The collapse of such a well-known and revered company as Enron can be without exaggeration said to open a new era in the history of US business. Raising a number of ethical and legal issues, the bankruptcy and accounting scandal of the energy giant gave many businessmen a clue that ethics could be no less important than profits if they aim at long-term existence. Regulators, too, had many issues for consideration so as to prevent such scandals.
One of the blatant instances of unethical business decision making was the creation of so-called special-purpose entities (SPEs). The creation of SPEs is a legitimate step when the company forms a separate entity for outsourcing some of its functions, such as janitorial services, accounting procedures, and so on. The entity then exists as a separate organization, and its finances do not show up on the company’s books.
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While the practice itself was legitimate, Enron executives violated the rules and procedures for setting up and runing such entities. In the first place, the companies set up as SPEs were not as independent as they should have been under the law. Thus, Raptors, one of the SPEs, was directly managed by Enron’s Chief Financial Officer. This interdependence permitted Enron to force these entities into transactions used to cover up its financial imbalances. In dealings with Raptors, for instance, it “sold an asset near the end of a reporting quarter; after the next quarter had started, Enron repurchased the asset from Raptors” (Stice, Stice, & Skousen, 2004, p.6). The main objective of such actions was manipulation of earnings because the asset in question had seriously lost in value, and Enron would otherwise have to note it on their books.
Enron’s problem was that it suffered losses as many companies do in their business. However, instead of honestly sharing the bad news with the public through financial statements, the company chose to manipulate earnings through SPEs so as to conceal the real state of affairs. Losses were recorded in SPEs, not in Enron’s statements, and as a result, after the correction of accounting statements to reflect the true picture, “over 80% of the profits reported since 2000 vanished and Enron quickly collapsed” (Jickling, 2003, p.2).
The main issue involved in such partnership structures to be considered from the legal and ethical standpoint is the transparency of corporate dealings. To what degree can shareholders and other involved entities control the internal affairs of a corporation? What role should the Board of Directors have? Clearly, over-emphasized control can create a situation when the company will not be able to maintain its autonomy and function successfully. On the other hand, lack of control and transparency in decision-making can create situations involving accounting scandals. For investment professionals, the question is also: To what degree can one trust the company’s executives to report honestly their profits and losses?
The ethical issue to consider for business executives is also their priorities. Is it acceptable to violate ethics to promote the success of your company? Or is success desirable only when it is achieved through legitimate means? This is an issue that a businessman has to solve for oneself, and Enron’s story may be a good starting point for consideration.
References
Jickling, M. (2003, January 4). The Enron Collapse: Overview of Financial Issues. Congressional Research Service Report for Congress. Retrieved July 29, 2006, from http://www.royce.house.gov/UploadedFiles/RS21135.pdf
Stice, E.K., Stice, J.D., & Skousen, K.F. (2004). Intermediate Accounting (15th ed.). Mason, OH: Thomson South-Western.
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