OVERVIEW
The student will write two separate Case Assignments from the Ferrell textbook.
There must be a
clear thesis statement with an introduction that provides a clear overview of
the paper’s contents.
The issue(s) raised in the topic must be treated objectively. The conclusion
must offer a robust
summary of the issues treated in the paper and suggestions for further study.
The paper will be
written to cover the topic to sufficient depth for an upper-class research
paper and provide a
substantive evaluation of the ethical issue(s).
INSTRUCTIONS
You will research what the literature says about the issues in each case and
what the secular
worldview suggests would be the course or courses of action that decision
makers within the
organization should have taken to remedy the dilemma. You will also research
the Bible for
remedies that a Christian or follower of God should have taken. Make
recommendations from
both worldly and biblical views that decision makers should have implemented to
avoid the
ethical situation. Support your recommendations using content from the selected
scholarly
resources.
Your assignment must include evidence of the following:
· Identify Ethical Issue(s)
and Stakeholders, Evaluation of Ethical Implications,
Develop Plan of Action, Integrate Biblical Worldview in Value Judgments,
Research
Support in Application of Ethical Solution(s), and Writing Style (APA
formatting),
grammatical errors and sentence structure.
· Each assignment should be
between 5-6 pages not including the title and references
pages
· Each assignment must be written in
current APA format
· Each assignment must
include 5 peer reviewed, scholarly sources. All sources must
be of a scholarly nature, either textbooks or journal articles from
peer-reviewed
journals and the Bible. All citations should be in the References section and
included
in-text.
As this is a paper that requires research, it must be written in third
person
Case: Enron Assignment can also be
found in the Ferrell textbook, “Enron: Questionable
Accounting Leads to Collapse.” The paper must use the
following (3) Level 1 headings that
correspond to the case points:
BUSI 472
· Enron’s Ethical Culture,
Stakeholders, and How it Contributed to its Bankruptcy?
· Evaluation and
Implications of Enron’s Unethical Behaviors
· Recommended Plan of Action
· Integration of Biblical
Worldview and Value Judgments
Note: Your assignment will be checked
for originality via the Turnitin plagiarism tool. The tool
is a starting point for instructors to
check overall Academic Integrity and higher scores generally indicate a higher probability of
Academic Misconduct. The higher a score the higher the
probability that there are too high a
percentage of quotations included in the narrative, and/or there are passages that have not been
properly cited.
9-4aThe Whistle-Blower
Assigned to work directly with Andrew
Fastow in June 2001, Enron vice president Sherron Watkins, an eight-year Enron
veteran, was given the task of finding some assets to sell off. With the
high-tech bubble bursting and Enron’s stock price slipping, Watkins was
troubled to find unclear, off-the-books arrangements backed only by Enron’s
deflating stock. No one seemed to be able to explain to her what was going on.
Knowing she faced difficult consequences if she confronted then-CEO Jeffrey
Skilling, she began looking for another job, planning to confront Skilling just
as she left for a new position. Skilling, however, suddenly quit on August 14,
saying he wanted to spend more time with his family. Chair Ken Lay stepped back
in as CEO and began inviting employees to express their concerns and put them
into a box for later collection. Watkins prepared an anonymous memo and placed
it into the box. When Lay held a companywide meeting shortly thereafter and did
not mention her memo, however, she arranged a personal meeting with him.
On August 22, 2001, Watkins handed Lay
a seven-page letter she had prepared outlining her concerns. She told him that
Enron would “implode in a wave of accounting scandals” if nothing was done. Lay
arranged to have Enron’s law firm, Vinson & Elkins, and accounting firm
Arthur Andersen look into the questionable deals, although Watkins advised
against having a third party investigate that might be compromised by its own
involvement in Enron’s conduct. Lay maintained that both the law firm and
accounting firm did not find merit in Watkins’s accusations. Near the end of
September, Lay sold some $1.5 million of personal stock options, while telling
Enron employees that the company had never been stronger. By the middle of
October, Enron was reporting a third-quarter loss
of $618 million and a $1.2 billion write-off tied to the partnerships about
which Watkins had warned Lay.
