Ethical Failure By An Business Organization Accounting Essay

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Business ethics in organizations requires principle-based leadership from top management and purposeful actions that include planning and implementation of standards of appropriate conduct, as well as openness and continuous effort to improve the organization's ethical performance. Although personal values are important in ethical decision making, they are just one of the components that guide the decisions, actions, and policies of organizations. The burden of ethical behavior relates to the organization's values and traditions, not just to the individuals who make the decisions and carry them out. A firm's ability to plan and implement ethical business standards depends in part on structuring resources and activities to achieve ethical objectives in an effective and efficient manner. Many ethical decisions in business are close calls. It often takes years of experience in a particular industry to know what is acceptable.

Many people believe that business ethics cannot be taught. Although we do not claim to teach ethics, we suggest that by studying business ethics a person can improve ethical decision making by identifying ethical issues and recognizing the approaches available to resolve them. An organization's reward system can reinforce appropriate behavior and help shape attitudes and beliefs about important issues. For example, the success of some campaigns to end racial or gender discrimination in the workplace provides evidence that attitudes and behavior can be changed with new information, awareness, and shared values.

To improve ethical decision making in business, one must first understand how individuals make ethical decisions in an organizational environment. Too often it is assumed that individuals in organizations make ethical decisions in the same way that they make ethical decisions at home, in their family, or in their personal lives. Within the context of an organizational work group, however, few individuals have the freedom to decide ethical issues independent of organizational pressures.

A framework for ethical decision making in business:-

Ethical Issue




Business Ethics

Evaluations and


Ethical or






Model of the ethical decision making process in business includes ethical issue intensity, individual factors, and organizational factors such as corporate culture and opportunity. All of these interrelated factors influence the evaluations of and intentions behind the decisions that produce ethical or unethical behavior. This model does not describe how to make ethical decisions, but it does help one to understand the factors and processes related to ethical decision making.

Common Reasons for Taking Unethical Decision:-

Pressure can drive people to do things they wouldn't normally do. Pressure to succeed, pressure to get ahead, pressure to meet deadlines and expectations, pressure from co-workers, bosses, customers, or vendors to engage in unethical decision or at least look the other way.

Some people make unethical decision because they are not sure about what really is the right thing to do.

Misguided loyalty is another reason for unethical conduct on the job. People sometimes lie because they think in doing so they are being loyal to the organization or to their bosses.

Then there are those who simply never learned or do not care about ethical values. Since they have no personal ethical values, they do not have any basis for understanding or applying ethical standards in business. These people do not think about right and wrong. They only think, "What's in it for me?" and "Can I get away with it?"

Downstream Consequences:-

A failure to understand the downstream consequences of present day actions are often a significant obstacle to motivating ethical behavior.  Unfortunately, it is often difficult to comprehend how our actions in the present can have a significant negative impact on our future.  Further, it is even more difficult to motivate society at large to attend to and appreciate how seemingly mundane decisions in the present can have a devastating effect on our future.

Ethical failure in ENRON:-

Enron Corporation was an American energy company based in Houston, Texas. Before its bankruptcy in late 2001, Enron employed approximately 22,000 and was one of the world's leading electricity, natural gas, pulp, paper, and communications companies, with claimed revenues of nearly $101 billion in 2000. Fortune named Enron "America's Most Innovative Company" for six consecutive years. Enron was originally involved in transmitting and distributing electricity and natural gas throughout the United States. The company developed, built, and operated power plants and pipelines while dealing with rules of law and other infrastructures worldwide. In just 15 years, Enron grew into one of America's largest companies, but its success was based on artificially inflated profits, dubious accounting practices, and - some say - fraud.

What Happened????

Enron morphed from a sleepy gas pipeline into a rogue trading company

Enron officers used their political clout affect policy, e.g., electricity deregulation

Pressure on Indian officials to push development of expensive power plant

Enron traders caused California's energy crisis

Enron's profits were the product of accounting fraud

Enron used SPEs to hide billions of dollars of debt

Skilling left before the collapse because he "knew something"

Top management, auditors, and banks were all part of the conspiracy

The Board and regulators were asleep at the wheel

Lay sold his shares while touting the company to employees and investors

Executives were dumping their shares while employees, not allowed to sell from their 401(k)s, saw their retirements wiped out

The Enron collapse was the (inevitable?) result of management greed

Why did Enron Happen???

Individual and collective greed-company, its employees, analysts, auditors, bankers, rating agencies and investors-didn't want to believe the company looked too good to be true.

Atmosphere of market euphoria and corporate arrogance.

High risk deals that went sour.

Deceptive reporting practices-lack of transparency in reporting financial affairs.

Unduly aggressive earnings targets and management bonuses based on meeting targets.

