An Ethical Analysis of the Arthur Anderson Case by johnmanchoAnalyzing the Enron and Arthur Andersen
The Arthur Andersen and Enron scandal was based upon deception and lying to the public. Greed was a major reason that the collapse of Enron occurred. Many people were affected by the actions of the companies. One of the major moral impacts was that to investors, shareholders, and others who had financial interests in the company. The financial records being published did not accurately reflect the financial performance of the business cheating investors. Once the earnings were restated, the stock took a major hit and reduced its book value causing major losses for its shareholders. Once the information was released to the public there were massive sell offs and soon everyone started selling their shares. In two years the company disappeared laying off their 36,000 employees. Not only did the employees lose their jobs but they lost the money they had put towards Enron’s employee retirement fund and also their pension fund. Even the employee’s health insurance became non-existent and there was no severance pay. Other pension funds were faced with massive losses with the decline of Enron. Enron was seen as a stable company and many different funds thought that the company was doing financially well. Even analysts were deceived by the company’s performance and they mislead other people into giving Enron a buy rating. Not only did shareholders of Enron face losses but also many other people as a result of the market reaction to the news. People lost confidence in the markets by looking at Enron and how their real financial numbers were masked. Those who did business with Enron also faced losses including creditors and suppliers.
Enron’s management was another major primary stakeholder. A major player in the collapse was Andrew Fastow. The management profited greatly by overstating earnings while not worrying about the consequences of the future of the company. They wished to pursue their own needs without any regard for the holders of the millions of shares that were owned by the public. The management had a high level of legitimacy and power but still they did not pay attention to the accounting practises used. It was Andrew Fastow that proposed the off book entities to make Enron’s position look more favourable. Enron’s management also ignored signs of shady accounting practices. They received bonuses in stock options which they exercised and sold before the crash. These types of moves wronged the average investor.
The government was a major stakeholder that was affected from the actions of the companies. Enron and Arthur Andersen transferred money to tax havens in order to reduce the amount paid to the Internal Revenue Agency. This wronged the average citizen in the United States.
Arthur Andersen also had a large stake in Enron`s performance. Due to the fact that they were both consultants and auditors, this created a conflict of interest. It was in Arthur Andersen`s best interests that Enron do well. Even Mr. Neuhausen warned the company about the off book entities and how it was a bad idea.
Is it ethical for the management of Enron and Arthur Andersen to spin off the company’s debt into special-purpose entities in order to make the company look financially better? Through this method the public were not aware of the debts and costs that Enron had. The average investor thought that the profit stated by Enron was the real profit but that was not the case. Enron and Arthur Andersen exploited the average investors’ confidence in public companies. It was because of this that many people lost their pension money and their retirement funds. Many people were wronged from the scandal. This issue involves ethics because of the fact that information was hidden from the investors. The only people who benefited from the scandal were the top level management positions. All others suffered as a result of their ambition for personal gain.
Those in management positions at Enron all profited from stock options and shares. Just before the bad news was let out, they sold most of their shares and exercised their options. This caused many people who bought in to lose out. Insider trading is immoral because basically it is considered as theft.
The issue of conflict of interest plays a large role in this case. Due to the fact that Arthur Andersen had a strong relationship with Enron and that Arthur Andersen earned over $27 million from consulting fees, this went against the code of ethics. It was because of greed that Enron’s true financial position was revealed. Profit is a main characteristic of a capitalist society. Sometimes the goal of profits overpowers moral reasoning which is what happened in Enron’s case. The management of both organizations took the narrow view and focused on personal profit maximization. It could be seen that they seemed to have lost their responsibilities to shareholders . By taking a broader view and being socially responsible they could have created more sustainable profits for themselves. The company’s profits were being reported at such large increases that it was difficult to show such sustained growths in their books. It was the $1.01 billion charge to earnings that created panic. Mr. Duncan acknowledged during a board meeting that many of the accounting practises were high risk. Employees who worked at the company were laid off once the company fell. 36,000 employees were victimized due to Fastow’s actions.
There were many negative economic outcomes with the fall of Enron and Arthur Andersen. One of the major economic outcomes was the loss of confidence in the markets. Investors could no longer trust financial statements of companies and the markets dropped significantly after this event. Many employees lost their jobs and all those who did business with the company had some sort of financial loss.
Those who had pensions plans with investments in Enron were affected the most. Thousands of life savings disappeared. Enron was a public company in the S&P 500 index. Index funds that followed the market all had invested in Enron. Even when Enron’s share prices were dropping, many people thought that they should buy in. They in the end suffered greater losses. Mutual funds and trading partners also suffered from the collapse.
Global markets reacted negatively to the news of Enron collapsing. There were many other international firms that had investments in Enron. Investment banks such as JP Morgan Chase and Bank of America also faced massive losses. In total JP morgan gave loans of $800 million to Enron for the development of a gas pipeline.
