The ethical dilemma at Enron conflicted with an interest in nature. The ethical dilemma involved a conflict of interest between maintaining a positive image regarding competence in the global market versus the needs of the investors, employees, and the executives. Executives at Enron perceived a significant risk in revealing the losses and threats to the investors, since it was apparent that most of the investors would withdraw from the company if they learnt of the losses and risks, and potential investors would be unwilling to invest in the company, a factor that would affect the company's market position negatively (Li, 2010). Hence, the executives resolved to overstate the company’s revenues and over-value the company’s stocks in the hope that such measures would help to correct the situation and restore the company to its initial position. Further, the dilemma involved a conflict of interest between observing professional standards and maintaining a high ranking client on the side of Arthur Andersen. Enron was one of the major clients of Arthur Andersen, and losing the client meant that the auditing firm would suffer notable financial losses. Additionally, the independence of the auditing firm was violated since there were close relationships between Enron’s executives and AA’s employees; for instance, David Duncan, an audit partner in charge of Enron’s account had a close personal relationship with Enron’s chief accounting officer. Further, a number senior executives of Enron came from AA, while several AA employees were allocated permanent offices at Enron; thus maintaining close relationships with Enron’s employees, a factor that compromised the independence of the audit firm.
How the company handled the issue
The ethical issue at Enron emanated from a series of losses that originated from failed investments that the company indulged in to beat the competition and maintain its market position. Enron was ranked as the leading company in the world among the primary natural gas, electricity, and communication companies towards the end of the 20 th century (Li, 2010). Enron's company culture emphasized on competition and achievement of financial goals; hence, with the increase in competition, the company embarked on international investment and diversification strategies to maintain its market position. However, rather than gaining profits, the strategies led Enron into massive losses since the strategies were poorly planned and implemented. Further, in 1999, Enron ventured into the broadband market and fiber optics in a bid to grow its income and market share; however, the venture was also a wrong decision, and it plunged the company into further substantial losses that threatened the survival of the company.
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However, Enron made a wrong approach in managing the issue by failing to disclose any information about the losses and risks to the investors and other interested parties. Instead, the company embarked on hiding its liabilities and overstating its revenues, thus earning a phenomenal bottom-line that convinced more shareholders, including employees to invest in the company's stocks. Enron managed to cover the frauds for approximately five years with the help of Arthur Andersen, an auditing company that provided Enron with both internal and external auditing and consultancy services. Also, the executives of the company increased the stock price, and they pocketed vast sums of money through stock trading. However, the company could not survive due to the enormous losses, which were approximated at $618 million in October 2001, and as a result, the company's stock declined to less than $1, causing considerable losses to the employees and the investors and the company’s collapse (Li, 2010).
Legal and professional considerations
The legal considerations that pertained to the case are mainly centered on fraud, whereby the fraud was facilitated by critical executives at Enron as well as Arthur Andersen. Kenneth Lay, the chairman, founder, and CEO of Enron played an essential role in influencing the fraud since he lacked the due integrity and he was dishonest. In 2001, despite knowing Enron’s risky financial condition, Lay went ahead to assure investors and employees of the company’s future growth and encouraged them to invest more in the company's stock (Li, 2010). The announcement, coupled with Lay’s sale of a substantial amount of his shares, raised the price of Enron’s stock, further accelerating the company’s bankruptcy. Further, Andrew Fastow, Enron’s Chief Finance Officer, contributed to the fraud by working with David Duncan, the audit partner in charge of the company’s account, in manipulating Enron’s financial numbers. Fraud is a criminal offense, and all the individuals involved were tried and punished, where Enron's executives, including Andrew Fastow and Jeffrey Skilling, Enron's CEO, were sentenced to 10 years and 24.4 years in prison respectively, while Arthur Andersen was barred from conducting auditing work.
Additionally, the case involved several violations of the professional standards, including the violation of auditing standards, whereby David Duncan failed to act independently in conducting audits as required. Instead, Duncan chose profit and contributed to the fraud at Enron instead of determining the financial health of the company for the wellbeing of the investors and the employees (Li, 2010). Further, the company executives failed to act in the best interest of the employees and the investors by exaggerating the company’s profits, thus encouraging further investments that eventually led to the collapse of the company and losses to the employees and the investors.
The impact of the case on the company
The case had severe impacts on Enron, including the collapse of the company and the loss of the company’s 16 years of investment, which saw the company ranked among the most successful companies in the globe. Moreover, the company suffered further losses in the court procedure that led to the imprisonment of Enron’s key executives. Further, the company, as well as its executives, lost their reputation as a brand globally, which indicates that the company cannot survive if revived in the future.
The impact of the case on stakeholders, employees, clients, and shareholders
The case affected the key stakeholders, clients, shareholders, and employees of both Enron and Arthur Andersen. Employees of Enron lost their pensions and jobs, while investors incurred losses of billions of dollars. On the other hand, shareholders lost their investment as well as their income, while the clients of both Enron and Arthur Andersen suffered from the sudden collapse of the business entities. Further, the employees of the audit company also suffered from a loss of income since the company ceased to exist after a judgment to discontinue its services was issued.
References
Li, Y. (2010). The case analysis of the scandal of Enron. International Journal of Business and Management , 5 (10), 37.