For her trouble, Watkins had her
computer hard drive confiscated and was moved from her plush executive office
suite on the top floor of the Houston headquarters tower to a sparse office on
a lower level. Her new metal desk was no longer filled with the high-level
projects that had once taken her all over the world on Enron business. Instead,
now a vice president in name only, she faced meaningless “make work” projects.
It is important to note that Watkins stayed in the company after warning Lay
about the risks and did not become a public whistle-blower during this time. In
February 2002, she testified before Congress about Enron’s partnerships and
resigned from Enron in November of that year.
9-4bThe Chief Financial Officer
In 2002, the U.S. Justice Department
indicted CFO Andrew Fastow—who had won the “CFO of the Year” award two years
earlier from CFO Magazine—on 98 counts for his alleged efforts to
inflate Enron’s profits. The charges included fraud, money laundering,
conspiracy, and one count of obstruction of justice. Fastow faced up to 140
years in jail and millions of dollars in fines if convicted on all counts.
Federal officials attempted to recover all of the money Fastow had earned
illegally, and seized some $37 million.
Federal prosecutors argued that
Enron’s case was not about exotic accounting practices but about fraud and
theft. They contended that Fastow was the brain behind the partnerships used to
conceal some $1 billion in Enron debt and that this debt led directly to
Enron’s bankruptcy. The federal complaints alleged that Fastow had defrauded
Enron and its shareholders through off-balance-sheet partnerships that made
Enron appear to be more profitable than it actually was. They also alleged that
Fastow made about $30 million both by using these partnerships to get kickbacks
that were disguised as gifts from family members, and by taking income himself
that should have gone to other entities.
Fastow initially denied any wrongdoing
and maintained that he was hired to arrange the off-balance-sheet financing and
that Enron’s board of directors, chair, and CEO had directed and praised his
work. He also claimed that both lawyers and accountants had reviewed his work
and approved what was being done, and that “at no time did he do anything he
believed was a crime.” Skilling, COO from 1997 to 2000 before becoming CEO, had
reportedly championed Fastow’s rise at Enron and supported his efforts to keep
up Enron’s stock prices.
Fastow eventually pleaded guilty to
two counts of conspiracy, admitting to orchestrating myriad schemes to hide
Enron debt and inflate profits while enriching himself with millions. He
surrendered nearly $30 million in cash and property, and agreed to serve up to
10 years in prison once prosecutors no longer needed his cooperation. He was a
key government witness against Lay and Skilling. His wife Lea Fastow, former
assistant treasurer, quit Enron in 1997 and pleaded guilty to a felony tax
crime, admitting to helping hide ill-gotten gains from her husband’s schemes
from the government. She later withdrew her plea, and then pleaded guilty to a
newly filed misdemeanor tax crime. In 2005, she was released from a year-long
prison sentence, and then had a year of supervised release.
In the end, Fastow received a lighter
sentence than he otherwise might have because of his willingness to cooperate
with investigators. In 2006, Fastow gave an eight-and-a-half-day deposition in
his role as government witness. He helped to illuminate how Enron had managed
to get away with what it did, including detailing how many major banks were
complicit in helping Enron manipulate its financials to help it look better to
investors. In exchange for his deposition, Fastow’s sentence was lowered to six
years from ten. Fastow has also stated that
Enron did not have to go out of business if there had been better financial
decisions made at the end.
The case against Fastow had been
largely based on information provided by Michael Kopper, the company’s managing
director and a key player in the establishment and operation of several of the
off-balance-sheet partnerships and the first Enron executive to plead guilty to
a crime. Kopper, a chief aide to Fastow, pleaded guilty to money laundering and
wire fraud. He faced up to 15 years in prison and agreed to surrender $12
million earned from illegal dealings with the partnerships. However, Kopper
only had to serve three years and one month of jail time because of the crucial
role he played in providing prosecutors with information. After his
high-powered days at Enron, Kopper’s next job was as a salaried grant writer
for Legacy, a Houston-based clinic that provides services to HIV-positive and
other chronically ill patients.
