Introduction

What led to Enron’s downfall and what were the ethical issues involved in its downfall?

Enron is an example of a company that engaged in unethical practices only to promote the interests of two people in the association to the detriment of the others. Enron was one of the largest energy companies globally and was the most innovative company in the United States until its bankruptcy.

It was accused of certain unethical and illegal practices, such as the counterfeiting of its financial statements. Companies and investors who lost capital when the company went bankrupt due to Enron’s unethical practice suffered huge losses. Enron’s management practices, which led to its collapse, did not follow standard ethical principles of multinational business operations.

One principle of standard global business code is the principle of transparency (Edwards, Hawkins & Schedlitzki, 2019). This principle reveals that everyone in the association must be transparent and honest in their organizational practices. This means that top management of the company must provide clear and accurate financial statements about the business and actual records and data about each business practice. Enron’s officials did not follow this ethical policy. Instead, Enron, with the help of its accounting firm Arthur Anderson, misrepresented its financial statements and issued false and unclear statements. People and investors have lost much money since being deceived by fake financial statements that were generated under the supervision of the company’s directors and the CEO. Another Global business standard code is the fiduciary policy (Fairchild & Marnet, 2018). This policy requires that people performing the business activities should work with diligence, honesty, and must demonstrate credibility to business owners and the business community. Unfortunately, Enron management has had not acted with honesty. At Enron, Andrew Fastow, the then CEO of the company, behaved dishonestly and unethically, engaging in illegal and unethical training. As a result, he was behind creating countless companies that were not responsible for estimating taxes. These companies and his associates used him because he wanted to make millions from unregistered businesses. Additionally, the managers used it to sell this stock when the company’s value was at its peak, as they firmly believed the business would decline in the future due to fraudulent practices, but people didn’t know this , so they lost their money.

How did the Government response to Enron’s unethical practices?

The Enron scandal was a financial scandal marked during America’s long-standing financial boom in the 1990s (Connell, 2017). In December 2001, Enron became the largest bankruptcy in American history (Connell, 2017). Due to the shocking decline of the business and misrepresentation of profits, internal and external controls could not determine cash losses disguised as profits for different years using accounting methods that never followed the ethical accounting procedures. The activities of the executives at Enron destroyed the company, generated millions of dollars as liabilities because Enron sold their company’s stock before their costs collapsed. Enron employees lost their jobs as much of their retirement savings were invested in Enron stocks.
The scandal played a crucial role in decreasing investor confidence in US businesses Internal controls do not work on the same code. Enron’s management, particularly its audit committee, did not understand the proper economic practices it attempted and therefore did not provide adequate oversight.

The US federal government, as a reaction to the scandal, formulated and enacted new legislation to improve accounting procedures and to strengthen the SEC (Securities and Exchange Commission) to prevent any further accounting fraud of such a massive volume (Gorshunov et al., 2020). The Public Accounts Reform and Investor Protection Act incorporated strict government control over the release of corporate funds from the new contract law of the 1930s. The Sarbanes-Oxley Act was passed in 2002 to prevent theses illegal practices by US legislation (Gorshunov et al., 2020). Despite the failures of external auditors and internal regulation of companies, many financial experts agree that the federal government also has specific responsibilities in such situations. Moreover, it was also found that excessive economic liberation also contributed to Enron’s rise to $100 billion approximately (Fairchild & Marnet, 2018).When the government chose to liberalize the energy industry, politicians in the legislature and the governor received millions of dollars in donations, removing almost all government restrictions, and this also allowed the proliferation of Enron’s unethical practices.

How can corporations overcome the problem of unethical accounting?

The rules and regulations of accounting are there to ensure that financial statements are genuine and are useful in their financial decision-making. But then also some companies become vulnerable to unethical accounting practices. Unethical accounting is a term used when businesses and companies break accounting rules or say falsify their financial policies to present an image that doesn’t exist. For example, a company is listing higher assets and incomes but on the other hand, is hiding debt or other liabilities, perhaps to sell a business or to make a deal. Criminal activities like fraud and tax evasion and poor ethics demonstrated by accounting professionals can also cause damage to the reputation of the business and alleviate its trustworthiness.

How to overcome the problem of unethical accounting:
1. Establish straightforward guidelines:
There should be an easily understood code of conduct that outlines and shows the company’s expectations about ethical behavior in accounting.
2. Promote knowledge:
Giving just the code of conduct isn’t enough. The corporation should routinely remind the newly employed about it and also to your existing staff.
3. Employ data monitoring.
4. Create Policies and Practices:
Companies must develop policies defining and identifying ethics violations. These policies should be included in the employee handbook and punishment should be put in place for those who raise ethical issues.
5. Build a Culture of Transparency, Openness, and Communication:
When it comes to organizational ethics, people must see and hear what is right to stand for and speak out if they see something occur that is not right.

How can corporations ensure that the management behaves responsibly and ethically whilst maintaining corporate profitability?

Developing ethics in the company creates a positive work culture for employees and managers and it leads to profitable business. Companies with clear organizational ethics strengthen and support an environment where workers feel respected, engaged, and safe. Entrepreneurs can create an ethical corporate culture that benefits investors, organizations, and stakeholders. The work ethics makes employees aware of certain expectations. Then they will want to move forward to achieve the goals of the business organization they work for. This contributes to performance due to the increased use of the system. In such an ethical workplace environment, the management and the employees tend to remain morally and ethically correct in their actions, leading to business growth and sustainable development. Business ethics work on the basis of the credentials of a business organization. Most customers prefer to consume products of ethical companies and hence, remaining ethical is also profitable for a business.

A food producing organization, for example, must maintain hygiene and uphold nutrition in its food products to enhance the quality of life of the customers. This increases the number of customers who purchase products from this organization. The work ethics of the organization ensures long-term operation without employee attrition or job disruption. This contributes to the high volume of benefits received from customers due to the good reputation of the business entity. The organization’s performance is must be monitored and evaluated against a code of conduct, and this will lead to the expansion of business profit in a thorough and explicit manner (Alwi, Ali & Nguyen, 2017). In addition, ethically structured protocols help reduce the number of specific complaints related to criminal audit events. Moreover, management of a company can be shaped more ethically through practicing ethical decision making. In this respect, it has to be noted that making ethical decision is a process that takes into account the choices of every stakeholder and this makes the management more accountable and the management policies more transparent.

References

Edwards, G., Hawkins, B., &Schedlitzki, D. (2019).Bringing the ugly back: A dialogic exploration of ethics in leadership through an ethno-narrative re-reading of the Enron case. Human relations, 72(4), 733-754. Fairchild, R. J., &Marnet, O. (2018). Fraud-perception, superegos, and cultural spread of unethical behaviour: theory and evidence from Enron. Retrieved July 13, 2021, from https://www.qmul.ac.uk/busman/media/sbm/research/researchcentres/behavioural-finance-working-group/Fairchild-et-al.pdf
Connell, M. (2017). The Fall of Enron and the Creation of the Sarbanes-Oxley Act of 2002. Retrieved July 13, 2021, from https://digitalcommons.lasalle.edu/cgi/viewcontent.cgi?article=1029&context=honors_projects
Gorshunov, M. A., Armenakis, A. A., Feild, H. S., & Vansant, B. (2020). The Sarbanes-Oxley Act of 2002: relationship to magnitude of financial corruption and corrupt organizational cultures. Journal of Management, 21(2), 73.
Alwi, S. F. S., Ali, S. M., & Nguyen, B. (2017). The importance of ethics in branding: Mediating effects of ethical branding on organization reputation and brand loyalty. Business Ethics Quarterly, 27(3), 393-422.