Introduction
Ethics deals with decisions regarding what is good or bad based on moral duties and obligations. It is a branch of philosophy that encompasses defending a course of action based on moral concepts. Decisions made are based on values and subsequent outcomes of the action. Ethics in accounting and business ensures that stakeholders are protected from fraudulent attempts by employees who are not morally upright. Accounting aims at providing financial information regarding the position of an entity or organization meaning that the accounting discipline must be upheld with the utmost integrity. Some business decisions fall within the confines of the law while others lack guidance under the law. This leaves a person to execute their judgment (Nwakpa, 2010).
Case Study of Enron
Enron was once termed as one of the largest and most powerful energy deregulation companies which sold natural gas and electronic power supplies. It however collapsed due to misrepresentation of the company financial reports arising from questionable accounting. They had borrowed external debt and were unwilling to provide stakeholders and investors with information on financial reports. Using Enron as the case study, the paper seeks to identify forms of unethical behavior, the impact of unethical behavior and seeks to suggest solutions that can be employed by entities to enforce moral values and ethical practices within business entities.
Forms of unethical behavior in business entities
Unethical behavior manifests itself in several ways within entities. They are however influenced by several factors that determine employees’ decisions within the firm in their day-to-day performance of duties. Based on the case of Enron, some of the possible identified forms of unethical behavior include the following.
Conflict of Interest
Enron did not observe conflict of interest rules on its senior finance officers thereby allowing them to run parallel entities which did business with the firm. These transactions in turn concealed debts that would have tainted Enron’s financial standing. Disclosure and conflict of interest emerge if the accountant has to protect certain information. Accountants are charged with the responsibility of furnishing stakeholders who have legitimate authority to access financial information regarding business entities. However, this role may be difficult to undertake in the event of a conflict of interest. A good example is where an accountant is confronted to provide full disclosure of the financial records of the firm. If the information is potentially damaging, inaccurate information may be disclosed.
Negative managerial pressure and governance issues
In the case of Enron, governance issues were a key factor towards their collapse. There were no rules in place to ensure financial literacy among the directors. Independent auditors were equally unwilling to challenge the management of Enron. Sometimes, accountants are confronted by conflicting situations where they are placed under stress while executing reporting responsibilities. The ethical dilemmas occur when the accountant has to report sufficiently on assets, profits, losses, and liabilities despite pressures exerted by management to produce reports. Some accountants can alter records and play with numbers to generate their reports and get them ‘off their chests’. This may paint a wrong picture of the actual position of the company and may lead to collapsing if irregularities are not addressed as in the case of Enron.
Manipulating financial records
Enron engaged in dubious accounting ethics and tampering with financial reports. Manipulating financial records is a form of corporate fraud that hides the true standing of the company hence posing as a risk to stakeholders. This may be considered a high-profile crime especially when the recipients of the financial reports lack sufficient knowledge in the accounting area. Manipulating financial records sends false signals to stakeholders as business transactions are falsified. Financial statement fraud may be difficult to point out if several parties within the organization collude to defraud the company.
Failure to comply with standards and incompetency
The energy industries, like all others, have regulations and standards that must be applied to accounting and financial responsibilities. Enron failed to comply in this area. Failure to comply with set standards affects objectivity in reporting. Reporting should not be subjective but rather based on factual evidence that has been compiled by the accountant. Failure to comply with industry standards may arise from a lack of competence and training in accounting meaning that the accountant is not armed with the relevant skills that ensure accuracy in the execution of their duties. Inadequate training and qualification on the part of the accountant negatively affect the discharge of duties.
Lack of transparency in reporting
Accountants may sometimes give out false information regarding the financial status of the company. They may equally exaggerate business revenue which means that investors do not have the right information on the accurate financial position of the firm. This affects profit and loss reports that are carried out within the firm and may be detrimental to the performance of the business entity in the long run. In the case of Enron, auditing was compromised by management and Enron hid significant losses and debts that reflected a negative image of the company.
Greed and misuse of organizations funds
Management should exercise oversight of company finances to guard against greed and misuse of funds. Enron’s management failed to exercise financial oversight. Most accountants have direct access to funds within the organization which they may channel to individual projects. Despite this leading to the loss of jobs, it can also lead to the closure of business entities as the firm is crippled by accountants’ investments. If accountants use the business fund, sufficient reporting must be undertaken. Misuse of funds is usually driven by greed where accountants want to make more money in the shortest time possible.
Poor storage of financial reporting instruments
All financial records within the company must be stored adequately and safely. Damage to these records implies that financial reporting will not be all-inclusive due to the omission of several transactions. This leads to inadequate financial reports in the event of consolidation hence affecting negatively the accuracy of the reports generated.
Corruption and monetary incentives
Enron is reported to have engaged in questionable dealings which depict corruption. In this case, management may offer financial incentives to the accountant to persuade them to alter financial reports and hide irregularities in financial dealings. Management usually undertakes this option when they want to produce favorable reports to woo investors and give a false representation of the company performance to shareholders. Some members of management may want their portfolio to look flowery and give an impression that the company is performing much better than it is.
