HC2121 The Influence of Ethical Climates Theory Assignment Sample

Comparative Business Ethics and Social Responsibility

Executive Summary of The Influence of Ethical Climates Theory

Corporate social responsibility has been part of responsible and ethical corporate practices for a long. The Enron Company was established in the year 1985 based in Houston, Texas, and was one of the leading natural gas, communications, and electricity, pulp, and paper organizations before its fall. It was nearly commonly considered as America's most ground-breaking organization throughout the late 1990s. It was named as America's most innovative company by Fortune for the future six years in 2000 after it closed its income as $ 101 billion. The main aim of this report was to discuss the failure and bankruptcy of Enron Company in the year 2001. Moreover, it discussed how Enron’s corporate culture leads to its bankruptcy. It also entailed how the bankers, attorneys, and auditors at Enron contributed to its demise. Besides, it demonstrated the role of CFO (chief financial officer) in creating the issues that led to the financial problems of Enron. 

Contents

Executive Summary.

Introduction.

Enron’s Corporate Culture and Bankruptcy.

Enron’s Demise.

Enron’s CFO (Chief financial officer) and Financial Problems.

Conclusion.

References.

Introduction to The Influence of Ethical Climates Theory

The social responsibility of business indicates its duty to incorporate those choices and act on those activities that are needed regarding the goals and standards of society. It is noteworthy that business ethics is linked with the fields of moral guidelines and decision-making, codes of conduct, and supremacy for a business. Corporate social responsibility has been part of responsible and ethical corporate practices for long (Goel and Ramanathan 2014). The Enron Company was established in the year 1985 based in Houston, Texas, and was one of the leading natural gas, communications, and electricity, pulp, and paper organizations before its fall. It was nearly commonly considered as America's most ground-breaking organization throughout the late 1990s. It was named as America's most innovative company by Fortune for the future six years in 2000 after it closed its income as $ 101 billion. It split into numerous non-energy-linked areas entailing risk management, bandwidth, and weather derivatives. However, the main business of Enron was the transmission and distribution of power. Unfortunately, this company distorted in 2001 most strangely in consequences resulted in dishonor to become the largest insolvency and stock failure (Dibra 2016). This report is going to discuss the failure and bankruptcy of Enron Company in the year 2001. Moreover, it discusses how Enron’s corporate culture leads to its bankruptcy. It also entails how the bankers, attorneys, and auditors at Enron contributed to its demise. Besides, it demonstrates the role of CFO (chief financial officer) in creating the issues that led to the financial problems of Enron. 

Enron’s Corporate Culture and Bankruptcy

It is true to say that there must be a strong corporate culture within an organization. An optimistic culture in the company today is unluckily the exclusion rather than the custom, but a robust corporate culture can separate a business from its rivals in the notices of its stakeholders. Moreover, businesses with a robust culture incline to generate quality outcomes when compared with weaker culture companies. To develop and preserve a moral corporate culture requires consistent communication regarding the moral values of the company and certifying that the behaviors of all members of company are associated with those norms. It needs going afar just the inscribed regulations to getting for the greatest ambitious behavior. This means living the philosophies supporting the norms, even when there is no regulation or where the printed rule is uncertain. It guides each member of the company in an accurate direction (Guiso, Sapienza, and Zingales 2015).

However, in the case of Enron Company, its corporate culture played an essential role in its failure or downfall (Li 2010). It is evident from the case study that the corporate culture of Enron was egotistical and violent. Its corporate culture supposedly encouraged disobeying the rules in pursuit of revenue as they believed that its workers could manage augmented risk without any danger. Its people were put in the examination to make profits and act well, and many people were keen to disobey ethical norms to keep their jobs by cutting corners and misrepresenting dealings to enhance the company’s earnings. Furthermore, there has been a culture at the company wherein employees who did not reach a certain mark of performance or those ranked in the bottom 20 % were laid off while the ones who overachieved the targets were only rewarded. The managers of the company believed in great uncertain dealings and that any condition could be revolved into a profit, and so the workers of the company also believed this attitude (Eckhaus and Sheaffer 2018).

The leading managers at the pledge of dealings at Enron generated a toxic corporate culture by utilizing dishonesty, greediness, and fraud. Moreover, the leadership in this company was concerned more about the improvement of themselves rather than the desires of its admirers. Such an absence of esteem for ethics demonstrated that the leadership had no common vision with its people that go beyond generating income. It can be said that such a toxic corporate culture at the company was the main reason for its bankruptcy or fall. This company had an environment wherein there is no faith and openness between workers and managers and hence it led to work occupied with privacy and misgiving that rejected internal competitiveness and pessimism (Seago 2016).