Excessive interest in maintaining stock prices.

Management practices in Enron:-

First, rising stars like former Enron CEO Jeffrey K. Skilling and ex-Enron CFO Andrew S. Fastow created and implemented business ideas that led to major problems, which could not be legally or ethically fixed, resulting in their downfall (Fusaro and Miller 2002). Second, among the big ideas was the creation of an asset light company by applying Enrons trading and risk management skills to power plants and other facilities owned by asset heavy outsiders. To maintain a high credit rating and raise capital, Enron relocated many of its assets off the balance sheet into complex off-the-book partnerships or Special Purpose Entities (SPEs). The problem with this big idea was that some SPEs required Enron to kick in stock if it's rating and stock price fell below a certain point. In fact, Enron was left holding a financial liability of over $5 billion in debt. When its stock and asset values began declining, Enron was immediately vulnerable to financial overextension (Cruver 2002). Third, another big idea was the expansion of Enrons energy trading expertise into a wide array of new commodities to spur earnings growth everything from paper goods to metals to telecommunication broadband capacity (Swartz and Watkins 2002). The problem was that Enron tried to do too much, too fast, with little or no return (Fusaro and Miller 2002). Enron invested $1.2 billion in fiber-optic capacities and trading facilities, but the telecommunications broadband market collapsed. Furthermore, it could never generate adequate profits from energy trading in markets, such as metals, to cover the billion dollar mistakes (Cruver 2002). In effect, people, processes, policies and principles that aided and implemented the rush to financial growth at any cost all contributed to the Enron scandal.

What were the results???

Many people suffered from Enron's failure, but employees were hit especially hard. Thousands were laid off with just $4,500 in severance pay.

Enron had encouraged employees to invest their pension assets in the company's stock. Employees who had foolishly done so lost pension savings as well as their jobs.

In June 2002, Arthur Andersen was convicted of obstruction of justice for its destruction of Enron documents. Andersen, which was once the largest accounting firm in the U.S., was barred from auditing clients.

The government nearly had a scandal on its hands, as many politicians had Enron as a major contributor to their campaigns.

The energy industry went through a crisis, since other companies in the industry were Enron copycats and had very similar deals and trading positions in place when Enron went down. And investors took a big hit.

Finally, even with its downfall, some good has come - regulators are seeking to improve standards and practices in accounting, corporate governance, risk control, and pension fund administration, to ensure that another Enron does not emerge.


Enron offers a number of important insights for managers. Firstly, it underlines the vital role of top management leadership in fostering organizational culture. The footprint of Jeffrey Skilling is conspicuous in all accounts of Enron's organizational culture. Enron's plight also highlights the vulnerability of rank and file employees to prevailing cultural norms, morals and sanctions. Particularly in the absence of counteracting forces or dissenting opinions, increasing identification with an organization's cultural values is likely. Andy Fastow, the former chief financial officer of Enron, responded to a scathing cross-examination by stating, "Within the culture of corruption that Enron had, that valued financial reporting rather than economic value, I believed I was being a hero." During his trial, Mark Koenig, Enron's former head of investor relations, told jurors "I wish I knew why I did it. I did it to keep my job, to keep the value that I had in the company, to keep working for the company. I didn't have a good reason."

Secondly, within organizations, the impact of culture and leadership on even most the sophisticated management control system must not be overlooked or minimized. It is often too easy to consider cultural and management control systems separately, with cultural being a soft issue and management controls a hard one. Managers must always remember that a culture created through a reckless and overly aggressive leadership style can lead to individuals taking actions that can subvert even state-of-the-art management controls. Organizations need to distinguish more carefully between leadership styles such as that of Kinder, which expected high but fair performance and those that demand excessive and ultimately unattainable levels of performance.

Finally, the Enron saga speaks to the importance of not abandoning professional integrity. Perhaps, the most important lesson for managers to take away is to use personal cultural capital to find a working environment that matches one's personal values and principles. If they don't match, one should leave and find a company that does. As with the Challenger disaster in our epigraph, Enron should be a wake-up call for managers in all organizations.

Learning's from the Enron case

I do believe Enron will be the morality play of the new economy. It will teach executives and the American public the most important ethics lessons of this decade. Among these lessons are:

You make money in the new economy in the same ways you make money in the old economy - by providing goods or services that have real value.

Financial cleverness is no substitute for a good corporate strategy.

The arrogance of corporate executives who claim they are the best and the brightest, "the most innovative," and who present themselves as superstars should be a "red flag" for investors, directors and the public.

Executives who are paid too much can think they are above the rules and can be tempted to cut ethical corners to retain their wealth and perquisites.

Government regulations and rules need to be updated for the new economy, not relaxed and eliminated.