Today Andy Fastow has been released
from prison and works as a document-review clerk at a law firm. He also speaks
about business ethics at many different forums, including Leeds Business School
at the University of Colorado, the University of New Mexico, the University of
Texas at Austin, and the Association of Certified Fraud Examiners global
conference. During his speaking engagements, Fastow has emphasized that a major
problem companies encounter in business ethics is not using principles and
overly relying on rules. He claims that laws and regulations technically
allowed the risky transactions he made at Enron. He also cited General Motors,
IBM, and the nation of Greece as more recent examples of companies (or nations)
that faced hardship and/or bankruptcy because they took actions that were
highly risky but technically allowable by law.
The main idea that Fastow tries to
communicate in his lectures is that it is not enough to simply obey rules and
regulations. It is also easy to rationalize questionable behaviors. Fastow
claims that ethical decisions are rarely black-and-white, and sometimes
unethical decisions seem more or less unethical depending upon the situation.
For instance, he used Apple’s tax evasion as an example of an action that
seemed less unethical because it was less pronounced than what often occurs in
other cases. There are always murky areas where regulations can be exploited.
Instead, businesspeople must be able to recognize when issues are going too far
and stop them before they snowball into an Enron-esque crisis. Fastow
recommends that the best way to deal with questionable situations is to
construct and examine a worst-case scenario analysis and look at the risks of
questionable deals with more scrutiny.
9-4cThe Chief Executive Officer
Former CEO Jeffrey Skilling, generally
perceived as Enron’s mastermind, was the most difficult to prosecute. At the
time of the trial, he was so confident that he waived his right to avoid
self-incrimination and testified before Congress, saying, “I was not aware of
any inappropriate financial arrangements.” However, Jeffrey McMahon, who took
over as Enron’s president and COO in February 2002, told a congressional
subcommittee that he had informed Skilling about the company’s
off-balance-sheet partnerships in 2000, when he was Enron’s treasurer. McMahon
said that Skilling had told him that “he would remedy the situation.”
Calling the Enron collapse a “run on
the bank” and a “liquidity crisis,” Skilling said that he did not understand
how Enron had gone bankrupt so quickly. He also said that the off-balance-sheet
partnerships were Fastow’s creation. However, the judge dealt a blow to Lay and
Skilling when he instructed the jury that it could find the defendants guilty
of consciously avoiding knowing about wrongdoing at the company.
Many former Enron employees refused to
testify because they were not guaranteed that their testimony would not be used
against them in future trials, and therefore questions
about the company’s accounting fraud remain. Skilling was found guilty of
honest services fraud and sentenced to 24 years in prison, which he has been
serving in Colorado. He maintains his innocence and has appealed his
conviction. After his release from prison, Andy Fastow was quoted as saying
that the bankruptcy of Enron was not Skilling’s fault. In 2008, a panel of
judges from the Fifth Circuit Court of Appeals in New Orleans rejected his
request to overturn the convictions of fraud, conspiracy, misrepresentation,
and insider trading. However, the judges did grant Skilling one concession. The
three-judge panel determined that the original judge had applied flawed
sentencing guidelines in determining Skilling’s sentence. The Court ordered
that Skilling be resentenced. The matter was taken to the Supreme Court.
In June 2010, the U.S. Supreme Court
ruled that the honest services law could not be used to convict Skilling
because the honest services law applies to bribes and kickbacks, not to conduct
that is ambiguous or vague. The Supreme Court’s decision did not suggest that
there had been no misconduct, only that Skilling’s conduct was not in violation
of a criminal fraud law. The court’s decision did not overturn the conviction
and sent the case back to a lower court for evaluation.
