ENRON ETHICAL ISSUE

Enron Ethical Issue

Table of Contents

Introduction3

Background3

Ethical Issues6

Board of Directors7

Auditors8

Analysts and Banks9

Conclusion11

References15

Introduction

While the investigators continue to pick over the remains of the giant that once was Enron, the story is still unfolding and parts of that story will probably remain untold. However, it is possible to piece together much of that story and to reflect upon the issues that Enron raises for a business, academic and general public audience. This paper, therefore, seeks to: Identify the ethical issues that arise from the case.

In a paper of this length we cannot do full justice to the Enron story. However, in seeking to understand the complex financial dealings we hope to show how senior executives at Enron managed to operate in the way that they did even though the 'emperor was proved to have no clothes'. We dwell on the financial dealings at length because they are the key to understanding the story. However, a whole host of ethical issues are raised and the article identfies, and discusses, the key ones.

Background

Enron was formed in 1986 from the merger of natural gas pipeline companies Houston Natural Gas and Internorth, and in the following 15 years diversified to provide products and services related to natural gas, electricity and communications. The operations at the time of the 2 December 2001 filing for Chapter 11 bankruptcy protection include the transportation of natural gas through pipelines; the generation, transmission and distribution of electricity; marketing of natural gas, electricity and other commodities and related risk management and financial services; development and operation of power plants and energy related assets; the delivery and management of energy commodities and capabilities to industrial and commercial sectors and the development of a network platform to provide bandwidth management services and the delivery of high bandwidth communication applications.

Enron failed when the market lost confidence in it following major profit and asset write-downs in the third quarter of 2001. This caused loans to become due as stock market collateral collapsed making new borrowings impossible. Enron suffered the usual fate of a failed business; it simply ran out of cash. However, the lost confidence was not the cause of the collapse but merely its latest symptom. Enron failed because in the words of one commentatcr' it was the proverbial 'Emperor's New

Clothes'. The assets and expected earnings which underpinned its meteoric rise to residence in the Fortune top ten were largely illusory, while the tangled web of related companies and financial deals hid a huge burden of debt. Its aggressive accounting practice and market power ensured that the secret was safe, at least in the short term.

In 1997 the company reported operating results of $5l5m and profits of $105m as a result of nonrecurring charges of $4l0m that 'allow us to clear the decks for future growth' [Enron press release 20 January 1998]. From this point to summer 2001 the published financial results were spectacular, with the company meeting or exceeding rising earnings targets in 20 successive ...