The company was having overconfidence on being the world's leading company and the management of the company believed that its rivalries had no chance against it. Besides, its executive compensation plans appeared less concerned with making incomes for investors than with inspiring officer prosperity. The chairman, Ken Lay, of the Enron was of the view that a highly ethical and moral corporate culture is considered to be the most important for the company's success and that can assist people to reach their full potential. He tried to ensure that individuals privileged the values of honesty, esteem, and brilliance. However, ethical behavior and practices were put in Enron’s business. Thus, in this manner, the culture at energy giant Enron Company was cultivated with moral difficulties and a twisted moral extent (Isac and Remes 2017)

Enron’s Demise

Ethical accounting can be considered as the entire moral tactic to business , and these practices certify that a business is honest towards all its stakeholders starting from workers to customers. Ethical codes are the foremost guidelines that accountants select to adhere to improve their profession, preserve people's faith, and showcase fairness and honesty. There is no doubt that an accountant’s most worthy resource is an authentic reputation. The auditors, bankers, and attorneys who take the high road of ethical practices get admiration and integrity; they are reached out for their guidance and services (Inyang, Oboh and Nwabuikem 2019). Auditors and accountants have access to sensitive information that must be remained honored and thus the role of ethical decision making is vital for this personnel and the welfare of the companies they work for (Liang, Marinovic and Varas 2018). However, Enron Company was a failure due to improper accounting systems as it utilized corrupt accounting principles to generate income. 

Yes, the bankers, lawyers, and auditors at Enron played an essential role in its demise. All these SPEs (special purpose entities) constituted deceitful financial reporting as they did not truthfully demonstrate the company’s accurate financial condition. It is true saying that Arthur Andersen was playing the role of the auditor in the company and was accountable for certifying the accurateness of the company's financial statements and internal accounting. He was the main contributor to the company's bankruptcy as he manipulated the financial statements along with compelling the reviewing team to disregard the moral business practices and hence inspiring himself and his top managers. The auditors have the responsibility to obey to greater norms of behavior in a bid of their work and in their associations personally as well as with the workforce of audited establishments. It is noteworthy that auditors in every company are expected to adhere to ethical principles and demonstrate the company's financial position in a moral manner (Everett and Tremblay 2014). In the case of Enron, Arthur Anderson was also expected to give independent and precise documents of the company’s financial performance. Besides, the reports reviewed by the auditor at Enron were utilized by the company's shareholders to judge its financial soundness and forthcoming scope before they decided whether to invest (Al-Baidhani 2016).

It is true that attorneys take moral choices each day while determining how to protect or signify a customer, and they functioning for larger companies also should perform morally in their corporate practices. Furthermore, the lawyers or attorneys of Enron Company belonged to Vinson and Elkins who assisted the company close certain major deals. They offered their legal assistance to the deals by giving transaction opinion letters to help those deals. Aftermath, the investigations made it clear that the deals had also contributed to the initial demise of Enron. The firm did not confess obligation but decided to pay $30 million to Enron to resolve assertions that Vinson and Elkins had donated to the company’s downfall. The attorneys approved the dealings as legal without question and also assisted structure SPP (special purpose partnerships) in a manner that looked honest (Dinovitzer, Gunz and Gunz 2014)

The primary banker of the Enron Company was Merrill Lynch who enabled the wrong actions of the company. It assisted the company to sell its Nigerian Barges that enabled the company to inappropriately record about $ 12 million in incomes and hence fulfill its goals for earning at 1999 end. It was a kind of fraud wherein the banker Merrill Lynch had aided Enron. That banker allegedly bought the barges for about $ 28 million out of which Enron financed $ 21 million. In this manner, the brokerage and investment banking company continued to utilize risky investment practices that lead to substantial financial losses for the company as the economy entered a recession in 2008 (Hosseini 2016).

Enron’s CFO (Chief Financial Officer) and Financial Problems

Chief financial officers in a company are normally subject to moral dilemmas and they should manage consistent pressure from the exterior and interior individuals in their professional career. It is true that as the decisions made by him can have a profound influence on a company, it is vital to have accurate competencies and learning to navigate moral issues in accounting practices. Further, a wrong choice company's CFO may result in loss of faith and a ruined reputation among workers, the board of directors, and other stakeholders (Ahmad et al., 2014).

In the Enron Company, Andrew Fastow was the chief financial officer (CFO) at the time of demise and dishonor. He was the person who charged with money laundering, impediment of justice, and collusion accused on 98 accounts for his determinations to assist expand the company's profits. The main fraud was that he had concealed the accurate condition of the company financially by hiding its debts and following unprincipled accounting practices. It can be said that poor ethics in accounting mainly lead to numerous adverse outcomes both related to business and individuals. The punishments, in that case, may entail massive financial costs, legal penalties, and long-term prison, fraud, and faced nearly 140 years in jail for his suspected role in the demise. He was time-based upon the extent of crime (Cuninghame 2017).

