Good Research Paper On Enron AND “Business Ethics”

Type of paper: Research Paper

Topic: Enron, Company, Finance, Business, Ethics, Corporation, Crime, Banking

Pages: 9

Words: 2475

Published: 2021/03/26

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Introduction

As global energy giant Enron sank into insolvency, sinking the savings and funds of stockholders and “nest eggers,” the Federal Bureau of Investigation (FBI) initially deployed two agents from its Houston office; as the mammoth company sank deeper, the FBI increased the number of agents to the investigation to 45, many of who were specifically selected from its different field offices across the United States and were equipped to “navigate” the vast paper trails attendant to the case. The Enron case soon morphed into the most extensive and complicated “white collar” crime in the history of the FBI.
The case also created an unprecedented task force composed of prosecutors, operatives and specialists located in Houston and in Washington, D.C. The task group was developed for purpose; to discover how company management could commit fraud on such a massive scale, develop and construct an air tight against the suspects, and strive for their punishment in court. The investigation, lasting half a decade, resulted in the conviction of senior Enron officials who engaged in deceiving capitalists with shady accounting techniques (Federal Bureau of Investigation, 2006, p. 1).
Investigators rummaging through the debris of the energy giant have sought to unravel the elaborate alliances and financial schemes that contributed to Enron’s collapse. From the information derived from the investigation, two images were slowly becoming clearer. One, the burnished image of the company relentlessly polished by the senior management, and two, one of a slowly dying company being held by clandestine activities of the same officers. In the end, the death of the company could not be averted anymore. Even calling in favors from friends in Washington and a last minute attempt to merge with another company failed to revive the dead corporate giant, making the decision to seek insolvency protection one of the biggest and swiftest collapse of a company in US history (Eichenwald, Henriques, 2002, p. 1).
What exactly comprises “white collar crime?” “White collar crime” can be defined as “non-violent, illegal activities that are committed by individuals or business or government organizations for financial and personal gain.” The Constitution’s Commerce Clause empowers the Federal government to oversee and litigate financial crimes. A number of Federal agencies, including the FBI, the Internal Revenue Service (IRS), the United States Secret Service United States Customs Service and the Securities and Exchange Commission (SEC) have a part in enforcing state and Federal laws regarding white collar crime. In the estimates of the FBI, “white collar crimes” cost the American economy more than $300 billion yearly. In addition, the activity of financial crimes has been connected to extremist funding schemes (Israel, 2015, p. 1).
The demise of Enron is regarded not only as a corporate crisis; it is also viewed as a political and legal debacle. As mentioned earlier, the crisis brought on by the collapse of Enron is inflicting extensive financial damage to the US economy. Power companies such as those in natural gas and electric utilities are faced with increasing cost adjustments. Initiatives to construct power generation facilities, oil transportation systems, and electrical transmission facilities are being delayed or even cancelled. However, the impact of Enron is not limited exclusively to power; in almost all sectors, the crisis and the resulting stringent credit facilities are beginning to be felt.
In the aftermath of the Enron debacle, an estimated $12 billion in capital in new power generation facilities have been temporarily shelved as fund markets, severely rattled by Enron’s rapid sinking into a “sea of red ink,” have dramatically raised the cost of finances for new power generation projects. In the end, the ultimate “victim” in the shelving of power projects will be the public, as the postponement of these power projects will result in power shortages across the United States. Though energy markets go through periods of lower demand, thus mitigating the effects of the shelved power projects, the collapse of Enron will still be felt even in today’s energy structure. However, there are differing views on the impact of Enron. In the opinion of presidential economic consultant (and one-time Enron analyst) Lawrence Lindsey, the collapse of Enron will not significantly impact the US economy. The American private sector is stating that Lindsey’s position is a lie.
American businessmen believe that Enron’s collapse has severely impacted the US economy, with the energy industry absorbing the brunt of the debacle. The aftermath of the Enron crisis-tightening credit lines for new projects-could not have come at a worse time. During the event, the US energy sector was in dire need of funds to retool its energy systems with new transmission facilities and power generation plants; in the wake of the debacle, the perception of the credit market on loans and debts were completely changed and held off funding new projects.
Another way that the Enron debacle cost the US economy was the amount of stockholder value that was drawn out of the market. Enron’s shares of stock dropped from $90 dollars a share to a mere 50 cents in one year alone. That alone took a colossal $67 billion dollars in shareholder value from the US economy, with current and former Enron employees faced with the prospect of having significantly reduced pensions. Power companies with business relations with Enron also suffered substantial losses either by way of contracts or debts.
