protected from the overall liability fo the company. It is also true with shareholders, they also do not share the total loss of the company above the amount which they shared in the company. As in any company, the shareholders share in the dividends but they do not pay the company’s debts (Velasquez, p. 16). They are mere investors in the company.
However, this view was debunked by Hoffman (Mahdavi, Mokhtari, & Parhizgar, p. 2). He also shared the general view that business ethics is all about the ethics of the leaders or individual persons and not about organizational ethics. He affirmed that the character and reputation of an organization depends on the integrity of an individual. Good and ethical managers may be negatively affected by a bad organizational culture while people with poor integrity can also be strengthened by a very ethical organization (p. 2).
Hoffman furthered that there is a direct relationship between individual and organizational integrity (p. 2). Leaders come to an organization as they are, with their own sets of values, drives, motivations, and ethics (p. 2). Sometimes, they share their own values and beliefs. If the organization allows the leaders to be influential, this could transform an organization to either become upright or wayward. A binding organizational culture is a main instrument by which one person or leader may change or unchange the overall identity of the group or organization (p. 2). Hence, business ethics refer to the collective responsibilities of the organizational members.
If we further analyze the misconduct of the leaders described above, we can say that Enron fell because their leaders perpetuated and maintained the culture of greed in the company (p. 3). This was shared by the other Enron executives. Company heads pushed on with their misconduct and fraud because their ultimate goal is to amass and maintain great wealth. In hindsight, it is also very wise to consider that corporate frauds are not just a by-product of corporate leadership. There are factors outside ethics which a company leader dispenses of. It includes their excellence in management, the organizational structure, and a lack of leadership, among others (p. 3). These compose the overall organizational culture and identity.
Repercussions of Corporate Crimes
In monetary terms, Enron has been one of the largest bankruptcies in the history of the United States. It is estimated to have a total loss that surpasses $1 billion (Li, p. 2). Aside from the huge financial losses, this corporate scandal shattered the financial world as it lessened the investors' confidence and made it difficult for firms to raise capital. After Enron, publicly traded firms lost $7 trillion in stock market value from 2000 through 2002 (p. 5). It also led to the public scrutiny of America’s CEOs and other top honchos. They were pinpointed as behind the big business fraud. Also, the accounting consultancy firm Andersen, a globally prestigious firm, lost its integrity and transparency.
Enron and other business frauds also forced the U.S. government to enact the Sarbanes-Oxley Act in 2002 (p. 3). It is one of the most general reforms in the corporate world which ultimately guard against fraudulent acts of businesses. It compels corporate integrity and truthfulness among American companies in their business oeprations (p. 3). Among other major changes in corporate policy making is that the company boards should disclose their auditing controls and recruit more directors with auditing skills (p. 4).
One major lessonin this business fraud is the moral degeneration of an entity is more or less brought about by their leadership. Corporate governance is best served by indivduals of strong and intact ethical standards. At present, the corporate boards still need greater reforms in the moral aspects of their management (Velasquez, p. 5). There were just so many scandals and controversies in the last few years and it is hard to believe that moral upliftment has already been accomplished in the corporate world. This leads us to conclude that a better and more ethical organization is a by product of a strong, moral leadership and a sound organizational culture. Leaders who make ethics a substance of their everyday conversations and actions set the satge for moral recovery and upliftment. They help shape a better organizational culture and prevent the vulnerability of people or groups to misbehave.
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