Case study methodology and applications

Enron was at one time considered to be a highly successful energy firm based out of Houston, Texas. The company was initially formed from a merger of two prominent gas pipeline companies in 1985, and the company's scope then broadened to include the provision of products and services in the realms of electricity, natural gas, and communications. Enron's reach expanded beyond the United States to the international market, as the company dealt in the management and delivery of energy services and products to customers in both commercial business and industrial sectors throughout the world. The financial success of Enron was created mostly throughout the nineties, when the CEO and CFO at that time created Enron into a company that was worth $150 billion, making it the seventh largest company on the Fortune 500.

All of this perceived success, however, was later found to be fraudulent due to questionable accounting practices, and 2001 saw Enron implode due to enormous debts. The firm was forced to declare bankruptcy, which had devastating effects. Over 4000 employees were laid off by the company. The stock price of Enron quickly plummeted, resulting in shareholders experiencing the loss of tens of billions of dollars. Furthermore, there was a shift in regards to public confidence, and throughout the world this scandal lead to widespread mistrust in corporate integrity.

The main cause for the financial collapse of Enron was faulty and fraudulent accounting practices. In the year 2000, the company had reported a net income totaling $979 million, when in fact the company had only brought in $42 million. Cash flow reports were also dramatically incorrect, as the company had reported a cash flow for the year 2000 as $3 billion, while the cash flow of the company was actually a value of negative $154 million. At that time, the financial collapse experienced by Enron in the year 2001 constituted the largest bankruptcy to ever have occurred in U.S. corporate history.

The precise nature of the fraudulent accounting practiced by Enron was found primarily in the strategies used by the company to conceal losses. In particular, the company developed what were called "special-purpose entities" (SPEs), which were partnerships used by the firm in order to conceal losses. These SPEs functioned by allowing the company to falsely create the appearance of increased cash flow by moving assets and debts off its balance sheet. When the company sold assets, SPEs created the false appearance that funds were flowing through the books, which formed a highly favorable financial appearance for the company. This, however, was not an accurate representation of the financial health of the company, and the practice of using these SPEs to manipulate financial reports was deemed as fraudulent activity. After the fraudulent nature of the accounting practices of the company were illuminated, Enron then provided its true financial statements for the year 2000 and part of 2001, which showed a dramatic plummet in cash flow from 2000 to 2001, from $127 million to negative $753 million. Enron's stock price crashed and the company was forced to file for bankruptcy, resulting in claims totaling 22,000 in number at a sum totaling approximately $400 billion.

How were all of these fraudulent activities practiced by Enron brought to light? The Vice President of the company in 2001, Sherron Watkins, was required to complete the task of locating assets the company could sell-off due to the slipping in stock price already underway for Enron. Watkins noticed the questionable accounting practices being conducted, and she decided to bring these practices to the attention of the CEO of Enron in August 2001. In response, the CEO had their law firm look into the questionable practices, while he sold off millions of dollars in stock options even though he was reporting to employees of the company that Enron was at its strongest. This claim was false, as by October 2001, the questionable accounting practices that were presented to the CEO by Watkins were responsible for a reported third -- quarter loss totaling $618 million and a write-off of $1.3 billion. As a result of her whistle-blowing activity, Watkins was then demoted to receiving make-work projects, no longer had access to her computer files, and was considered to be Vice President of Enron in name only. She later resigned from Enron and testified before congress regarding the fraudulent accounting partnership activities being practiced by the company. The whistleblowing activity of Watkins resulted ultimately in the indictment of Enron's CFO Andrew Fastow by the U.S. Justice Department in 2002. Fastow was indicted 98 counts for alleged inflation of profits for Enron, including charges of fraud, conspiracy, obstruction of justice, and money laundering.

Issue

What factors most predominantly formed the basis of the unethical practices demonstrated by Enron, ultimately resulting in the financial collapse of the company and legal charges against high ranking employees? The corporate culture of Enron undoubtedly played a major influential role in the motivation for individuals involved in the company to choose to partake in such questionable practices. It was suggested in the case study that the corporate culture of Enron could be appropriately described with the word "arrogant," which was evident in the general conduct of the company and its employees as they conducted business. The pride exhibited by the employees of the company was overwhelmingly inflated, and the company, most likely inadvertently, encouraged employees to bend the rules in order to maximize profits. Also, decisions and practices within the company often served the interests of the compensation for executives at Enron far more than it served shareholders. Overall, the practices at Enron did not reflect ethical behavior, even though the CEO claimed to value a highly moral and ethical culture, and integrity was not exhibited by the company on any level.

The idea the culture of Enron is involved in the demise of the company is supported through research as well (Kulik, 2005). Kulik (2005) suggested that the culture of Enron is based in agency theory, and stated that the individuals involved in the high management levels of the company were agency-reasoning. Furthermore, this researcher indicated several conditions that were present during the collapse of Enron. These conditions included a corporate culture characterized by strong agency and norms that were collectively non-compliant, an environment that was overly generous in certain respects and did not acknowledge corporate failures, as well as the tendency to not conduct appropriate business ethics training with newly hired staff. Kulik (2005) also argued that the Enron case was so far-gone, that implementing any recommendations based in ethics literature at that time would not have saved the company from its collapse. Moreover, the researcher made suggestions for directions that research in business ethics could take in the future in order for effective ethical actions to be implemented in cases that exist in conditions similar to Enron. These suggestions included devising the means to determine what the difference is between commitment and connivance, what the word "balance" means in the context of legal and ethical theories that are multi-dimensional, as well as the appropriate balance between agency reasoning and stewardship reasoning.

