By filing a lawsuit for bankruptcy in 2001, the leading US energy company, Enron, ranked first on the list of the largest corporate crashes in US history. Its case has become an example for many organizations involved in unethical financial activities. In addition, this case resulted in the adoption of the Sarbanes Oxley Act of 2002, which regulated the principles of reporting and management of information about companies’ assets and economic responsibility. The subsequent sanctions against Arthur Andersen, the auditing firm that oversaw Enron, confirm a significant change in financial control policy. Enron’s bankruptcy was fueled by the fraudulent concealment of losses, and with an efficient system of both external and internal audits, the scandal could have been avoided, and the perpetrators punished timely.
Reasons and Failures
The history of Enron is associated with the falsification of accounts, in particular, the concealment of losses. Managers overestimated the company’s performance systematically so that their shares were worth more and options could be sold at a higher price. According to Hosseini, at the beginning of its activities, Enron was a profitable gas and electricity business, but further, the company began to grow and lost its main focus (37451). The organization became involved in the construction of power plants, trade-in water supplies, and other projects. As a result, one might assume that the organization’s corporate culture was low, and high-level theft by hiding failed transactions in their reports indicate ethical concerns.
The main violation that Enron’s management systematically committed was the destruction of documents that shed light on financial fraud. In addition, as Hosseini notes, the compensation policy followed by the organization was one of the factors that attracted supervisory attention to the company’s activities (37455). Enron’s share price grew steadily, which was unnatural in the face of market fluctuations and periodic changes in consumer interests. By hiding real assets and not providing objective data in financial reports, the corporation’s management let down not only investors but also ordinary employees who were involved in fraudulent schemes without knowing it (Hosseini 37455). As a result, the Enron scandal was an example of how unethical forms of doing business can affect different interested parties.
Arthur Andersen Involvement
Partner organization Arthur Andersen which led the financial due diligence of the bankrupt company, also found itself at the center of the Enron scandal. As Enron’s main auditor, Arthur Andersen deliberately concealed the facts of the audits so as not to lose a successful client and a stable profit. According to Diermeier et al., about four dozen large firms terminated their contracts with Arthur Andersen due to the story around Enron (2). In 2002, the Texas court found the auditor’s staff guilty of destroying thousands of documents related to Enron’s audits, which was aimed to obstruct the investigation (Diermeier et al. 9). Arthur Andersen then relinquished its license to audit financial statements. In 2005, the Texas court’s decision was overturned by the US Supreme Court (Diermeier et al. 10). Nevertheless, the reputation of the firm was heavily undermined by the scandal, and the company could no longer regain its position.
The example of Arthur Andersen’s activities confirms that cooperation in fraudulent financial reporting may have severe implications not only on the main violators but also on their accomplices. The firm’s corporate culture was weak, and the organization violated the ethical principles of auditing systematically by hiding Enron’s financial misconduct. As a result, after all the checks, Arthur Andersen lost its status as one of the most reputable consulting companies and came under significant pressure from government oversight boards.
Measures to Prevent Enron’s Failure
The only possible option for Enron to avoid the outcome that happened in 2001 was to promptly eliminate any form of fraudulent financial activity. Palla et al. note that such an objective could have been realized through sustainable forms of internal influences by addressing the ethical code and corporate culture of the company (76). Enron could have created a program for overcoming the crisis and subsequently established a more transparent system of all financial transactions. However, the management of the organization put the goal of enrichment at the forefront, which led to dire consequences for the corporation. Moreover, many employees of the company lost funds due to unethical business promoted by management. According to Palla et al., the early identification of fraudulent routes by internal audit “would have saved victimized employees billions of dollars in pensions” (78). Nonetheless, no attempts were made, and both Enron executives and subordinates were left unemployed and faced severe responsibility.
The fraudulent concealment of losses was the main cause of the scandal in which Enron and Arthur Andersen, the accounting firm, were involved in 2001. The violations of ethical principles of work and a weak corporate culture contributed to the bankruptcy of the organization and the dismissal of employees who were not aware of managers’ criminal schemes. If appropriate internal audit measures had been taken in advance, this could have prevented a scandal and saved investors’ assets, but due to an extensive fraudulent scheme, the outcome was negative.
Diermeier, Daniel, et al. “Arthur Andersen (C): The Collapse of Arthur Andersen.” Kellogg School of Management Cases, vol. 1, no. 1, 2017, pp. 1-10.
Hosseini, Seied Beniamin. “The Lesson from Enron Case – Moral and Managerial Responsibilities.” International Journal of Current Research, vol. 8, no. 8, 2016, pp. 37451-37460.
Palla, Anil Kumar, et al. “A Case Study on Ethics in the 21st Century & the Enron Effect.” International Journal of Business and Social Science, vol. 9, no. 4, 2018, pp. 76-80.