Large financial institutions such as Citigroup and J.P Morgan Chase have publicly disclosed losses amounting to hundreds of millions of dollars with the possibility that the sector may lose billions of dollars more. On the whole, the demise of Enron posts a ½ of one percent increment to the expenses for capital in the energy sector. Simply put, the collapse adds $4 billion in costs to the power sector. Framed against the backdrop of an industry valued at more than $1 trillion in yearly revenues, the hike may seem small. However, the increased costs are sufficient to adversely impact “independent producers” of natural gas and capital allocations even by well funded electric utility companies (Flanigan, 2002, p. 1).
In what can be regarded as the largest “white collar” crime in America’s history, Enron officials continually lied to their personnel and to the global market, evincing profit margins on non-existent, forward investments that often times will not be realized. By way of persistent institutionalized chicanery, officers and agents of the company were able to redirect millions of dollars in investments to their personal funds while Enron slowly died. By the turn of the millennium, Enron was in debt amounting to billions of dollars, and the company finally imploded. Thousands of Enron personnel were financially shattered, their pensions sinking with the energy giant (Business Pundit, n.d., p. 1).
An additional casualty of Enron’s collapse was Arthur Andersen, the accounting company that filled the financial force of Enron and the company that managed the energy giant’s financial affairs. After the company destroyed files related to Enron’s dubious practices, the firm went belly up and was found guilty of obstructing justice. In the aftermath of the debacle, Congress lined up measures that will protect the financial system from further exploitation (Norris, 2003, p. 1).
The procedures for disclosing a business’ financial standing are governed by the United States Financial Accounting Standards Board and the 1933 Securities Act. The allowed methods are generally termed as “generally accepted accounting standards (GAAP). However, there are times that companies will resort to “non-GAAP” methods and then expound for the choice. As long as the company reports GAAP numbers even with “non-GAAP” methods, these are often considered as legal practices. In the case of Enron, its adoption of “mark-to-market accounting” changes the values when the conditions in the market also changes. “Non-GAAP” numbers are more exact when predicting short-term profits; however, Enron used this technique in forecasting long term profit margins, and when the conditions changed, the forecasts were grim for the energy giant (Brinkman, 2012, pp. 1-2).
When Enron finally collapsed, the value of the company’s shares that once stood at $90 per share plummeted to a mere 26 cents. The debacle had shown tell-tale signs of insider trading via “special purpose vehicles” with names such as JEDI and Chewco. Reports to the Securities and Exchange Commission unearthed the disturbing fact that former Enron officials Kenneth Lay and Andrew Skilling had been jettisoning large blocks of company shares even though the two aggressively promoted the message for company employees and investors to ramp up their buying of company stocks (Pusey, 2014, p. 1).
Aside from JEDI, “Cactus Funds” were a set of “volumetric production payment (VPP) schemes in limited contracts. The VPP was lending funds to oil and gas concerns, and then asking the borrower pay Enron in oil and gas rather than in cash. The VPPS set the stage for the company to develop more complex financial tools that contributed heavily to its collapse. In the case of the “Cactus Funds,” this set generated a flow of gas resources that could be traded at “spot prices.” The funds then utilized “natural gas swaps” to steady the prices “Cactus” could obtain for the gas, reducing the risk for the company.
In this light, a “Cactus Fund” generated a known sequence of cash payments in the same manner as that of bonds. Enron can then halve the payments as securities and trade them to banks similar to the manner that an investment company trades corporate bonds to large capitalists. Trading a type of managed set of VPP agreements to generate the cash Enron required in complying with the VPP loans. Enron did not conceal its use of the “Cactus Funds” regarding them as innovative solutions to the issue of inexpensively generating funds. Enron, by the middle of 1993, had raised nearly a billion dollars by way of the Cactus funding mechanism.
Lastly, Enron developed an additional partnership, the “Joint Energy Development Investors (JEDI). The instrument was an even split between Enron and California’s public pension system, or CalPERS. The JEDI mechanism was regarded as a pioneering mechanism owing to the fact that a retirement fund developed and aided in establishing it (Moncarz, Moncarz, Cabello, Moncarz, 2006, pp. 22-23).
The death of Enron was not only indicative of the largest corporate failure in US history at the time; it also pointed to the abject state of the ethics of America (Silverstein, 2013, p.1). Did the energy giant publish a code of ethics it expected to be practiced by company employees? Yes. However, publishing and practicing are two different poles, and this is none so more evident than in the case of Enron (Miller, 2002, p. 1).
If there was one case that tested the concept of “corporate accountability,” then that would be Enron. Its declaration of insolvency in 2001 unearthed weaknesses in the mechanism of government corporate oversight; these included verification companies that are not attached to the companies, company directors who did not extensively question company policies, attorneys and capitalists who allowed shady deals in exchange for enormous fees. Though the Enron debacle was followed by other corporate scandals such as WorldCom and Tyco International, none was able to match the sheer scope and magnitude of Enron (Masters, Johnson, 2006, p. 1).