Besides, the CFO made use of SPE's to conceal $1 billion of the company's debts and used unjust techniques for earning nearly $ 30 million. Furthermore, it can be said that he was the mastermind behind the conglomerates utilized to hide that much debt, and that debt led openly to the company's bankruptcy. Moreover, the CFO of the company was also said to have defrauded Enron and its investors via off-balance-sheet associations, making the company seems more lucrative than its actual position (Agrawal and Cooper 2017). As per the Accounting today (2013), Fastow was accused of not obeying with particular securities rules when Enron did some of its financings.

Conclusion on The Influence of Ethical Climates Theory

From the above report on the bankruptcy of Enron Company in the year 2001, it can be concluded that the corporate culture of Enron was self-centered and fierce. Further, its corporate culture fortified disobeying the rules for making revenue as they believed that its workers could manage enlarged risk without any vulnerability. Additionally, the leadership in this company was anxious more about the upgrading of themselves rather than the needs of its followers. Such nonexistence of regard for ethics confirmed that the leadership had no common vision with its people that go beyond generating income. Furthermore, it can be inferred that the lawyers or attorneys of Enron Company contributed to the initial demise of Enron. The punishments for the CFO of Enron Company entailed massive financial costs, legal penalties, and long-term prison, fraud, and faced nearly 140 years in jail for his suspected role in the demise. He was time-based upon the extent of crime. Therefore, Enron Company was a failure due to improper accounting systems as it utilized corrupt accounting principles to generate income. 

References for The Influence of Ethical Climates Theory

Accounting Today 2013. Former Enron CFO Andrew Fastow confronts the fraud examiners. [Online]. Available at https://www.accountingtoday.com/news/former-enron-cfo-andrew-fastow-confronts-the-fraud-examiners [Accessed on: 21 September 2020]

Agrawal, A., and Cooper, T.2017. Corporate governance consequences of accounting scandals: Evidence from top management, CFO, and auditor turnover. Quarterly Journal of Finance, 7(01), pp.1650014.

Ahmad, S.A., Yunos, R.M., Ahmad, R.A.R. and Sanusi, Z.M.2014. Whistleblowing behavior: The influence of ethical climates theory. Procedia-Social and Behavioral Sciences, 164, pp.445-450.

Al-Baidhani, A.M.2016. The nature of a dynamic relationship between the audit committee and auditors, both internal and external. Bus Eco J, 7(262), pp.2.

Cuninghame, C.2017. The confessions of Andrew Fastow. Australian Restructuring Insolvency & Turnaround Association Journal, 29(4), pp.4.

Dibra, R.2016. Corporate governance failure: The case of Enron and Parmalat. European Scientific Journal, 12(16).

Dinovitzer, R., Gunz, H.P. and Gunz, S.P. 2014. Reconsidering lawyer autonomy: The nexus between firm, lawyer, and client in large commercial practice. American Business Law Journal, 51(3), pp.661-719.

Eckhaus, E., and Sheaffer, Z.2018. Managerial hubris detection: the case of Enron. Risk Management, 20(4), pp.304-325.

Everett, J. and Tremblay, M.S. 2014. Ethics and internal audit: Moral will and moral skill in a heteronomous field. Critical Perspectives on Accounting, 25(3), pp.181-196.

Goel, M. and Ramanathan, P.E.2014. Business ethics and Corporate Social Responsibility-Is there a dividing line. Procedia Economics and Finance, 11(1), pp. 49-59.

Guiso, L., Sapienza, P., and Zingales, L.2015. The value of corporate culture. Journal of Financial Economics, 117(1), pp. 60-76.

Hosseini, S.B.2016. The lesson from Enron case-moral and managerial responsibilities. Journal of Current Research, 8(08), pp. 37451-37460.

Inyang, W.S., Oboh, J.O. and Nwabuikem, R.T.2019. Ethical thoughts in accounting and their effects on accounting practice. Research Journal of Finance and Accounting, 10(6), pp. 147-170.

Isac, F.L., and Remes, E.F.2017. Culture and business ethics–a comparative perspective. Studia Universitatis „Vasile Goldis”. Arad–Economics Series, 27(3), pp. 54-65.

Li, Y.2010. The case analysis of the scandal of Enron. International Journal of Business and Management, 5(10), p.37.

Liang, Y., Marinovic, I. and Varas, F. 2018. The credibility of financial reporting: A reputation-based approach. The Accounting Review, 93(1), pp. 317-333.

Seago, J. 2016. Toxic leaders, toxic culture: internal auditors can identify unhealthy behaviors that may undermine the organization. Internal Auditor, 73(3), pp. 28-34.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Business Ethics Assignment Help