Introduction
Management practices enable an organization to operate effectively in achieving its goals. Ethical principles are of vital importance to the success of an organization. The Enron scandal is among the worst bankruptcy cases in American history. The company ignored management practices and auditors colluded with the management of the company leading to its failure (Bryce 2008, p.145). Shareholders lost their investments and employees lost their jobs with the collapse of the company.
Meanwhile, stockbrokers and the government failed to take an initiative to inform the public about the financial miscalculations that were going on in the company. The combination of these unethical practices led to the collapse of one of the largest energy corporations in the U.S.A. In particular, the company failed to practice the agency theory in financial management leading to its failure. The management did not protect the interests of the shareholders and they lost their investment considerably. Management was irresponsible and used inside information to their benefit. There was financial manipulation by top executives at Enron leading to the ultimate collapse of the corporation.
The Enron Corporation collapsed because the management failed to observe the fiduciary, fairness, and transparency ethical principles. The company’s top executives were not loyal and diligent in dealing with the shareholders as the principals in the agency relationship (Fox 2003, p.132). The fiduciary principle explains the failure of the top management to protect shareholder’s interests. The company did not practice the fairness principle and dealt unfairly with the employees, creditors, and government.
Employees particularly lost dearly and creditors had to restructure their deals (Tonge 2003, p.18). The management at Enron ignored the transparency ethical principle. There was no disclosure of what was going on from the inside. The investment brokers were not open to the shareholders to explain the financial manipulations in the company. The auditor became subjective from the managerial influence and failed to give a true and fair view of the company’s financial position leading to its collapse.
Body
The failure of Enron Corporation was because of neglecting the fiduciary ethical principle (Culpan, & Trussel 1974, p. 70). The fiduciary principle deals with a trust relationship where one party should be diligent and loyal to the property held for the other person. In this scenario, the agency theory between management and shareholders better explains the fiduciary principle. The agency theory describes the conflict of interest that arises when managers have the responsibility to invest the shareholder’s wealth (Collins 2006, p.56). The managers are the agents while the shareholders are the principals.
Therefore, managers should maximize the shareholder’s returns and comply with legal standards. The top managers at Enron failed to protect the interests of shareholders thus neglecting the fiduciary principle. The shareholders lost their investment and the company incurred many agency costs especially because of the involvement with the external auditor, Arthur Andersen.
In the fiduciary relationship, the company also failed to be loyal to other stakeholders of the company. These stakeholders are the employees, customers, and creditors of the company. The management has a responsibility to protect the interests of these stakeholders because they play an important role in the success of the company. This responsibility to stakeholders stems from a moral perspective of the management to its stakeholders (Fusaro, & Ross 2002, p.100).
The management should not harm stakeholders’ interest because of the fiduciary relationship that exists. At Enron, the management failed to protect the interests of stakeholders such as employees who lost dearly in the company. The management protected their own interests at the expense of the stakeholders’ interests and by so doing, they violated the fiduciary principle.
Enron failed to be transparent in their operations and dealings with shareholders and other stakeholders of the company. The company were not fair in their dealings and had unfair processes. There were many insider dealings that top management enriched themselves through stock options while shareholders lost their investments (Salters 2008, p.42). Their operations were unfair especially to employees who lost their jobs on the verge of the collapsing organization. The company lost the confidence of creditors because of unfair treatment and the use of the loaned assets in an unfair way.
The board of directors at Enron failed to warn the management about their dealings. It was an unfair process for the top executives to collude with the external auditor in using the inside information to their advantage. These managers were aware of the accounting and financial miscalculations within the corporation. The managers unfairly manipulated the sales of the company to portray high profits, which was not true (Healy, & Krishna 2003, p.176). In addition, these managers sold their stock options at exaggerated prices and made abnormal profits using the inside information. This practice was unethical and violated the fairness principle of the Global Business Codex. The top three executives at Enron enriched themselves at the expense of the other stakeholders, which was unfair.
Further, the company was not transparent in its operations. The company’s top executive was not true with the operations of the company. The management did not want to show the real status of the company because Enron was a blue-chip company. It would have been a shame for such a company to collapse. The management hid the truth from the stakeholders violating the transparency principle. The culture of the management to deceive the stakeholders and portray a different situation from the reality was the major cause of the company’s failure. The audit committee did not act objectively in its operations.
Normally, the audit committee should foresee the operations of the board of directors (Swartz, & Sherron 2004, p.111). At Enron, the audit committee was negligent in its operations and it did not take interest in the trading going on at the company. This failure led to the eventual collapse of the corporation.
The auditor at Enron, Arthur Andersen, is one that completely ignored the transparency principle. An external auditor should give a true and fair view of the company’s financial position from an examination of the financial statements. The auditor should be independent of the company and give an unbiased opinion on the true position of the company. However, the auditor was negligent in performing his duties (Scherer, & Petrick 2003, p.40). The auditor in this company colluded with the top executives in stealing from the company. This auditor failed in holding the ethical principles and failed to disclose the true view of the corporation.
Conclusion
The Enron Corporation collapsed because of failure to observe the fiduciary, fairness, and transparency principles of the Global Business Codex. The management practices at Enron failed to meet the above ethical principles leading to its ultimate debacle. The management neglected the agency relationship with shareholders leading to conflict of interest in the organization. Shareholders lost their investments at Enron while top management enriched itself from the purchase of stock options. The top executives at the company used inside information to their benefit at the expense of the shareholders.
In addition, the top executives were not loyal to employees and creditors who lost their jobs at the collapsing company. The management was unfair with its dealings and not transparent in its operations. The top management failed to present the true view of the corporation and inflated the profits of the company. Consequently, the top executives enriched themselves while the company was dying from the inside. The auditor greatly contributed to violating the transparency principle by failing to disclose the true view of the financial position of the company. Overall, the management practices at Enron failed to practice the ethical principles of the Global Business Codex.
References
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Collins, D., 2006. Behaving Badly: Ethical Lessons from Enron. Indianapolis: Dog Ear Publishing.
Culpan, R., & Trussel, J., 1974. Applying the Agency and Stakeholder Theories to the Enron Debacle: An Ethical Perspective. Business and Society Review, 110 (1), pp.59-76.
Fox, L., 2003. Enron: The Rise and Fall. New Jersey: John Wiley & Sons.
Fusaro, P., & Ross, M., 2002. What Went Wrong at Enron: Everyone’s Guide to the Largest Bankruptcy in U.S. History. New Jersey: John Wiley & Sons.
Healy, P., & Krishna, P., 2003. The Fall of Enron. Journal of Economic Perspectives, 17 (2), pp.3-10.
Salter, M., 2008. Innovation Corrupted: The Origins and Legacy of Enron’s Collapse. USA: Harvard University Press.
Scherer, R., & Petrick, A., 2003. The Enron Scandal and the Neglect of Management Integrity Capacity. Mid-American Journal of Business, 18 (1), pp.37-49.
Swartz, M., Sherron, W., 2004. Power Failure: The Inside Story of the Collapse of Enron. USA: Doubleday.
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