9-4dThe Chair
Ken Lay became chair and CEO of the
company that was to become Enron in 1986. A decade later, Lay promoted Jeffrey
Skilling to president and chief operating officer, and then, as expected, Lay
stepped down as CEO in 2001 to make way for Skilling. Lay remained as chair of
the board. When Skilling resigned later that year, Lay resumed the role of CEO.
Lay, who held a doctorate in economics
from the University of Houston, contended that he knew little of what was going
on, even though he had participated in the board meetings that allowed the
off-balance-sheet partnerships to be created. Lay said he believed the
transactions were legal because attorneys and accountants had approved them.
Only months before the bankruptcy in 2001, he reassured employees and investors
that all was well at Enron, based on strong wholesale sales and physical volume
delivered through the marketing channel. He had already been informed that
there were problems with some of the investments that could eventually cost
Enron hundreds of millions of dollars. In 2002, on the advice of his attorney,
Lay invoked his Fifth Amendment right not to answer questions that could be
incriminating.
Lay was expected to be charged with
insider trading, and prosecutors investigated why he had begun selling about
$80 million of his own stock beginning in late 2000, even as he encouraged
employees to buy more shares of the company. It appears that Lay drew down his
$4 million Enron credit line repeatedly and then repaid the company with Enron
shares. These transactions, unlike usual stock sales, do not have to be
reported to investors. Lay says that he sold the stock because of margin calls
on loans he had secured with Enron stock and that he had no other source of
liquidity. According to Lay, he was largely unaware of the ethical situation
within the firm. He had relied on lawyers, accountants, and senior executives
to inform him of issues such as misconduct. He felt that he had been protected
from certain knowledge that would have been beneficial and would have enabled
him to engage in early correction of the misconduct. Lay claims that all
decisions he made related to financial transactions were approved by the
company’s lawyers and the Enron board of directors. Lynn Brewer, a former Enron
executive, states that Lay was not informed about alleged misconduct in her
division. Additionally, Mike Ramsey, the lead attorney for Lay’s defense,
claimed that he was not aware of most of the items in the indictment. In the
end Lay was convicted on 19 counts of fraud,
conspiracy, and insider trading. However, the verdict was thrown out after he
died of heart failure at his home in Colorado in 2006. The ruling protected
some $43.5 million of Lay’s estate that the prosecution had claimed Lay stole
from Enron.
9-4eThe Lawyers
Enron was Houston law firm Vinson
& Elkins’s top client, accounting for about 7 percent of its $450 million
in revenue. Enron’s general counsel and a number of members of Enron’s legal
department came from Vinson & Elkins. Vinson & Elkins seems to have
dismissed Sherron Watkins’s allegations of accounting fraud after making some
inquiries, but this does not appear to leave the firm open to civil or criminal
liability. Of greater concern are allegations that Vinson & Elkins helped
structure some of Enron’s special-purpose partnerships. In her letter to Lay,
Watkins had indicated that the firm had written opinion letters supporting the
legality of the deals. In fact, Enron could not have done many of the
transactions without such opinion letters. The firm did not admit liability,
but agreed to pay $30 million to Enron to settle claims that Vinson &
Elkins had contributed to the firm’s collapse.
9-5Arthur Andersen LLP
In its role as Enron’s auditor, Arthur
Andersen was responsible for ensuring the accuracy of Enron’s financial
statements and internal bookkeeping. Investors used Andersen’s reports to judge
Enron’s financial soundness and future potential, and expected that Andersen’s certifications of accuracy and application of
proper accounting procedures would be independent and free of any conflict of
interest.
However, Andersen’s independence was
called into question. The accounting firm was one of Enron’s major business
partners, with more than 100 employees dedicated to its account, and it sold
about $50 million a year in consulting services to Enron. Some Andersen
executives even accepted jobs with the energy trader. In March 2002, Andersen
was found guilty of obstruction of justice for destroying relevant auditing
documents during an SEC investigation of Enron. As a result, Andersen was
barred from performing audits. The damage to the firm was such that the company
no longer operates, although it has not been dissolved formally.
