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According to Hendrikse & Hendrikse (2003, p188), code of ethics refers to “the business constitution that governs relationships and behaviour among the company, its directors, management and employees, and the inter-relationship among the company, shareholders, and business and community stakeholders.”
Thus, it aids the company to reveal the standards that govern its conduct to the internal and external parties, thereby conveying its commitment to honest and responsible business behavior. The December 2001 collapse of Enron is largely attributed to the unethical conduct by top executives at the company in the areas of accounting, finance, and management (Mark, 2007).
Thesis Statement: Enron violated three ethical principles (the transparency principle, the fiduciary principle, and the fairness principle) of the Global Business Standard Codex in its management practices, leading to its collapse in December 2001.
The unethical conduct was mainly due to the conflicts of interest on the part of its top executives and lack of oversight on the part of its board and advisers (Deakin & Konzelmann, 2003). For more than a decade, the top management of Enron managed to post false impressive results about the company by engaging in illegal and unethical activities. These results were achieved through questionable accounting practices and special purpose entities.
The management also managed to manipulate the company’s resources to their personal gains rather than for the interest of other stakeholders. Another way the management engaged in unethical practices was by overvaluing the company shares, thus sending wrong signal to investors, shareholders, employees and other stakeholders. In essence, the management compromised the principles of transparency, fiduciary duty, and fairness, leading to the collapse of the company.
The principle of transparency
This principle requires the management of a company to practice truthfulness, avoid deception, and provide honest disclosure, candor and objectivity in the operations and financial reporting of the company. The management of Enron violated this principle in several ways. First, Enron established over 700 special purpose entities (SPEs), with majority of them not being consolidated.
These entities were created for the purpose of evading the rules for consolidation, thus they were able to hide billions of dollars of debts from the company balance sheet, leading to exclusion in recording interest expense thus inflating the reported profit (Culpan & Trussel, 2005).
These complex off-the-book partnerships were used to relocate many of its assets off the balance sheet, enabling the company to have a sustainable high credit rating and raise capital. The inflated profits deceived investors, shareholders and other stakeholders to have confidence in the company and invest even further.
Secondly, in defiance of this principle, the management concentrated on transforming Enron as a new kind of virtual trading giant, operating outside the scrutiny of investors and regulators by compromising the auditor, Arthur Andersen and the business press including the BusinessWeek that praised Enron vision of a virtual company that can securitize anything and trade anywhere (Anon, 2001).
The events prevented investors and the public from learning the company’s secret partnerships, off-balance sheet operations, and the soaring leverages. Additionally, the company did not reveal its problems in the current disclosures and involved expertise of Andersen in the subsequent disclosures of misconduct; hence, it was able to deceive the public for quite a long time (Benston, 2003).
Further, Enron participated in schemes aimed at tax evasion and manipulation of prices in many areas it operated in. For example, Enron was accused of inappropriate manipulation of prices and supplies of electricity in California (Stevenson 2002, Hirsch 2001).
Enron paid only $17m of taxation between 1996 and 2000 despite posting pre-tax profits of $1.79 billion and also received rebates totaling over $ 381 million (Tonge, Greer & Lawton, 2003). Through deals shrouded in secrecy and aimed at deceiving the public and investors, Enron failed in big way to observe transparency principle.
The principles of fairness and fiduciary
These principles require a company to exercise fair dealing, fair treatment, fair competition, fair process, diligence and loyalty in its operations. The management practices at Enron were characterized by numerous conflicts of interest among top executives, thus compromising these principles. Enron failed to observe these principles in the following major ways. First, according to the agency theory, the monitor is supposed to be independent of the agent.
Therefore, the company’s auditor should not at any instance be having any conflicts of interest with the firm or its management. In this case clearly violated since Arthur Andersen, Enron’s external auditor served also as its internal auditor and financial advisor, receiving $52 million in fees mainly from consulting services (Culpan & Trussel, 2005). In these events, there is conflict of interest, since it is very questionable whether the auditor could fairly audit transactions and operations that he already had recommended and approved.
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Secondly, the top executives focused on stakeholders’ deception and accumulation of short-term personal financial gains at the expense of other stakeholders such as employees, shareholders, investors, suppliers and the public. For example, Enron Chairman, Kenneth Lay, realized $123.4 million from exercising stock options in 2000, with other top executives following suit.
As a result, most ordinary shareholders lost their investments and thousands of Enron employees lost their jobs as well as their retirement savings (Culpan & Trussel, 2005). More so, Enron exercised unfair competition on its competitors. Enron’s principal business of commodities trading was made possible following deregulation in the market and exemption from oversight by the Commodity Futures Trading Commission (CFTC) through political influences (Tonge, Greer & Lawton, 2003).
Enron was a major contributor to both political parties; hence, it was very influential in Texas and Washington, with most of Enron executives being well linked through all levels of society and government (Drinkard and Farrell, 2002). In addition, Enron management put pressure on its legal advisor, Vinson and Elkins, to legally condone investors, an aspect that created room for fraud by employees to take place.
Moreover, the Citigroup, J.P. Morgan, and Merrill Lynch made over $200 million in fees from deals that helped Enron to boost cash flow and hide debt, thereby failing to exercise due diligence and thus leading to more harm to other stakeholders (Petrick & Scherer). Similar pressure was put on Andersen to approve questionable and high-risk accounting practices in order to retain the consulting business. Through these acts and other fishy dealings, Enron violated the principles of fairness and fiduciary duty.
By forming secret unconsolidated partnerships, practicing questionable accounting principles and biased media coverage, Enron was able to deceive all stakeholders that it was a highly successful company. The management of Enron succeeded in pressuring its regulators and advisors, and even silencing any whistle blower.
Thus, overall, it was able to deceive the public that it was a highly successful company worthy investing in. These unethical practices violated the ethical principles stated in this paper, eventually leading to collapse of Enron, as well as loss of many investments and employment opportunities. The Enron case will remain as one of the examples that will shape the future application and monitoring of code of ethics in business operations.
Anon. (2001). Enron: Let us Count the Culprits. Business Week, 12/17/2001, Issue 3762, p154.
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Culpan, R. & Trussel, J. (2005). Applying the agency and stakeholder theories to the Enron debacle: an ethical perspective. Business and Society Review, Vol.110, No.1, pp.59-76.
Deakin, S. & Konzelmann, S. (2003). Learning From Enron. ESRC Centre for Business Research, University of Cambridge. Working Paper No 274. Web.
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