“Persons must be treated as having their own autonomously established goals and must never be treated purely as the means to another`s personal goals”(Beauchamp and Bowie)
Ethics are mainly the kind of values and morals an individual or society finds desirable or appropriate.when talking about leadership ethics is about what leaders do and who leaders are,their nature ,behaviour and their virtuousness.It helps establish and reinforce organizational values and leaders play a major role in establishing the ethical climate of their organizations and powerful leaders can have a major impact on the lives of the followers and the fate of an organization.The primary issue is not whether leader will use power ,but whether they will use it wisely and well.Powerful leaders and top business executives use sometimes use their authority to advance their own careers and economic gain at the expence of organization members and the public.As Beu and Buckley,2004) said that “By being involved in an unethical practices a leader can influence other members of the organization to engage in crimes of obedience”
It is the duty of top management in a corporation to ensure that employees are behaving ethically by encouraging, rewarding, enforcing, and leading by example in ethical behavior. According to Robert Lussier, in his book Management Fundamentals, "Ethics are the standards of right and wrong that influence behavior." . Ethical behavior pays, because society regards it highly, and besides that, it is in line with the Law; such that in a corporation if you are about to do something and you are not to sure as to whether it is legal or not, normally if it is ethical then it is most likely to be legal.A major example of unethical behaviour was carried out by the firm formally known as Enron.My research of this example is to show how unethical behaviour at enron had an effect on the accounting profession as a whole.
Enron and it`s over ambition and greed is a sad story of what happened to corporate America.This example is one of the greatest bankruptcy in the history of America,a lot of bizarre accounting tactics were used at Enron which showed enormous profits and hidden debts,thus fooling shareholders and the world for many years.When Enron`s trickery was discovered ,it became quite apparent that some loopholes existed in the present accounting system of the worldas well as the laws which were designed to govern ethical behaviour. Below is my research on how Enron flouted the laws of accounting, and ethics mainly as a result of its internal culture, and how Enron has changed the accounting profession and what actually went wrong.
In July 1995, Houston Natural Gas and InterNorth, a natural gas company from Omaha came together in a merger in order to gain a larger share of the natural gas transportation market. Together the two corporations had a natural gas pipeline that spanned over 37 000 miles, $12.1 billion worth of assets, 15 000 employees and thus became the second largest pipeline network in U.S.A. In November of the same year, Samuel Segnar, the CEO of HNG/InterNorth stepped down making way for Kenneth Lay, the Baptist minister's son from Missouri who had a PhD in Economics attained at the University of Houston. Loren Fox notes that, "Upon becoming CEO, one of the first things that Lay decided to change was the name of the corporation. With this in mind he hired the consultants Lippincott & Margulies to come up with a new name that represented power and energy, thus came about the birth and introduction to America and the world of Enron"
When enron was formed it`s core business was of trading natural gas contracts in the "spot markets". Spot markets were markets in which gas was bought and sold at ruling market rates. Traders would negotiate for prices, and at the hub gas would be routed to the highest bidder. This process took place monthly and had an advantage over the old system whereby contracts were long term and prices were fixed over long periods of time resulting in losses to the transporters when the demand for gas fell. Enron also traded in oil, Enron traders were involved in lucrative oil financial trading, which was based on betting on the prices of oil. It must be noted that from the 1980's oil became increasingly profitable and thus business in this department was big to all energy companies.
According to Alex Gibney's Enron-the Smartest Guys in the Building, in 1987, two senior traders by the name of Louis Borget and Thomas Mastroeni who had made good deals in the past started making big bets that oil prices would rise, but unfortunately, the oil prices started falling, resulting in huge losses. Not wanting to concede to defeat the two did not report the losses to Houston, but instead went ahead to make even bigger bets on the price of oil continuing to fall in the hope of recovering what they had lost, but even worse for them, the prices of oil started rising, resulting in losses at both ends. Upon investigations it was discovered that the two, had a separate set of books in which losses were recorded and had falsified its reports to headquarters. According to Mike Muckelroy, an ex Enron executive interviewed in the documentary Enron- The Smartest Guys in the Room, this was not the first time that Borget had done such a thing, but because he was Lay's "golden goose", he went away without even a warning, but in fact an encouragement to "keep making us money" the first time around. This time the losses were so big that they resulted in Enron Oil declaring bankruptcy and so the two were fired and sued in civil court. With Lay's main money spinner gone to the slams, and a subsidiary shut down, Lay had to find a new "big brain" that would come up with ways of making money. This is where Jeffery Skilling came into the picture.
