Business Ethics Assignment -

Enron Scandal
Ghianinda Miharja - 2918228

Discussed in a group consist of:

• Abiyan Satrio

• Gema Rendrahadi

• Riri Lazzoria

Company Brief Overview

Enron was formed in July 1985 when Texas-based Houston Natural Gas merged with InterNorth, a
Nebraska-based natural gas company. In its first few years, the new company was simply a
natural gas provider, but by 1989 it had begun trading natural gas commodities, and in 1994 it
began trading electricity.

Ethical Concern
As 2002 began, energy Trader Enron Corp. found itself at the centre of one of corporate America’s
biggest scandals. In less than a year, Enron had gone from being considered one of the most
innovative companies of the late 20th century to being deemed a byword for corruption and
mismanagement.

By the late 1990s, Enron had begun shuffling much of its debt obligations into offshore
partnerships—many created by Chief Financial Officer Andrew Fastow. At the same time, the
company was reporting inaccurate trading revenues. Instead of finding a real business solution to
improve the company’s financial condition, the executives chose to take short term solution by
hiding the debt and losses through accounting tricks. Because they didn’t want the Enron’s stock
price to go down. Some of the schemes traders used included serving as a middleman on a
contract trade, linking up a buyer and a seller for a future contract, and then booking the entire
sale as Enron revenue. From 1996 until 2000, their revenue keeps increasing in an amazing
rate. Not because they actually earn a real revenue, but because they put prospects and
projected revenue into their report which was only an illusion.

Not only about their revenue growth was fake, but their liability as well. To appear as a financially
healthy company, Enron hides their debt from their report by setting up a side company and
push the debt over to them. As a result, the liability seems in a good condition in their report while
in reality, they still have these debts.

Basically, a third-party financial auditor company has a role to provide a reliable second
perspective towards a company financial report. By this, false reporting from companies can be
prevented. In this case however, Arthur Andersen as Enron’s financial company does not do the
job right. Enron paid more to make the audit does not expose the false schemes.

Relevant Theories of Ethics Regarding to this Case

Deontological
The Enron scandal reveals ethical violations due to accounting fraud. Based on deontological
ethical theory that assesses the morality of an action based on compliance with the rules, it can
be said that obeying the rules is more important than the results. The fraudulent financial reports
made by Enron clearly violate deontological ethics, where they choose to lie to the general public
or shareholders that they are a good company. In fact they have a lot of debt. People in Enron
companies who choose not to behave in an appropriate manner ethically do not have an
obligation to do what is right. This brings a lack of ethics for the company. If those employed by a
company cannot run a business with the right ethics, then the business will, like Enron, eventually
fail.

Consequentialism
Consequentialism is the class of normative ethical theories holding that the consequences of
one's conduct are the ultimate basis for any judgment about the rightness or wrongness of that
conduct. Thus, from a consequentialist standpoint, a morally right act (or omission from acting) is
one that will produce a good outcome, or consequence.

When we apply consequentialism to this case, we would not consider the false auditing trick to be
a righteous act because the consequence of it would be many people being manipulated about
the value of the stock. And it could make the people lose money because they buy a very high
overvalued stock when the financial condition of Enron is actually vulnerable.

Virtue Ethics
One of the ethical theory that intersects with this case is the virtue ethics theory. In this theory, we
refer to someone that appear to be the representation of an ethical person according to ourselves
as the ethical foundation. When we are faced with a dilemma of ethics, we imagine what would
that ethical do. I personally may refer to Prophet Muhammad as the basis of my ethical foundation
as he is the most virtuous person in my belief.

So when we see the false accounting scheme of Enron by making a fake financial reporting
illusion, we imagine whether that is a virtue act based on Prophet Muhammad. We know that it is
not, because he taught us to be honest.

How to Prevent in Ethical Perspective

• The major ethical issue in this case is manipulation and fraud. To prevent these, the company
should embed ethical values into its company culture so that every element of the entire
organization act in a ethical manner. This can be done through employee trainings.

• When assigning executives, the company has to be careful to consider the track record of these
executives and behavior tendency to prevent unethical leadership. This can be done by
applying psychological test, and look into their past track records.