ENRON: Were They the Smarted Guys in the Room?
On December 2nd, 2001, the energy trading company Enron filed for chapter 11 bankruptcy resulting in financial losses for countless shareholders, massive unemployment for loyal employees, worthless 401(k)s and retirement pensions for its workers (Schultz, 2001). Enron was in complete disarray, but they also left the financial institutions of America in utter disgrace leading to the creation of the Sarbanes-Oxley Act of 2002. By understanding the illegal or borderline illegal behaviors of key Enron employees, we will be able to better understand why Enron was perceived to be the smartest guys in the room, when in fact, they were con-artists. We must also consider what immoral or unethical behaviors contributed to the lapse of judgement at Enron. I will examine whether Enron employees are responsible for their actions and then draw my own conclusions of what activity was the most egregious that led to the demise of Enron.
Enron was founded by Kenneth Lay as an energy trading company that led the energy deregulation charge to become the one business to rule them all (allusion to Lord of the Rings). “The trouble began when electricity deregulators, prodded by Enron and many others, decided to impose this vision (energy deregulation) by fiat. The result was called mandatory ‘unbundling’” (Jenkins, 2001). In effect, these energy speculators wanted to game the highly regulated system using corrupt channels to further their deregulation agenda. Although this was not illegal, Enron’s move to mark-to-market accounting, approved by the SEC and FASB and being led by CEO Jeffrey Skilling, allowed the energy company to hide massive losses from unknowing investors (Weil, 2001). This practice will later balloon into fraudulent, criminal activity led by mastermind Andy Fastow who began hiding the company’s debts using a form of structured finance and cooking up profits including the Nigerian barge deal with Merrill Lynch. These transactions had no or misleading financial disclosures and can be considered defrauding investors and the public at large because they were at the time a public company (Elliot, 2019).
There was a cloud of judgement amongst the Enron employees contributing to the unethical and immoral behaviors observed. “Enron Broadband Services and Blockbuster entered a partnership to enter the burgeoning VOD market…Enron started logging expected earnings based on expected growth of the VOD market, which vastly inflated the numbers” (Segal, 2019). I cannot think of anything more unethical, more immoral, more evil than partnering with Blockbuster. These were the guys known for charging ridiculous late fees to customers and that was their business model. Arthur Anderson, the accounting firm, literally got sucked into Enron’s shredder when they were caught red handed destroying evidence, which is not only unethical but an obstruction of justice. Employees were known to manipulate the California electric grid, turning off power and selling it back at exorbitant rates all under the guise of arbitrage. Employees knew it was wrong, but the fear of losing their jobs and year-end bonuses was greater than the fear of legal repercussions—the cloud of judgement was blinding. Finally, when the company was forced to fold their employees were sent packing in massive layoffs without any notice and 401(k)s absolutely depleted, which is wrong, unethical, even immoral.
Today, many companies state they have a fiduciary responsibility to their shareholders. Enron’s fiduciary responsibility was anything but for their shareholders as they criminally defrauded all of them. Not even their own employees were spared. I believe this is the most important issue because it crosses the boundary of ethical behavior into illegal activity. It begs us to question, did a single Enron employee use any of the Eight Steps to Sound Ethical Decision Making in Business: fact gathering, defining the ethical issues, identifying the stakeholders, the consequences, their obligations, considering reputations, providing solutions, and checking their guts? (Trevino & Nelson, 2014) This was their Achilles heel and their fraudulent activities under mark-to-market accounting with backroom deals was their ambrosia and their poison.
References
Elliot, R. (2019, Feb 24). As Ex-Enron CEO Exits Prison, Some of Company's Old Businesses Thrive. Retrieved from The Wall Street Journal: https://www.wsj.com/articles/as-ex-enron-ceo-exits-prison-some-of-companys-old-businesses-thrive-11551018908?mod=searchresults&page=1&pos=1
Enron Images. (2019, 03 29). Retrieved from famous-trial.com: https://famous-trials.com/legacyftrials/enron/enronimages.html
Gibney, A. (Director). (2005). Enron the Smartest Guys in the Room [Motion Picture].
Jenkins, H. (2001, Dec 19). Enron = Deregulation? Retrieved from ProQuest Historical Newspapers: The Wall Street Journal: https://search-proquest-com.proxy.libraries.rutgers.edu/hnpwallstreetjournal/docview/2074400803/B2BF10BDD91F4349PQ/2?accountid=13626
Schultz, E. (2001, Dec 19). Enron Workers Face Losses On Pensions, Not Just 401(k)s. Retrieved from ProQuest Historical Newspapers: The Wall Street Journal: https://search-proquest-com.proxy.libraries.rutgers.edu/hnpwallstreetjournal/docview/2074400951/B2BF10BDD91F4349PQ/23?accountid=13626
Segal, T. (2019, Feb 9). Enron Scandal: The Fall of a Wall Street Darling. Retrieved from Investopedia.com: https://www.investopedia.com/updates/enron-scandal-summary/
Trevino, L., & Nelson, K. (2014). Managing Business Ethics, 6th Ed. Hoboken: John Wiley & Sons, Inc.
Weil, J. (2001, Dec 04). After Enron, 'Mark to Market' Accounting Gets Scrutiny. Retrieved from ProQuest Historical Newspapers: The Wall Street Journal: https://search-proquest-com.proxy.libraries.rutgers.edu/hnpwallstreetjournal/docview/2074385519/B2BF10BDD91F4349PQ/20?accountid=13626