On June 26 1990, Jeff Skilling was hired by Enron as the chief executive of Enron Finance.. Skilling asserted himself from the word ‘`go' and immediately went to work on restructuring the organizational hierarchy at Enron by flattening the management levels. Skilling administered the change of working relationships through the knocking down of office walls and creating the "open office", where everyone was in contact with each other more easily. The greatest changes that Skilling made were in the actual lines of business that Enron partook, and its culture. Being a finance man from Harvard, Skilling believed more in the finance or "asset light" side of business that had to do with trading rather than in the asset accumulation side of business as he saw this having increasing liability in the future.
Skilling started to increase to size of the departments by adding more employees therefore he hired top graduates from across America. A culture of creativity and internal competition erupted at Enron as Skilling introduced a system of evaluation known as "rank and yank" which was carried out by a Performance Review Committee (PRC). John Markoff, New York Times reports about this system being one in which traders were forced to compete against each other in bringing money to Enron and those who lagged behind were fired. This culture mixed with the fact that the managerial ranks had been broken, thus leaving a lot of power in the hands of these traders. Having no boss to control them and to enforce ethical behavior resulted in traders partaking in ruthless trading at Enron. Traders went for profits at all costs, ignoring any need to be ethical that prevented them from making the sale. Employees became more innovative and intraepreneurs were born within every department of the organization, as big ideas were greatly rewarded, but with this also came many unfair practices.
The dot com era of the 1990's brought major significant changes in the structure of corporate America and the introduction of the internet changed businesses all across the world. Most Americans started owning stock, and this dot com era brought about major growth in corporations, especially those that concentrated in technology. People began to believe that if corporations like Microsoft could grow by as much as 50% annually then at least the companies they invested in should not find it difficult to grow by at least 10% to 15% yearly. This belief spread in Enron as well, but as their current lines of business grew and reached maturity, growth became increasingly difficult and thus there was the need to diversify and look for other means of bringing in the growth.Enron then started looking for new ways to grow and thus entered into new business ventures, this included the generation of electricity by wind, through acquiring Zond Corporation. Eventually Enron entered the brokering of commodities and energy services through Enron-online and thus it fully engaged itself in internet related activities.
In order to asses the value of a company and its financial condition, analysts normally look at the total value of a company's assets, its return on equity, its cash flow statements and its earnings or net profit. Earnings are reported in the financial statements that are submitted to the Securities and Exchange Commissions on a quarterly basis, and so the aim of Enron in its need to keep stock prices up, was to meet the quarterly projections that analysts set up for the price to be raised or lowered. In the wake of this task, things started falling apart at Enron and business became less profitable and in some instances resulted in losses, and to make things worse the stocks started tumbling. The main question was How would Enron keep the numbers? Therefore Enron started making up figures through complex mathematical formulae, but as the pressure mounted and business became less profitable these numbers were inflated, and even worse was the fact that some transactions which would have been recorded as being profitable in the future would actually run losses.
Was it then fair for Enron stock to be priced on these false earnings?Enron was using mark to market accounting practice. Mark to market accounting is a method used to calculate the future value of a transaction using present prices and then recording the resulting profit instantly .My research has led me to the conclusion that Enron stock was overpriced because although mark to market is a legal accounting practice, it is for use by certain business practices such as banking and Enron as an Energy company whose deals were far reaching and much more complicated than is within the specifications of mark to market should have never used this method. Arthur Anderson its accountants only approved to these practices because, as much as there were rules to regulate how mark to market can be used, there were no rules that stated where it could not be used. If there were no rules barring Enron from practicing its dubious accounting tactics, Arthur Anderson just rubber stamped these procedures and certified them as being "fair".
