Overview of the ethical issue or case

Instructions:

Respond to the following questions in your own words. Your responses should include specific examples and should incorporate concepts and terms from your textbook or outside sources.

In a local or national newspaper, find an article about a topic related to business ethics. Read the article. Then, provide an overview of the ethical issue or case, and write 3–5 paragraphs that answer the following questions:

  1. Ethical Decision Making step 1: What are the facts? Give a fair and accurate understanding of the situation.
  2. Ethical Decision Making step 2: What are the ethical issues?
  3. Ethical Decision Making step 3: Who is affected by the decision?  What are the consequences of your decision?
  4. Ethical Decision Making step 4: What are your alternative courses for action? 
  5. Ethical Decision Making step 5: New York Times Test- What would public reaction be if on the front page of the New York Times?  Can you defend your decision openly?

Please choose one ethical Model and defend your ethical decision based upon your model of choice.  Please choose from: Economic Model of Social Responsibility, Stakeholder Model of Corporate Social Responsibility, Principle Based Ethics or Utilitarianism based model.

 

Step 1

Unethical accounting practices or otherwise known as ‘book cooking’ is serious malpractice within publicly traded companies that have grave consequences like resulting in the company in question foreclosure. The most widely known instance of accounting malpractice is the 2001 scandal that involves the energy company Enron and the audit firm Arthur Andersen. In this case, Enron had on many occasions incorrectly reported their financial statements with Arthur Andersen aiding them in the misconduct by sign off the reports even though they were inaccurate (Keller, 2002). An instance of this unethical behavior is when Enron entered into business partnership with the then ‘king’ of video rentals Blockbuster. However, the deal would collapse eight months later causing severe financial losses to Enron. Nonetheless, Enron did not report this loss to its shareholder but instead partnered with a Canadian bank that loaned it a sum of 115 million dollars in exchange for the profits from the venture with Blockbuster. In this case, the reported profit from the venture with Blockbuster was the sum loaned by the bank. When the discovery of the misconduct finally happened, the company went bankrupt and resulted in massive losses for the company’s stakeholders. Reports indicate that at the company’s climax the share price was 90.75 dollars. However, after the collapse, the shares went to an all-time low of 0.26 dollars (Keller, 2002). The massive loss didn’t just affect the shareholders but also 85,000 employees who had diligently worked for the company for many years. Moreover, the audit firm Arthur Andersen in a dramatic turn of events was also closed down due to aiding unethical practices.

Step 2

The reported ethical issue in the case of Enron was accounting malpractice. In this case, the company would conceal any losses from the public by misrepresenting their financial statement to appear as though they were making a profit. The intentional misrepresentation of facts by the company was an act of dishonesty and fraud against the stakeholder. Consequently, Enron had discovered numerous ways of misrepresenting any financial losses. One such instance was when the company built a power plant and reported estimated profits in its books even though the plant hadn’t made any returns (Segal, 2018).

Step 3

            The collapse of Enron wrecked economic havoc on its stakeholders. According to Segal, the company shares worth dropped from 90.75 dollars to a low of 0.26 dollar which indicated a massive loss for the shareholders of the company (2018). Moreover, the collapse caused the loss of jobs for more than 85,000 individuals who worked for the company. As a result, the closure had severe consequences on the American economy as many individuals were affected directly or indirectly. Many of those who lost enormous investments or lost their jobs had other persons who depended on them. Hence, the cost of the collapse trickled down the economy. In light of these happenings,  a decision was made by the government to bring up new regulations to counter and prevent any other company from conducting accounting malpractice. The legislation act known as the Sarbanes-Oxley Act was introduced in 2002 by the then president George Bush (Segal, 2018). As a result, the bill introduced a stringent penalty for fabrication of financial statements which are tantamount to deceiving shareholders. Moreover, due to the Enron scandal, the Financial Standard Board raised the bar on ethical behavior in financial reporting and accounting. Therefore, the board can audit companies in the US and on detecting any malpractice occurrence the managers involved are replaced.

Step 4

The other company adversely mentioned in the scandal is Arthur Andersen audit firm. The company faces accusations of conspiring with Enron in the misrepresentation of financial statements as it was the auditing firm in charge of Enron books. The company did not adhere to the ethical code of conduct that all accountants are obliged. In this case, the scandal could have been avoided if the audit firm had adhered to its role and reported any financial wrongdoing. As expected, any accounting or auditing firm should represent itself with a certain level of competency and professionalism which the firm failed to do (Accounting Malpractice – and the Law, n.d). Hence, resulting in a massive financial loss for stakeholders of Enron. In the US, auditors are expected to adhere to Generally Accepted Auditing Standards and the Generally Accepted Accounting Principles which prohibit auditors from misrepresenting financial statements (Accounting Malpractice – and the Law, n.d). In this case, the accepted standards require all accountants and auditors to uphold independence, professionalism, and accurate financial representation. Therefore, had the firm adhered to this standard the scandal would be detected and avoided much earlier.  As such, the decision-making model that the firm would have incorporated is the stakeholders model of corporate social responsibility which demands that a company’s actions be driven by the needs of the stakeholders rather than the stockholders.

Step 5

In the case that the audit firm had revealed malpractices of Enron to the front page of the New York Times, the consequences would still be dire.  As a result, this would have resulted in a widespread panic that would lead to the collapse of the Enron share price in the stock market. However, if the issue were detected earlier and reported, it would have prevented massive loss of funds as the adequate measure would be adopted to avoid the company from making further losses. Therefore, in my view, the loss would not have happened had this been reported earlier and counter-measure adopted.

 

 

Reference

Accounting Malpractice – and the Law. (n.d.). Retrieved Oct 12, 2018, from Garret & Tully: www.garrett-tully.com/blog-articles/accounting-malpractice-and-the-law/

Keller, B. (2002, Jan 26). Enron for Dummies. Retrieved Oct 12, 2018, from The New York Times: www.nytimes.com/2002/01/26/opinion/enron-for-dummies.html

Segal, T. (2018, Sep 20). Enron Scandal: The Fall of a Wall Street Darling. Retrieved Oct 11, 2018, from Investopedia: www.investopedia.com/updates/enron-scandal-summary/