It is still not clear why Andersen
auditors failed to ask Enron to better explain its complex partnerships before
certifying Enron’s financial statements. Some observers believe that the large
consulting fees Enron paid Andersen unduly influenced the company’s decisions.
An Andersen spokesperson said that the firm looked hard at all available
information from Enron at the time. However, shortly after speaking to Lay Vice
President Sherron Watkins took her concerns to an Andersen audit partner who
reportedly conveyed her questions to senior Andersen management responsible for
the Enron account. It is not clear what action, if any, Andersen took.
9-6The Fallout
Although Enron executives obviously
engaged in misconduct, some people have questioned the tactics that federal
investigators used against Enron. Many former Enron employees feel that it was
almost impossible to obtain a fair trial for Lay and Skilling. The defense was
informed that 130 of Enron’s top managers, who could have served as witnesses
for the defense, were considered unindicted co-conspirators with Lay and
Skilling. Therefore, the defense could not obtain witnesses from Enron’s top
management teams under fear that the prosecution would indict the witnesses.
Enron’s demise caused tens of billions
of dollars of investor losses, triggered a collapse of electricity-trading
markets, and ushered in an era of accounting scandals that precipitated a
global loss of confidence in corporate integrity. Today companies must defend
legitimate but complicated financing arrangements. Legislation like
Sarbanes–Oxley, passed in the wake of Enron, has placed more restrictions on
companies. Four thousand former Enron employees struggled to find jobs, and
many retirees lost their entire retirement portfolios. One senior Enron
executive committed suicide.
In 2003, Enron announced its intention
to restructure and pay off its creditors. It was estimated that most creditors
would receive between 14.4 and 18.3 cents for each dollar they were owed—more
than most had expected. Under the plan, creditors would receive about
two-thirds of the amount in cash and the rest in equity in three new companies,
none of which would carry the tainted Enron name. The three companies were
CrossCountry Energy Corporation, Prisma Energy International, Inc., and
Portland General Electric.
CrossCountry Energy Corporation would
retain Enron’s interests in three North American natural gas pipelines. In
2004, Enron announced an agreement to sell CrossCountry Energy to CCE Holdings
LLC for $2.45 billion. The money was to be used for debt repayment, and
represented a substantial increase over a previous offer. Similarly, Prisma
Energy International, Inc., which took over Enron’s 19 international power and
pipeline holdings, was sold to Ashmore Energy International Ltd. The proceeds
from the sale were given out to creditors through cash distributions. The third
company, Portland General Electric (PGE),
Oregon’s largest utility, emerged from bankruptcy as an independent company
through a private stock offering to Enron creditors.
All remaining assets not related to
CrossCountry, Prisma, or Portland General were liquidated. Although Enron
emerged from Chapter 11 bankruptcy protection in 2004, the company was wound
down once the recovery plan had been carried out. That year, all of Enron’s
outstanding common stock and preferred stock were cancelled. Each record holder
of Enron Corporation stock on the day it was cancelled was allocated an
uncertified, nontransferable interest in one of two trusts that held new shares
of the Enron Corporation.
The Enron Creditors Recovery
Corporation was formed to help Enron creditors. It stated that its mission was
“to reorganize and liquidate the remaining operations and assets of Enron
following one of the largest and most complex bankruptcies in U.S. history.” In
the very unlikely event that the value of Enron’s assets would exceed the
amount of its allowed claims, distributions were to be made to the holders of
these trust interests in the same order of priority of the stock they
previously held.
In addition to trying to repay its
shareholders, Enron also had to pay California for fraudulent activities it
committed against the state’s citizens. The company was investigated in
California for allegedly colluding with at least two other power sellers in
2000 to obtain excess profits by submitting false information to the manager of
California’s electricity grid. In 2005, Enron agreed to pay California $47
million for taking advantage of California consumers during an energy shortage.