Special Purpose Entities are subsidiary companies that are part of a corporation but are viewed as separate business entities. Generally the job of an SPE is to act as a trust in which the mother company places its assets and the SPE can then either borrow against these assets or carry out financing arrangements backed by those assets. An SPE can be used for hedging as the risk of the underlined assets is transferred to the SPE. In a case of conflicting interests Enron used its employees, namely, Michael Kopper and Andrew Fastow the CFO to manage its SPE. According to the SEC, an SPE created by a company has to meet two requirements in order to be considered independent, these are.
1. A SPE has to have at least 3% of its equity, or ownership come from a third party not related to the company. That has to be a real investment, so that the outside investor risks losing that 3% stake.
2. A party other than the than the company must control the SPE
According to my research, the understanding is that when Enron formed these SPE it borrowed money from banks and other investors and used its own stock as a guarantee to these investors such that if their stakes proved to run losses Enron would reimburse them using its stock. Thus in actuality Enron was borrowing money from itself, which was against the rules. Under the rules of a corporation, a corporation exists as a separate legal entity with no connection to its owners and because SEC did not specify the meaning of the term "control" in its rules Enron used this flaw to its advantage. The Special Purpose Entities were used by Enron to hide its accumulating debt by offloading its high risk assets into their books, and not only did this happen, but this "holding" of assets was then considered by Enron as a sell, and profits were recorded into Enron's books when the transactions took place. Enron went ahead to use its stock as collateral to these offset assets to the SPE, meaning that for holding Enron's assets the SPE was guaranteed stock as backing if the price of the assets fell. Further more in its quarterly reports, Enron made no mention of these SPE. The actual finding in this case is that Enron did business with itself and so should have reported its losses, but instead it used these phony entities to hide its debt and thus its earnings and credit remained high, allowing Enron to continue borrowing money therefore adding more debt, but above all, keeping its stock market price up.
The well-established company Enron, which was once ranked by Fortune as “the most innovative company in America” faced bankruptcy and thus the downfall of Enron. One of the causes of Enron’s failure is that there is a weak corporate governance of board of directors. Their lack of social responsibility from the 4 main criteria which were economic, legal, ethical and discretionary responsibilities. The reason to Enron’s failure is because of the ethical behavior of accountants and managers. The accountants were both self-satisfied and incompetent enough to certify Enron’s financial statements. This is because they lack in solid ethical framework, and with further push from the managers, it affects these accountant’s ability to work. In my opinion, they were given a choice, whether their actions will be rewarded or punished by their supervisors. The manager that practices the utilitarian view knowing that he made a few bad decisions which leads to the loss of millions of the company, tries to cover up by hiring outside accountants to deal with off-balanced financial sheets. The environment of the organization has lead to the unethical behavior of accountants
From Enron’s downfall, there are quite a number of things which should have been done to prevent this scandal from happening. Firstly, ethical cultures must be well-fortified so that among employees, customers, suppliers and investors will have higher degrees of satisfaction and loyalty. Ethics must be looked from both moral-rights and justice views. In organizations, this concept that includes the right of employees to reject unethical actions must be practiced. This is to ensure that employees are always protected in rights of privacy, choices, health and safety. Besides that, we must treat people impartially and fairly, according to legal rules and standards. Procedural justice must also be applied so that policies and rules of the organization are fairly administered .
Secondly stricter rules must be enforced and imposed on companies so everything can stay in order. Certain techniques to do so include creating comprehensive policies around corporate governance, devising systems to share data across compliance documents to avoid duplication of work, such as finance sheets, establishing clear lines of responsibility so that both employers and employees know what is their area of responsibilities, and making those processes part of a company's culture. These broad guidelines can help ensure that scandals such as Enron’s would not happen again .
Finally, the lessons that can be learned from Enron’s failure is learn to be satisfied with what you have legitimately earned, as greed is a vicious vice that can destroy you. If you judge success in life by what you can accumulate, you will never be fully content, as someone will always have more, your children or others will always want more from you, and therefore, you will never have enough. It is in the human nature to be greedy, but not until you have to take illegal actions to earn it. Consider this example, managers in Enron such as Jeffrey Skilling wanted to make more money and at the end, they received their punishments. Skilling was sentenced to 24 years in prison in October 23, 2006 .
In conclusion, we must do everything in all cost to prevent from these things to happen again, so that there will be no unethical management to be practiced again.
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