The sense of competition in the company was fierce. This was due to the system put in place by executives, which saw that the 20% of employees each month that received the least favorable performance ratings were dismissed. It could be suggested that this highly competitive environment at Enron was a significant contributing factor to the eventual collapse of the company. Kuli et al. (2008) suggested a grassroots-type model that effectively provides a description of the structural factors in organizations that may influence the presence and spreading of behaviors that are unethical. In particular, these researchers used the application of social network theory in order to predict conditions that are favorable and conditions that are unfavorable for the emergence and growth of unethical behavior within organizations. Through this investigation, Kulik et al. (2008) demonstrated that network conditions that were favorable for the suppression of the initial emergence of unethical behavior within corporations actually acted to promote the diffusion of this behavior.

In regards to stakeholder theory, it has been suggested by some researchers that weakness in this area as it relates to social responsibility of businesses many have contributed to the accounting scandal experienced by Enron (Carson, 2003). In particular, it is highlighted how this theory tends to lack in prohibitions against deception and fraud, which is easily remedied by adding these types of prohibitions explicitly. Furthermore, Carson (2003) argued that events such as the Enron scandal indicate how the stakeholder's theory has unrealistic and naive expectations and hopes with regard to corporate executives acting as moral examples or being responsible for any social improvement. It was further suggested by Carson (2003) that other contributing factors to ethical scandals such as Enron include that the engagement in unethical conduct may be encouraged by the "perverse" incentives that are often created by payment and reward schemes.

There are in fact several factors involved that could have significantly hindered the existence of an ethical corporate culture for Enron. Three of these significant factors were discussed by Webley and Werner (2008). The first factor identified was a lack of commitment on behalf of upper management. Specifically, it was indicated that management commitment was especially important for the control orientation and scope of programs promoting ethical behavior. Management must take their roles and potential influence seriously, as the commitment to ethics displayed by executives significantly affects the course of ethics governance within corporations.

The second factor outlined by Webley and Werner (2008) that could have prevented ethical behavior by Enron was the lack of a well-designed business ethics policy. The researchers describe five traits that must be present within an ethics policy in order to make it sustainable. These five components include: agreement among the members of the organization with regard to what are considered to be core ethical values for the company; the presence of an ethical code that is stakeholder-based, which explicitly outlines ethical responsibilities and ethical guidelines with regard to issues that come up in all stakeholder relationships; appropriate guidance for employees provided by the code of ethics with regard to any ethical dilemmas that come up as a result of stake-holder relationships; the presence of provisions that ensure employees are able to receive ethical advice or raise any ethical concerns they may have; raising of awareness and the implementation of ethics training in order to familiarize staff with ethical standards and expectations within the company.

Another factor that may have significantly affected the outcome of the Enron event is that the company did not appropriately promote an ethical culture (Webley & Werner, 2008). Components to the successful promotion of ethical culture include ensuring that the behavior of management as well as communication between management and employees is in-line and conducive to ethical practices. Also, it is important that ethical considerations be incorporated into corporate strategy in order to ensure that core ethical values are integrated into the foundation of the company.

A final factor that may have contributed to the ethical breakdown resulting in the collapse of Enron was that the company did not effectively seek out feedback and assurance with regard to ethical policy (Webley & Werner, 2008). This is most effectively implemented through the development of a board level committee that oversees the ethical program. Evidence with regard to the ethical well-being of companies may be obtained through sources of evidence, such as stakeholder surveys and symptomatic indicators, like staff turnover rates or rate of customer complaints.

Recommendations

The most logical and ethical alternative action that could have been undertaken by Enron would have been to reevaluate its corporate culture, focusing in on core values and how their practices could reflect those values. This would have meant facing debts as they became apparent, and not trying to cover them up with questionable accounting. This also would have meant revising the systems within the company so that their entire mission, objectives, and motivations were not rooted in greed. Consequential theory would see that making these decisions would have differing effects on all people involved, including executives, employees, and shareholders. Choosing more ethical practices based in integrity rather than greed would have had a two-fold effect on executives. First, it would have resulted in the executives accumulating a lot less wealth considering all of their profits were acquired through fraudulent behavior. However, the second effect is that ethical practices would have potentially preserved the company for a longer period of time and the executives would not have experienced legal prosecution. In regards to employees, if Enron would have generally cared about maximizing the potential in all individuals, they would not have used the cut-throat motivation tactics they did with employees. More compassionate management practices would have preserved the jobs of many individuals. Furthermore, ethical accounting practices also would have potentially saved the company, and saved the jobs of the 4000 individuals that became unemployed due to the financial collapse of Enron. Finally, shareholders would have benefited financially from more ethical accounting practices due to the fact that the fraudulent behavior is what led to the collapse of the company and the plummeting value of the stock.

Implementation and Evaluation

The implementation of more ethically sound accounting practices would have had to start with changes in the beliefs and values of the executives at Enron. With greed driving the motivation behind decision-making, it is not surprising that poor choices were made with outcomes that benefited a few while compromising the financial well-being of thousands of employees and shareholders. Instead of these unethical behaviors, the company could have had a committee devoted entirely to the monitoring of practices within Enron to ensure that practices were in line with ethical values. This committee could have developed a protocol based in normative business ethics theory (Hasnas, 1998). Furthermore, establishing a committee that would make the company accountable for its actions would prevent the occurrence of whistle-blowing, where an employee would risk their job and personal well-being in order to try an right a wrong within the company. Instead "effective whistle-blowing" could be practiced by the committee, which would be more effective in halting or dissuading fraudulent behavior than having individual employees risk so much in trying to maintain some level of integrity (Near & Miceli, 1995).