Impact of unethical behavior in business entities
When ethics and morals are compromised or breached within business and accounting entities, the effects can be disastrous. They can be classified as short-run and long-run effects. Short-run effects relate to employee dismissals which require the organization to go through the process of re-hiring. Employee termination leads to gaps within the firm which may affect the normal business flow in the organization. In the long run, the firm may collapse since the true financial position of the organization is not known hence decisions undertaken by the firm are not supported by factual evidence.
An example is where profits and losses are falsified, and the firm ends up investing in different options with the understanding that they are making money. This eventually leads to the closure of the business enterprise like the case of Enron (Degorge, 2011).
Factors affecting business ethics and morals
Business ethics and morals are affected by a variety of factors. Personal attributes that govern individuals’ behavior include honesty, integrity, cautiousness, openness, and exercising diligence in the execution of duties. Other factors involve respect for relevant stakeholders like colleagues, clients, and employers. Responsible mentorship and careful guidance equally ensure that ethics and morals are taken seriously by employees in organizations. Awareness of social responsibility and duty of care also affect ethical and moral decision-making. Competence levels that define how well versed an individual have grasped the magnitude of their decisions in their fields determine how they make the right choices.
Relevance of ethics in business entities
Proper ethical behavior and moral uprightness are critical to success in any organization or business entity. Ethics must be observed to maintain confidentiality which reduces levels of uncertainty among prospective investors, shareholders, customers, and existing employees. Observing ethics ensures that people have confidence in accountants in the execution of their duties. It equally ensures that the desired level of professional competence among accountants is maintained based on knowledge and skills acquired and exercising diligence to industry accounting standards and norms. Enron in this case lost confidence in the public and professionalism was jeopardized (McPhail & Walters, 2009).
Measures to enforce ethical behavior
Several measures may be employed by business entities and accounting organizations like Enron to enforce ethical behavior and safeguard against uninformed decision-making. It can be argued that responsibility is not solely left on the individual, rather, the company must equally devise appropriate structures to maintain ethics and guard the company against the negative consequences of failure to uphold morals. Enron and companies alike must devise strategies to address moral dilemmas in their operations.
Normative intervention is an option that ensures that employees are aware of their acts and choices. It ensures that they are fully versed with the consequences of their action on themselves and stakeholders. For organizations where accounting malpractices are frequent, strict disciplinary measures must be devised to discourage any form of unethical behavior.
Organizational culture equally plays a role in determining the behavior of employees. Management and staff must inculcate a culture of honesty, integrity, and objectivity that is to be adopted by all members of staff. Instilling such a culture will serve as guidance to staff in their execution of duties to ensure that they are conscious of the decisions that they make.
Codes of ethics may be drawn up by relevant management to govern behavior and decision-making. They assure the public and relevant stakeholders’ that organization employees are acting professionally hence guarding against any malicious attempts to underestimate the operations of the firm morally. Depending on the context of decisions made, penalties and disciplinary action may be prescribed in the event of a violation of the code of ethics (Ketz, 2006).
Structures that govern compliance within the organization may be set up. For example, once an accountant completes preparing financial records, an employee who plays a supervisory role must carefully countercheck and ensure that reporting is accurate and adequate. The firm may further employ the services of an unbiased external auditor who performs an independent review of the firms’ accounts. In the event of serious deviation, action must be undertaken to determine where the discrepancies take place. Furthermore, forensic examination and audits may be employed to aid the detection of any form of financial reporting fraud.
The firm must also ensure they set up measures to detect any form of manipulation of records which may be evident in the improper valuation of assets, poor reporting on expenses and liabilities incurred by the firm, exaggeration and falsification in revenue reported, and other forms of corporate fraud that the firm may be exposed to. Frequent compliance checks must be undertaken to keep accountants on their toes. The firm should also engage in ensuring frequent training for their accounting staff to keep them conversant with industry standards and sharpen their accounting skills. This equally serves as a motivational factor to employees when the organization invests in their career growth.
Recommendations for better performance
Companies like Enron must set realistic goals for employees to ensure that they deliver adequately despite pressures in the workplace. Training programs on ethics should be provided to employees to instill recommended morals and continuously justify the need for the practice of the same. The human resource department within the organization can also integrate ethics within the appraisal process. Organizational culture should depict appropriate values and practices that ensure employees are in a position to understand the implications of their behavior. To solve internal problems, an appropriate reporting procedure should be properly documented and matters relating to escalation must be effectively drawn up.
Conclusion
It is important to understand that business and accounting entities answer to a variety of stakeholders: customers, clients, and shareholders. Each of these categories has different interests which are complex and may result in ethical dilemmas. One needs to have a set of personal ethics that govern their behavior. If they are successful, it implies that they are likely to adhere to other rules and codes of conduct within their profession. Ethical and moral behavior plays a key role in ensuring competitiveness, survival, and the ability of the firm to remain relevant in the market. If Enron observed the required standards and complied adequately, its fallout may have not occurred, and it would have continued thriving in the energy industry.
References
Degorge, R. T. (2011). Business Ethics. USA: Prentice Hall.
Ketz, E. J. (2006). Accounting Ethics: Theories of Accounting Ethics and their Dissemination. London: Routlege.
McPhail, K & Walters, D. (2009). Accounting and Business Ethics. USA: Taylor and Francis Group.
Nwakpa, P. (2010). Causes and Control of Unethical Behaviors in Tertiary Institutions in Nigeria. Academic Scholarship Journal, 2(1), 8 – 16.