9-7Learning from Enron
Enron was the biggest business scandal
of its time, and legislation like the Sarbanes–Oxley Act was passed to prevent
future business fraud. But did the business world truly learn its lesson from
Enron’s collapse? Greed and corporate misconduct continued to be a problem
throughout the first decade of the twenty-first century, culminating in the
2008–2009 global recession. Corporations praised high performance at any cost,
even when employees cut ethical corners. In the mortgage market, companies like
Countrywide rewarded their sales force for making risky subprime loans, even
going so far as to turn their back on loans that they knew contained falsified
information in order to make a quick profit. Other companies traded in risky
financial instruments like credit default swaps (CDSs) when they knew that
buyers did not have a clear understanding of the risks of such instruments.
Although they promised to insure against default of these instruments, the
companies did not have enough funds to cover the losses after the housing
bubble burst. The resulting recession affected the entire world, bankrupting
such established companies as Lehman Brothers and requiring government
intervention in the amount of nearly $1 trillion in Troubled Asset Referendum
Program (TARP) funds to salvage numerous financial firms. The economic meltdown
inspired a new wave of legislation designed to prevent corporate misconduct,
including the Dodd–Frank Wall Street Reform and Consumer Protection Act.
It is unfortunate that the Enron
scandal did not hinder corporate misconduct. However, Enron still has lessons
to teach us. Along with the business scandals of the financial crisis, Enron
demonstrates that, first, regulatory agencies must be improved so as to better
detect corporate misconduct. Second, companies and regulatory authorities
should pay attention to the warnings of concerned employees and
“whistle-blowers.” Third, executives should understand the risks and rewards of
the financial instruments their companies use and maintain a thorough knowledge
of the inner workings of their companies (something that
Ken Lay claimed he did not have). These conditions are crucial to preventing
similar business frauds in the future.
Conclusion
The example of Enron shows how an
aggressive corporate culture that rewards high performance and gets rid of the
“weak links” can backfire. Enron’s culture encouraged intense competition, not
only among employees from rival firms but also among Enron employees
themselves. Such behavior creates a culture where loyalty and ethics are cast
aside in favor of high performance. The arrogant tactics of Jeffrey Skilling
and the apparent ignorance of Ken Lay further contributed to an unhealthy
corporate culture that encouraged cutting corners and falsifying information to
inflate earnings.
The allegations surrounding Merrill
Lynch’s and Arthur Andersen’s involvement in the debacle demonstrate that
rarely does any scandal of such magnitude involve only one company. Whether a
company or regulatory body participates directly in a scandal or whether it
refuses to act by looking the other way, the result can be further perpetuation
of fraud. This fact was emphasized during the 2008–2009 financial crisis, in
which the misconduct of several major companies and the failure of monitoring
efforts by regulatory bodies contributed to the worst financial crisis since
the Great Depression. With the country recovering from widespread corporate
corruption, the story of Enron is once again at the forefront of people’s
minds. Andy Fastow has stated that businesspeople are falling into the same
trap as he fell into at Enron and believes fraud is “ten times worse” today
than it was during Enron’s time.
The Enron scandal has become
legendary. In 2005, four years after the scandal, a movie was made about the
collapse of Enron called Enron: The Smartest Guys in the Room. To
this day, Jeffrey Skilling continues to maintain his innocence and appeal his
case. In April of 2012, the Supreme Court denied his appeal, claiming that any
errors made in the trial were negligible. However, the following year a federal
judge reduced Skilling’s sentence to 14 years. Enron’s auditor, Arthur
Andersen, faced over 40 shareholder lawsuits claiming damages of more than $32
billion. In 2009, the defunct company agreed to pay $16 million to Enron
creditors. Enron itself faced many civil actions, and a number of Enron
executives faced federal investigations, criminal actions, and civil lawsuits.
As for the giant tilted “E” logo so proudly displayed outside of corporate
headquarters, it was auctioned off for $44,000.