Enron and Arthur Andersen violated the theory of Pareto Optimality. They did not include the full cost in the numbers that they presented to the public. There were some subsidiaries of Enron that faced losses but the company hid these numbers. This also goes against the requirement that all customers and suppliers must be informed about the company. The theory goes against what Mr. Duncan and Andrew Fastow did. They were concerned for personal benefits only.
The problem here could not be solved by the law since the accounting practises were legal when the scandal occurred. They stated all the debts and liabilities but just did not put them on the company’s main financial records. All the generally accepted accounting principles were abided by. There were other infringements of the law but the way the aggressive accounting practices were set up were allowed by the law.
Enron and Arthur Andersen infringed many different laws for which they were accountable for. The first issue was with the accounting practices. The company’s method of accounting was legal, but not ethically correct. They violated the transparency principle when they used the off-balance balance sheets. They also used future earnings for their current earnings report to inflate the share price.
The companies also disposed of important financial data so that it could not be recovered during the investigation by the SEC. This move violated many different laws and the shredding was considered obstruction of justice.
Another issue with Enron is that they used tax evasion as a way of making them look more profitable. They managed to hide $2 billion which would have been owed to the government. Legally they were obligated to pay those taxes.
In this case, the law was not detailed enough to include immoral actions such as that of what happened. There was inadequate information that Arthur Andersen had to abide by. Companies were allowed to show future earnings in current financial reports misleading investors.
Indefinite wordings were another issue in the case. The generally accepted accounting principles did not include anything about ethics, and was limited to just accounting principles. However even these principles were flawed. If positive law was used investors would not have been cheated.
The first principle that was violated was the principle of government requirements. This principle discusses how people are only focused on themselves. To prevent people from choosing their own desires, there are laws in place. Andrew Fastow and other management positions that were aware of the company’s practices and their morals had diminished.
Since the main players of this scandal decided that they would profit on other shareholders’ losses, they went against the principle of Utilitarianism. Many people lost their money when they bought shares sold by the high level employees in both corporations. They knowingly sold the shares in order to protect themselves from losses they would incur from keeping the shares. If every corporation did this, no one would trust the markets. Corporations are liable to their shareholders and should act in their best interests. Even the offshore tax shelters went against the principle. Money was hidden from the government by using price changing strategies. The citizens were deprived of their right to the tax revenue generated by the company and instead it was put into the pockets of the managers. This money could have gone into subsidizing health care costs or something that could have benefited the American population.
Investors were treated as a means for profits and not as investors. Enron and Arthur Andersen should have focused on the shareholders and allowed them to benefit from profit maximization. This was not the cause. The principle of Universal Duties by Kant states that people should be treated with dignity and respect. This only happens in a society that is law abiding. The idea of ``good will`` was not followed by those involved in the scandal. Their priority should have been the shareholders but they acted as if they were the only owners of the company.
Greed was an important factor in why the scandal happened. Everyone pursed their self-interests. It was because of this that in the end nobody gained. A society that allows one to go through any means to pursue their objectives can never be successful just like what happened in the case.
Top level employees at both these organizations had the obligation to follow a certain code of conduct. There was a code of ethics in place at Enron which was violated. Government regulations are designed so that companies such as Enron and Arthur Andersen could not do what they did (deceive investors). The actions by these two companies went against the principle of government requirements by Hobbes. The principle states that all men and women must surrender their freedoms in order for a healthy society. If this principle was followed there would be no room for pursuing self-interest over social interest.
All people live in a free society and that we can do what we please until it goes over the border of the law. Those who are in positions of power usually exploit those under them. Society can only function if rights are respected. In a capitalist system there is always inequality. Capitalism succeeds only if each person has a right to the property to own. What Enron and Arthur Andersen did violated the law and their ethical responsibilities including their code of ethics. The principle of contributive liberty by Nozick outlines how respected rights are essential to ethical conduct.
The solution to the Enron crisis would be to gather all those involved in the scandal to court and take back all the money taken from shareholders. This is essential in establishing justice and sending a message to the public that those who try and do unlawful business will be subject to the full force of the law. Once the money is gathered it should be put back into the company. Since many people own shares of the company, it would be in their best interest for the company to do well instead of receiving money from the liquidation of assets of Enron. A new management team should be put in and this would be decided by the United Sate’s government. All the company’s accounts should be investigated thoroughly including those that are offshore. Since this is a public issue, the government should get involved in ensuring the company does succeed and does not fall into the same trap. New laws need to be written clearly defining how companies need to be ethical in their day to day operations and in their accounting. The SEC needs to be more involved when working with companies to ensure that investors are not being cheated. There also need to be amendments to the generally accepted accounting principles. The reason the stock price fell was due to investors losing confidence. If the government becomes involved with the company’s operations speculators will buy into the stock. The strengths of this solution is that it shows that justice was done to those who wronged the public. It also increases confidence in the markets and that the government is there to ensure the safety of financial investments. It is better for shareholders to hold onto their stocks as there is a large chance the company can do better in the future as it was profitable. It would be of less universal benefit if the company filed for bankruptcy and liquidated all their assets. Through this method there is a potential for shareholders to lower their losses. The same should be done for Arthur Andersen as they were in the same boat as Enron.