Business Ethics

When considering ethical business practices, it is possible to interpret “business ethics” as a vague, open minded subject better suited for discussion in business schools; nevertheless, the accompanying assertion is that “business ethics” is of little or no use in the corporate jungle. This is an incorrect observation. In a 2000 poll of the Ethics Resource Center, 43 percent of all respondents disclosed that their managers are not good models for integrity. The same number also believed they are under immense pressure to jeopardize their company’s ethics benchmarks in the course of their jobs. Given that this was done two years before Enron, this can be considered as a staggering number. In the aftermath of Enron, the toll of Enron’s absconding the need to practice can clearly be seen.
Ex Enron senior management officials Skilling and Lay averred that running a global company such as Enron made them forget to instill ethical practices in the company. Lay and Skilling in effect were stating that due to the complexity and weight of running the daily affairs of the company, the daily shenanigans of vague, “off the books” practices utilized to conceal massive debts or to contest the dubious audit practices of Arthur Andersen were an excessive load for them. Given the extensive nature of the case, it is believed that there will be a thorough examination of the conduct of the company’s top management will also be done.
What has been discovered from the volumes of files and information is that the Houston-based energy company cleansed everything to achieve the objective of raising the prices of Enron’s stocks. In the observation of Bentley College-Center for Business Ethics executive director W. Michael Hoffman, in a capitalist system driven by competition, it is realistic to have corporate objectives and aims that keep the company focused in the direction that must be taken to achieve these aims. However, senior management must also inculcate the culture that these goals must be achieved within the confines of the ethical standards set by the company. Regrettably, Enron’s case is indicative of the driving force of profit over ethics (Wee, 2002, p. 1).
Enron’s fall and the devastation that was inflicted on the thousands of stockholders is a display of the grim repercussions of allowing one self to be enticed by magnetic leaders, or those that are driven by an avarice that is unmatched at the expense of the people who placed their trust in them. Ultimately, the displaced ethical standards of a few led to the demise of the company and left thousands in financial ruin in its path. Character is a crucial factor in understanding and framing people; it is also a critical factor in comprehending companies. In a business endeavor, the generation of profits is the main objective; however, even if the potential to realize a great amount of profit exists, there will be a scheme that will be in place to go around the tenets or even at times, bend and break the law.
After the discovery of each incident of calumny, new regulations and laws will be adopted in excess of the previous ones in attempt to stem future scandals. This conduct has been the general cycle of affairs of scandalous incidents in business. Though it is believed that the Enron debacle will not be the last of its type, its rambunctious story did start a new era in corporate ethics.
Its illegal business activities transformed a lethargic natural gas provider into one of the largest publicly held companies in the United States. These practices, facilitated by the “blessings” of bankers and agents looking for a windfall, resulted in Enron’s collapse. Pensioners and employees saw their savings and stocks disappear; it was a tragic ending to what was being trumpeted as a start to the “New Economy” where the Internet would expedite the transmission of prosperity and help in generating jobs across the social media. Though Enron was the peak of corporate criminal prosecutions, the scandal was preceded by successful prosecutions at Adelphia, Tyco International, and at WorldCom.
Retribution is an effective deterrent. Nevertheless, a clearly established mission and corporate protocol of ethics must also be developed. It is the base whereby company directors, managers, and employees depend on when there is a diversion in the road. These are the concepts that must be used in determining the importance of either short term profit or long term viability. Profit is a significant desire for any corporate shareholder; nevertheless, the quest for the company to placate shareholders must be balanced with the requirement to serve the other constituents of the company, all of which contribute to the value of the company. These systems must be strengthened with actions that will build trust.
In addition, increased and extensive oversight and the implementation of severe penalties for blatant violations must also be established. In this light, though it would be difficult to monitor ethical practices, the mere fact that there will be a larger audience closely scrutinizing every move of a company’s board of directors will motivate senior management to act responsibly. However, in the opinion of Standard and Poor analyst Mary Driscoll, this is not a “cure all,” and it is foolhardy to believe that scandals will not anymore occur; it is only hoped that these factors can curtail the frequency of these scandals in the future (Silverstein, 2013, p. 1). Deceit in accounting spelled the demise of Enron and WorldCom; the question being asked is whether these illegal practices will surface again. With the economy returning to strength, it is expected that rising profits will tempt a number of managers to “cross the line” hoping that these “adjustments” will be able to help the company earn more in the following years. However, there will be only one way to determine which executives were committing illegal acts, and that is when the corporate tide is “swimming out” and then the actions of these companies will be exposed (Henning, 2014, p. 1).

