Enron Case Study: Ethical Decision Making 1

Introduction

Ethical conduct is a prerequisite for all the employees of an organization. In the 20th

and the 21st Century, it has become imperative to promote ethical behavior among all

employees of an organization in their dealing with internal and external stakeholders of an

organization (Ferrell, & Fraedrich, 2014). This was necessitated by the separation of

ownership and management. Ethical conduct among all stakeholders ensures that the interests

of both owners and management, including employees, is considered and promotes mutual

respect and benefit among all the stakeholders (Carroll, & Buchholtz, 2014). In instances

where either of the parties violates the respect and trust of the other party, it results in losses

to some or all the stakeholders. This is evidenced by the Enron case, where the financial

impropriety of management led to losses to shareholders, employees, and the collapse of the

company.

Case Analysis

Ethical Theories Introduction

To have an understanding of the Enron case from an ethical decision-making

perspective, an analysis of the case by utilitarianism, Kantianism, rights issue ethics, virtue

ethics, feminist ethics, and common moral, ethical theories will suffice. First and foremost,

the rights issue ethical theory uses rights and obligations of individuals to determine whether

or not an action is ethical (Beauchamp, & Bowie, 2004; see also Ferrell, & Fraedrich, 2014).

On the other hand, according to the virtue theory, ethical action is determined premised on

the virtues and tenets demonstrated by an individual about the issue under consideration

(Beauchamp, & Bowie, 2004). The feminist theory also know as care theory, is premised on

the inclusion of what are perceived as feministic tenets such as kindness, love, and care in
Enron Case Study: Ethical Decision Making 2

determining whether or not an action is ethical. The common moral, ethical theory, on the

other hand, is premised on the social nature of human beings which places a moral

responsibility on individuals to behave or act in particular ways that promote morality

(Carroll, & Buchholtz, 2014). The Kantian ethical theories, on the other hand, are premised

on a means and ends analysis of situations. This entails determining if an end is ethical, and

then any actions ethical or not can be used to get to the end (Beauchamp, & Bowie, 2004).

Lastly, the utilitarianism ethical theory, on the other hand, is premised on the common good

principle. Whichever action promotes the good of the majority or benefits the majority is

deemed to be ethical (Carroll, & Buchholtz, 2014).

When the Enron case broke out, it emerged that Kenneth Lay, one of the founders of

Enron and chairman of the board, acting in cahoots with Andrew Fastow, the then Chief

Finance Officer, and Jeffrey Skilling, the CEO were involved in financial impropriety

including money laundering, insider trading and widespread fraud (Markham, 2015).

Therefore, contrary to the Enron code of conduct, that propagated virtues such as respect,

integrity, communication, and excellence, the top management of the company did not set a

good example and were the main cause of the demise of the company as a result of unethical

financial conduct (Boatright, 2013; see also Markham, 2015).

From the foregoing, it is, therefore, evident that the management and leadership of the

company violated many moral and ethical theories, professional accounting standards, laws

of the United States, and professional codes of conduct. Analysing the case using the

utilitarianism ethical theories, it emerges that the management and leadership of the company

acted driven by greed and selfish motives. The management failed to disclose losses, giving

the impression that the company was still recording good performance. Secondly, using the

information only privy to them, the top management were able to manipulate stock prices and
Enron Case Study: Ethical Decision Making 3

trade to maximize their selfish gains through insider trading (Boatright, 2013). The

management, also, violated the public trust by providing untrue or wrong information to dupe

the public and employees of the company to invest funds in a company that was performing

poorly. In addition to this, through a manipulated performance management system, the

company arbitrarily discharged employees who were good performers because the existing

system required at least 20% of underperformers be dismissed on an annual basis (Markham,

2015). Lastly, donations to political parties’ campaign activities contravened existing code of

conduct and went against the interest of the public because the management expected favours

from the beneficiaries of such donations when they assumed office upon election giving the

company an unfair competitive advantage (Ferrell, & Fraedrich, 2014).

Applying the Kantian theory to the Enron case, it emerges that the disinformation of

the public kept a poorly performing company in existences duping the public to keep on

investing in the business. Also, failure to disclose losses, wrongful discharge of employees,

insider trading, and retaliatory action against employees with dissenting views are

contradictory to the categorical imperative principles upon which the Kantian ethical theories

are premised (Markham, 2015). The vision of a company like Enron as discerned from the

case was to grow and make a positive impact globally. This is the end. However, the

approaches taken by the management, that it, the means as discussed above, contravenes the

Kantian philosophy of the end justify the means.

In the same grain, applying the rights ethical theory to the Enron case, it is clear that

as custodians of the company’s financial prosperity, the management failed in the discharge

of their duties, responsibilities and obligations. They violated the trust bestowed upon them

by the shareholders and the public. Secondly, the management had a legal and moral

obligation to provide correct information to the employees, investors and other stakeholders
Enron Case Study: Ethical Decision Making 4

to facilitate informed decision making (Markham, 2015). They failed in this by continuously

failing to disclose losses when made. At the same time, the ethical code of conduct of the

company and the law, forbid the management from making contributions to political parties

which they continuously contravened by making contributions to political parties and

presidential candidates (Boatright, 2013).

