Organizations are to be called ethical should possess “ethical behavior”. Ethical behavior is an outcome of the company’s ideal policies, statements and guidelines. There are three theories which provide a framework for judging the ethical nature of an organization: According to the theory of corporate moral excellence, ethical organization is one that is based on moral values. These moral values guide the behavior of the employees in their daily routine. According to the ethics and stakeholders theory, an ethical organization is one whose managers act in a responsible manner by paying attention to the “needs” and “rights” of all the stakeholders. According to the theory of ethics and corporate governance the “government practices” adopted by organization to ensure “right,” “fair,” and “just” decisions and actions plays a major role in building an ethical organization. Here, the Enron case has been taken to look at the various ethical issues and deviations from it. It is perhaps the most compelling business ethics case in a generation. Enron was a high-flying energy company that sought to transform itself into the world’s biggest energy trader. At one time it was by stock market value the seventh largest US company, led by its dynamic, politically connected chairman Kenneth Lay. But its share price collapsed when it emerged that the company had been concealing losses by setting up shell companies. Many executives benefited from the company’s high share price by cashing in their stock options. But employees who had put all their pension money in Enron shares lost everything when the firm went bankrupt. Andersen – one of the world’s five leading accounting firms – was Enron’s auditor. Andersen’s role in the Enron affair has brought the once prestigious accounting firm to its knees. Its job was to check that the company’s accounts were a fair reflection of what was really going on. As such, they were the first line of defence in the case of any fraud or deception. When the scandal broke, as the government began to investigate the company’s affairs, Andersen’s chief auditor for Enron, David Duncan, ordered the shredding of thousands of documents that might prove compromising. Andersen dismissed Mr. Duncan, but insisted that the firm did not act improperly and could not have detected the fraud. But, in June 2002, Andersen’s US division was found guilty by federal prosecutors of obstructing the course of justice. Pre-empting its official punishment, Andersen voluntarily agreed to stop auditing public companies in the US. Many important clients had already deserted the sinking ships, and its international businesses have been divided up between its rivals. Earlier attempts to save itself through a merger ended in failure. Following the conviction, multi-million dollar lawsuits brought by Enron investors and shareholders demanding compensation are likely to follow, and could bankrupt the firm. The scandal has also entered the political realm, because of Enron’s close links with the White House. Enron provided millions of dollars to finance Mr. Bush’s 2000 election campaign. Mr. Bush was a personal friend of Mr. Lay, but has been quick to distance himself from any involvement with the firm. It has also emerged that Mr. Lay called two US cabinet officers before the company filed for bankruptcy. And the US Treasury Department has said one of its officials felt he was asked to help Enron by company president Lawrence Whalley. Enron executives also met Vice President Dick Cheney and his energy task force several times to discuss the administration’s energy plan. The shock waves of Enron’s collapse have been felt on the British political scene because of the company’s sponsorship of both the main political parties, Labour and the Conservatives. “Cash for access” claims have been made against the Labour government, which abandoned its moratorium on gas-fired power stations after lobbying and campaign contributions from Enron. The government dismisses any suggestion of impropriety and says it would have been odd if energy ministers had not met with executives from Enron and other companies. The row has renewed campaigners’ calls for political parties to be funded by the state rather than relying on business donations. An extra dimension to the British overspill from Enron is added by the fact that Labour had close links in opposition with Arthur Andersen, who were the energy giant’s accountants. Allegations about the government’s links with Enron were eclipsed when the spotlight turned on Lord Wakeham, a former Conservative cabinet minister and non-executive director of the company. Lord Wakeham had served on the committee that was meant to oversee Enron’s auditing procedures. While investigations continue, Enron has sought to salvage its business by spinning off various assets. It has filed for Chapter 11 bankruptcy, allowing it to reorganize while protected from creditors. Former Chief executive and Chairman Kenneth Lay has resigned, and restructuring expert Stephen Cooper has been brought in as interim chief executive.
Enron’s false accounting was not spotted sooner has prompted the accounting industry to take a hard look at itself. Issues earmarked for attention by reformers include:
In theory, the Enron scandal should never have happened. US financial markets are supposed to be the best regulated in the world, with the Securities and Exchange Commission (SEC) enforcing strict rules on disclosure to protect investors and private agencies also monitoring companies. But Enron’s accounts proved impenetrable to government and private regulators alike, while its main business – energy trading – was only lightly regulated by another set of government agencies which exempted it from many reporting requirements, while maintaining close ties with the company. Enron executives faced criminal charges for fraud as investigations are underway by the SEC, the US Department of Justice and the FBI It is meant to be a reminder that simply having a detailed code of ethics on the books (as Enron certainly did) is not enough. Organizations need to infuse ethics and integrity throughout their corporate culture as well as into their definition of success. After all, being ethically literate is not just about giving large sums of money to charity-something that Enron did. It is about recognizing and acting on potential ethical issues before they become legal problems. Here, Enron appears to get a failing grade. Insider trading is one of the indefensible exploitations of information asymmetries. In due course, we will have a legal determination regarding whether or not Enron officers or directors engaged in this practice. But legal determinations aside, Enron officers should have been far more alert to the perception that they might benefit from exploitation of information asymmetry. Again ethical literacy is all about recognizing potential ethical issues before they become legal problems. And incidentally, since the U.S. Supreme Court’s Texas Gulf and Sulfur case in 1969 it has been unlawful for directors, as the Enron chairman was, who have inside price sensitive information to trade in that stock. Enron is not the only party that is vulnerable on the issue of truth telling. Its accountants and many Wall Street analysts ratified and legitimized the company’s scenarios and statements regarding its prospects. The accountants misled and analysts are certainly making the case for Enron deception but it is their job to pierce the veil. No potential client thinks otherwise. The role of accountants and analysts is to serve shareholders and potential shareholders in rectifying the information asymmetries that exist when shareholders deal directly with the company. Four elements are essential in a compliance culture: High level commitment- High profile company and board involvement is essential. But companies with successful programs are much more likely to have other senior executives such as the general counsel, the chief financial officer, and chief internal auditor play a significant role. Country managers also participate in all phases (development, implementation, monitoring) of company efforts. Statements, Policies and Operating Procedures- Successful companies are much more likely to have an anti-corruption statement and detailed procedures for disseminating it widely to employees, suppliers, and joint venture partners. These efforts are often supported by training and discussion groups and suppliers and joint venture partners are more likely to be bound by the company’s ethics policies. Management Responsibility, Supervision and Resources-Corporate involvement in company anti-corruption efforts is heavy. According to a Conference Board survey about half of the companies with successful programs manage their initiative directly, while slightly more than one-third issue guidelines to local offices and require country managers to certify compliance with corporate policy. The small remaining group coordinates local initiatives from headquarters. Record Keeping, Reporting and Whistleblowing- these are the least well developed elements of most programs. Successful companies regard compliance certification and the reporting of questionable practices to be critical to the success of their initiatives. Low employee utilization of whistleblowing systems continues to be a problem, but major business and labor advisory committees to the OECD have endorsed them on the grounds that it is better to encourage staff to raise worries within the organization than to put people in the position where they feel driven to approach the media.
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