How Ethics Influence Behavior in Organizations

In reality, there are some specific regulations governing our lives. However, regulations do not restrain everything. In some aspects, ethics play a much more important role than regulations. Ethics is “the code of moral values or principles that governs the behaviors of a person or group with respect to what is right or wrong” (Daft & Armstrong, 2012, p.369). Unethical behavior is very common in organizations. When people need to make a decision, unethical behavior may appear, especially when decision choices conflict with one’s self-interests. The Enron Scandal is a very interesting topic to better understand what are some responses organizations may have to unethical behavior. Previous to its collapse, Enron was an energy giant based in Texas with Arthur Andersen as their auditor. Enron violated accounting standards by manipulating the mark-to-market accounting method so their earnings would appear inflated, thus making it seem that they are financially stable and successful (Cunningham & Harris, p.40).

When Arthur Andersen audits Enron, they are supposed to give an objective evaluation, however, the audit team ignored many pressing concerns that people at Andersen’s head office were giving advice on. The team ignored the inflated earnings Enron reported albeit having a model for detecting falsified financial statements (Cunningham & Harris, p. 44). That particular audit team at the Houston office handled this problem by responding in an unethical manner. There have been speculations that Arthur Andersen received large amounts of money from Enron for their services, with some suggesting that Arthur Andersen willingly falsified financial statements for Enron (Nelson et al., 2008). Often, these types of unethical decision-making pose a great hindrance to the public, especially with a company as well established as Enron was. The scandal began to form in 2001 when, the CEO at the time, Kenneth Lay was advised by a senior staff informing him that Enron’s financial documents were “becoming much too aggressive and misleading, and that the company would implode soon if the misinterpretations were discovered” (Cunningham & Harris, 2006, p.34).

After receiving confidential information from the company’s law firm, Vinson and Elkins, Lay and his wife sold some of their private shares. Shortly after, in October 2001, Enron publicly announced that they had been inflating the amounts on their financial statements, therefore resulting in their first quarterly loss of $618 million US (Collapse to Convictions: A Timeline, CBC News, 2006). Combined with their market price subsequently plummeting, they filed for bankruptcy before the end of the fiscal year. Eventually, Arthur Andersen was convicted, and eventually found guilty, for shredding legal documents relating to Enron, as there was belief the Securities and Exchange Commission would come to investigate the scandal. Enron’s collapse can be traced to the overly aggressive accounting methods Arthur Andersen pursued in efforts to defer charges and ignore debt (Enron Scandal at-a-glance, BBC News, 2002). The entire scandal continuously roots back to poor and unethical decision-making made by both people at Enron and Arthur Andersen.

The unethical decision-makers are lacking of social responsibility, they failed to make decisions with considerations of its shareholders and the public. The company not only lied about what they were doing, but they also ruined the lives of many employees who worked so hard for the company. There were many flaws within Enron that were not identified. First of all, the company allows top executive to earn a copious amount of money with the personal shares they own. David Duncan earned $700,000 in the year prior to his indictment, and Andersen’s senior management profited even more from the lucrative audit and non-audit contracts with Enron (The Ninth International Conference “Investments and Economic Recovery”, May 22 – 23, 2009). For those who lost their jobs, their retirement accounts were cleared to zero, leaving them with nothing. Second, they duped their employees. Thousands of employees invested their savings and pensions in the company’s share market, while executives of Enron were actually selling their shares because they saw the deteriorating performance of Enron.

Between 1999 and mid 2000, when Enron shares were increasing on the stock market in New York, 29 members of the company’s management received a total amount of 1.1billion US dollars by selling a total of 77.3 million shares (The Ninth International Conference “Investments and Economic Recovery”, May 22 – 23, 2009). Lastly, they affect many people who are not part of their company too. Enron was a poor role model because they were a prime example of a company using unethical methods to profit, although they eventually failed. Also, their business model wasn’t one other companies should adopt because of Enron’s unethical behavior. Enron’s failure is not only because its executives’ unethical decision making, but also the problem of its organizational structure.

Enron is a vertical structure dominated organization, they have specialized tasks for every employee and department, and their decision making is highly centralized. That leaves the potential opportunity for their executives to make wrongful decision without being found out. Building on an unethical decision, like Enron did, can escalate into a snowball effect. This is because of deferring the problems over and over until it is not sustainable anymore. To mitigate this, the best way to deal with complicated problems is to do it ethically; therefore, the problem would not continue to escalate.

References

1. Cunningham, G.M. & Harris, J.E. (2006). Enron and arthur andersen: the case of the crooked e and the fallen a. 3. http://gpae.bryant.edu/~gpae/Vol3/Enron%20and%20Aurhur%20Andersen.pdf 2. Nelson, K.K.,Price, R.A., & Routree, B.R. (2008). The market reaction to arthur andersen’s role in the enron scandal: loss of reputation or confounding effects? http://richardp.bus.usu.edu/research/npr_andersen.pdf 3. Collapse to convictions: a timeline. (2006, October 23). http://www.cbc.ca/news/background/enron/ 4. Enron scandal at-a-glance. (2002, August 22). http://news.bbc.co.uk/2/hi/business/1780075.stm 5. The Ninth International Conference “Investments and Economic Recovery”, May 22 – 23, 2009 http://www.management.ase.ro/reveconomia/2009-2s/10.pdf