The management of the company demonstrated some behaviours and acted in ways

that violate ethical standards as per the virtue theory that uses virtues to determine if or not an

action or a decision is ethical. The management was dishonest by continuously providing

wrong information to the public and employees causing them to invest in Enron. They were

selfish because they used information that was not in the public domain to engage in insider

trading to promote personal gains through their activities in the stock exchange (Boatright,

2013). The management of the company were untrustworthy because they provided wrong

information related to the financial soundness of the company to various stakeholders. There

was a widespread lack of integrity among the top management and leadership of Enron as

discerned from the incidents highlighted above.

A scrutiny of this case using the feministic ethical theory, which uses a general

concern for the well-being of others in determining whether or not an action or a decision is

ethical, it is clear that the management of the company was not kind, caring, loving,

trustworthy, sharing, emotional, nor did they demonstrate any tenets fostered in this theory

(Beauchamp, & Bowie, 2004). The management in their actions, on the contrary, were unfair

as they promoted a culture that treated employees unfairly. The management and leadership

at Enron, through insider trading, failure to disclose losses, provision of wrongful

information, retaliatory action against employees, unfair treatment of workers through unfair

discharges and unfair performance appraisal practices, disregard of the law, unprofessional
Enron Case Study: Ethical Decision Making 5

behaviour, and the general selfish behaviour and conduct of the management of Enron

demonstrates unethical behaviour (Markham, 2015). This is since the aforementioned actions

disregard the feministic tenets of love, care, kindness, fairness, trust, peace, and a general

concern for the well-being of others.

First and foremost, under the common moral theory, the management failed in their

duty to safeguard the interests of the shareholders who are their employers by engaging in

fraud and financial impropriety. Secondly, the collusion between the auditors of the firm and

the management of Enron in a bid to promote self-gain contravenes the common moral ethics

(Beauchamp, & Bowie, 2004). Thirdly, lying to various stakeholders as to the financial

soundness of the company is another practice that contravenes the common moral theories.

Finally, the design of the 401K plan and the subsequent use of the same to dupe employees is

tantamount to theft and defrauding of employees of their lifetime savings and retirement

benefits (Boatright, 2013). These actions and behaviours are an indication of violation of

ethical standards judged from the perspective of common moral theory.

Standards Violated by Arthur Andersen

In acting in cahoots with the management of Enron, Arthur Andersen violated public

trust, disregarded and broke the law, and acted in violation of a moral, legal and professional

code of conduct that required the auditing firm to bring to the fore financial impropriety at

Enron in line with Securities and Exchanges Commission regulations under the Securities Act

(Boatright, 2013). First and foremost, a consulting subsidiary of Arthur Andersen provided

financial consulting services while Arthur Andersen provided auditing services, a violation of

ethical standards due to conflict of interest (Ferrell, & Fraedrich, 2014). The staff of Arthur

Andersen violated the company’s code of conduct that prohibited engaging in fraudulent

financial auditing practices. Thirdly, failure to report discrepancies in the audited financial
Enron Case Study: Ethical Decision Making 6

reports of Enron to the board of the company was a violation of trust and duty to the board, a

representative of the shareholders (Markham, 2015). Fourthly, lack of integrity as deduced

from these actions is a violation of the law and ethical standards as set by the company and

the SEC through misrepresentation of the financial position of the company to the general

public (Boatright, 2013).

On the other hand, the activities of Arthur Andersen were in violation of the

professional code of conduct for accountants as set by American Institute of Certified Public

Accountants (AICPA), Generally Accepted Auditing Standards (GAAS), Generally Accepted

Accounting Principles (GAAP), and Statements on Auditing Standards (SAS) (Boatright,

2013). Further, Arthur Andersen, through its staff charged with the responsibility of

safeguarding public interest failed in this duty by concealing the true financial position of

Enron through abetting management engagement in fraud. Therefore, Arthur Andersen

engaged in fraud, destruction of evidence when investigations were initiated, manipulation of

financial records, and assisting in the criminal activities of the management of Enron

(Markham, 2015).

Conclusion

The management of a company is charged with the responsibility of safeguarding the

interests of their employers, that is, the shareholders, who are the owners of the enterprise. To

be successful in these pursuits, the management is required to uphold high moral and ethical

standards through promoting a culture of integrity and ethical behaviour in the organization.

However, where the management propagates unethical conduct, their activities will result in

losses to the company, shareholders, and other stakeholders and like in the case of Enron, the

company might collapse.

References
Enron Case Study: Ethical Decision Making 7

Beauchamp, T. L., & Bowie, N. E. (2004). Ethical theory and business(7th ed). Upper Saddle

River, NJ; Prentice Hall.

Boatright, J. R. (2013). Ethics in finance. John Wiley & Sons.

Carroll, A., & Buchholtz, A. (2014). Business and society: Ethics, sustainability, and

stakeholder management. Cengage Learning.

Ferrell, O. C., & Fraedrich, J. (2014). Business ethics: Ethical decision making & cases.

Cengage learning.

Judeh, M. (2011). Ethical Decision Making and Its Relationship with Organizational

Justice. International Journal of Academic Research, 3(4).

Markham, J. W. (2015). A financial history of modern US corporate scandals: From Enron to

reform. Routledge.