Enron and Corporate Ethics Essay

On December 2, 2001, Enron Corporation, then the seventh largest publicly traded corporation in the United States, declared bankruptcy. That bankruptcy saw thousands of Enron employees and shareholders losing their jobs and their investments. Enron’s fall sent shockwaves to all corners of the business world. A Fortune 400 company with all the appearances of stability and corporate soundness, the company’s collapse was unthinkable. For here was a company who grew by leaps and bounds in so short a time – a company who came from obscurity to national prominence as the world’s largest in terms of revenue. But like anything else if it is too good to be true it probably is. Unlike most bankruptcies which are caused by poor management and stiff competition, Enron’s demise appears simple enough: individual and collective greed. It was shameless greed that motivated company officials to dupe thousands of honest individuals out of their hard earned money – money that ran up to billions (Nakayama, 2002). The scam was unearthed just like any other scam – when people start getting suspicious. Enron was generating a lot of revenues – it was a smokescreen that allowed the company to attract more investors. While revenue generation was at record highs, profit was scant and minimal – a fact many people overlooked until it was too late. Enron’s mirage was selling the same things over and over and over again. The illusion was the company was generating this much sales but the reality was there was barely any profit made. Like everything else in hindsight, it is now clear that tell tale signs were all over Enron’s 2000 Annual Report. Still questions remain as to how a company that paraded its own Code of Ethics be so shamelessly unethical, a corporation that prides itself as having a reputation for â€Å"fairness and honesty† be so downright ruthless, callous and arrogant. Beyond the dollars and cents, the Enron debacle offers a new textbook example of failed ethics in business (Berenbeim, 2002). ENRON’s 2000 Annual Report – Warning signs Most of the investigation on Enron’s finances has focused on its balance sheet—it reported an otherworldly increase in revenue: Between 1996 and 2000, Enron reported an increase in sales from $13. billion to $100. 8 billion – a 57% five-year sales growth rate. The company more than doubled its reported sales between 1999 and 2000. Looking back then, this was a sign that the company appeared too good to be true. Before it declared bankruptcy, Enron said it was on track to double revenue again the next year. Had it done so, it would have become the second-largest corporation in the world in terms of sales. According to Forbes. com, Enron’s reported revenue was based on its exploitation of a loophole in accounting rules – a tactic that may have been legal, but few investors understood it (Ackman, 2002). Forbes. com goes on to say that Enron earned more than 90% of its revenue from a business it calls â€Å"wholesale services,† Enron’s euphemism for trading. Here is how its 2000 annual report describes that activity: â€Å"Enron builds wholesale businesses through the creation of networks involving selective asset ownership, contractual access to third-party assets and market-making activities. † Yet again, another warning sign. Footnotes in the annual report for 2000, also show hints of the hidden debt that pushed the company into bankruptcy. According to Businessworld, a footnote on â€Å"preferred stock† indicates that if Enron’s share price were to fall below $48. 55–which first occurred on June 14–the company would be obliged to issue stock to a partnership called Whitewing Associates (Tergesen, A. 2002). Other footnotes reveal similar arrangements. True, Enron never put a dollar value on its potential obligations, and the footnotes did not divulge the extent of the partnerships. But enough was revealed to suggest that investors were not getting a full view of the company’s finances. Enron and its Code of Ethics Enron trumpeted its own Code of Ethics, but based upon investigation by the U. S. Senate Permanent Subcommittee on Investigations, it willfully and shamelessly violated the very code it promised to upheld (U. S Subcommittee on Investigations, 2002). In its decision, the Subcommittee cited, among others, the following: (1) Fiduciary Failure. The Enron Board of Directors failed to safeguard Enron shareholders and contributed to the collapse of the seventh largest public company in the United States, by allowing Enron to engage in high risk accounting, inappropriate conflict f interest transactions, extensive undisclosed off-the-books activities, and excessive executive compensation. The Board witnessed numerous indications of questionable practices by Enron management over several years, but chose to ignore them to the detriment of Enron shareholders, employees and business associates. (2) High Risk Accounting. The Enron Board of Directors knowingly allowed Enron to engage in high risk accounting practices (Thomas, 2002). (3) Inappropriate Conflicts of Interest. Despite clear conflicts of interest, the Enron Board of Directors approved an unprecedented arrangement allowing Enron’s Chief Financial Officer to establish and operate the LJM private equity funds which transacted business with Enron and profited at Enron’s expense. The Board exercised inadequate oversight of LJM transaction and compensation controls and failed to protect Enron shareholders from unfair dealing. (4) Extensive Undisclosed Off-The-Books Activity. The Enron Board of Directors knowingly allowed Enron to conduct billions of dollars in off-the-books activity to make its financial condition appear better than it was and failed to ensure adequate public disclosure of material off-the-books liabilities that contributed to Enron’s collapse. 5) Excessive Compensation. The Enron Board of Directors approved excessive compensation for company executives, failed to monitor the cumulative cash drain caused by Enron’s 2000 annual bonus and performance unit plans, and failed to monitor or halt abuse by Board Chairman and Chief Executive Officer Kenneth Lay of a company-financed, multi-million dollar, personal credit line. (6) Lack of Independence. The independence of the Enron Board of Directors was compromised by financial ties between the company and certain Board members. The Board lso failed to ensure the independence of the company’s auditor, allowing Andersen to provide internal audit and consulting services while serving as Enron’s outside auditor. Conclusion While Enron’s officials were caught and brought before the bars of justice, many wonder how widespread the lack of corporate ethics is in the business world. Greed they say is universal. Who knows what will be the next Enron. As long as there are CEOs, CFOs who disregard the simplest form of business decorum there will always be an Enron story. Let’s hope that people will not forget that story and profit from it.