References

Brinkmann, P (2012, July 6). Accounting standards now an issue in some earning reports. South Florida Business Journal Fort Lauderdale, FL
Business Pundit (2012) “10 famous white collar criminals” Retrieved 23 April 2015 from <http://www.businesspundit.com/10-famous-white-collar-criminals/
Eichenwald, K., Henriques, D.B (2002, February 10) Enron’s Many Strands: the company unravels; Enron buffed image to a shine even as it rotted from within. The New York Times Business Day
Federal Bureau of Investigation (2006) “Crimes in the suites: a look back at the Enron case” Retrieved 23 April 2015 from <http://www.fbi.gov/news/stories/2006/december/enron_121306
Flanigan, J (2002, January 20). Enron is proving costly to economy. Los Angeles Times The Nation
Henning, P.J. (2014, December 29). The year in white-collar crime. The New York Times White Collar Watch
Israel, S (2015) “White collar crime” Retrieved 23 April 2015 from <http://juris.nationalparalegal.edu/X1Sjczxrhh1kom0cabtvbpprfhs/WhiteCollar.aspx
Masters, B.A., Johnson, C (2006, May 26) White collar crime\s new milestone. Washington Post Special Reports
Miller, M (2002) “Enron’s ethics code reads like fiction” Retrieved 23 April 2015 from <http://www.bizjournals.com/columbus/stories/2002/04/01/editorial3.html?page=all
Moncarz, E.S., Moncarz, R., Cabello, A., Moncarz, B (2006). “The rise and collapse of Enron: financial innovation, errors, and lessons.” Retrieved 23 April 2015 from <http://www.ejournal.unam.mx/rca/218/RCA21802.pdf
Norris, F (2003, April 20) “Business ethics and other oxymorons” The New York Times Books
Pusey, A (2014) “Dec. 2, 2001: Enron files for bankruptcy” Retrieved 23 April 2015 from <http://www.abajournal.com/magazine/article/dec_2_2001_enron_files_for_bankruptcy
Silverstein, K (2013). “Enron, ethics and today’s corporate values” Retrieved 23 April 2015 from <http://www.forbes.com/sites/kensilverstein/2013/05/14/enron-ethics-and-todays-corporate-values/
Wee, H (2002) “Corporate ethics: right makes might” Retrieved 23 April 2015 from <http://www.bloomberg.com/bw/stories/2002-04-10/corporate-ethics-right-makes-might
Abstract
Corporate ethics impact the way that businesses conducts itself in achieving its objectives, a major part of which is generating profits for the management and the shareholders. These principles must guide the company in its day to day affairs in the corporate “jungle” as it faces competition from existing and new rivals. It is here where company managers would try to develop and innovate new policies and procedures in order to go around restrictive policies that these believe hinder the acquisition of potentially more profits for the company. The paper seeks to establish the case of Enron and its impact of bending the rules for a profit.

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