Anyone who turned on the T.V. or read the news in any format during the early 2000’s saw the story of Enron and their accounting failures. For those that aren’t familiar, a large company involved in energy grew rapidly and attracted lots of investors, both internal and external, who sought out to ride the “success” of the company. Unfortunately, the success of the company was built on unethical behavior. Shell companies were created to hide debt and once this was discovered stock prices plummeted. Regular citizens who had invested their hard-earned dollars into the company lost a significant amount their retirement.
Their accounting firm Arthur Andersen was found guilty of tampering as well, which was later overturned by the Supreme Court. The partner who was involved with Enron was fired because an investigation found that he ordered staff to destroy documents after the initial announcement of the investigation of his client. Arthur Andersen’s employees allegedly knew of scandals involving Enron’s purpose of the company’s it was using to hide debt. They were trying to hide the investments and how unproductive the investments actually were. (The New York Times). With so much bad publicity and their reputation dragged down with that of Enron, Arthur Andersen (who was the oldest accounting firm at the time) slowly met its death.
This widespread disaster not only shows the impact that bad financial management can have on an institution but also on the entire economy. Thousands of people’s lives were ruined by jail or left them in financial ruin. In the end, the company filed for bankruptcy on December 2, 2001, and sixteen people ended up serving jail time.
After it was beginning to surface that there were accounting informalities at Enron, the executives decided to have a law firm look into the issues. This in itself created issues because the firm had done work with Enron before. The issue of a conflict of interest arose but Enron still went through with using the firm. It is hard to say whether the form did a satisfactory job because “many of the detailed allegations of accounting problems in the letter went unaddressed in the law firm’s report.” (New York Times)
Jeffery Skilling refused to take any responsibility even though he and other upper management had oddly enough sold off their stock just in time. While they got rich, staff for companies owned by Enron, who reinvested their pay in the company for their retirement now were left with nothing. In the documentary The Smartest Guys in the Room, one PGE employee states that “ at the peak, I had about $348,000 and I sold it all for $1200” (Netflix The Smartest Guys in the Room at 1:40:14).
So how did the truth come to light? Sharron Watkins, an employee of Enron at the time, wrote a letter to Kenneth Lay anonymously and told him of problems with the accounting and suggested ways to get away with the issues. After she came forward to him in person, Lay seemed to show concern about the issues that were brought up but made no changes to operations. She expressed concern that the accounting issues if they became public, could ruin the lives of employees and not just those that had grown incredibly rich the past few years. (Forbes)
The mentioned accounting issues revolved around a style of accounting called mark-to-market accounting. This is used in the energy industry as was problematic because it dealt with showing current values of future profits due to things like forwards contracts. There is debate as to the regulations that surrounded mark-to-market accounting and just how much impact it had on the severity of the falsehood of their numbers. Skilling would make deals happen and be able to write them off as profitable.
“’Just as character matters in people, it matters in organizations,’ says Justin Schultz, a corporate psychologist in Denver.”
As students going forward into the real world and applying to firms, the results of your actions can have larger impacts than you may realize. Innocent people bank on the honesty of financial statements released by companies to support them in their retirement. Allowing yourself to compromise your values because of the request of a superior, even as far up as a partner, can ruin your life and the life of many of those who own shares in the company. While they may be above you in the workplace, you still have a duty to stay true to the investor, since they are the real owners. Abusing accounting strategies and lying to the public and your employees is no way to do business. Many fear contradicting management in fear of job security but the damage an accounting scandal can create can be much worse. Sharron Watkins letter was to her boss and not even to the public. If she had made these issues public, it may have helped by stopping the executives in their tracks and not giving them a heads up to hide discrepancies while selling off their stock onto unsuspecting investors. (Investopedia)
In this blog, we will look at similar instances where fraud in accounting and business has ruined the lives of those involved and those caught in the crossfire.
Those who do not learn from the past are doomed to repeat it,
Ethical Aspect of the Blog:
Ethical Reasoning — Ethical Reasoning is the process in which people examine the two sides of a decision: right and wrong. Through ethical reasoning, a person examines their own personal values and decides which choice is in their best interest.
In the case of Enron, CFO Jeffrey Skilling and CEO Kenneth Lay both used ethical reasoning. They could either report the company’s losses honestly and face the repercussions or they could lie to investors, make accounting errors and profit off of the errors made. They made the unethical choice and later suffered the consequence of jail because they valued making money rather than telling the truth.
Trevor's Ethics Blog 