The Merriam-Webster Dictionary interprets the words “truthful” and “truthfulness” as such which “contain, tell, or express the truth” (n.d.). Basically, the word “truth” stands for a situation where something or someone depicts sincerely any unfolding of events free of deception or fraud which cannot be told about Enron’s business. The story states that the first stage of the company’s business engagement involved the energy market and in particular, trading in gas (specifically, it included a commercial chain of purchasing gas from producers and then selling it back to utilities companies) (Healy & Palepu, 2003).
In other words, Enron substantially benefited from the pitfalls of obviously questionable accounting regulations leading to the reporting of fictitious data because no one could actually know the actual price of the “long-term” agreements to be established by the market alone. Consequently, Enron put down hypothetical numbers into its financial statements and then these numbers must be displayed periodically as net profits (traditionally, displayed as annual profits of the company). Unsurprisingly, truthfulness as a basic ethical principle was absent in the outcome of such compromising transactions: a quarterly financial statement could record high fictitious profits as an expectation, but the actual value of the contract turned out to have been substantially low and thereafter, the annual statement could differ spectacularly (Healy & Palepu, 2003).
The second troubling issue where the principle of truthfulness was not also adhered to, was represented by the establishment and functioning of the so-called “special purpose entities” created by Enron’s executives and management (Healy & Palepu, 2003, pp. 10-11). “Special purpose entities” were set up by Enron, but must be owned by independent investors holding shares of these companies. These enterprises constituted a lifebelt for Enron in terms of avoiding any unforeseen circumstances relating to future and forward contracts with energy producers. Thus, additional accounting fraud was facilitated by these special enterprises.
In accordance with accounting provisions valid in that period, if the “special purpose entity” does not qualify for certain requirements, it must be financially consolidated with a company which founded it. In order not to be consolidated in terms of accounting standards, the controlling stake (more than a half of the equity) in the special enterprise should be owned by independent parties. The bankruptcy proceedings initiated by Enron later demonstrated that Enron had been concealing huge debts by means of these “special purpose entities” (Healy & Palepu, 2003).
Essentially, risky transactions involving future and forward contracts finally resulting in a negative balance for the special enterprises were not shown in Enron’s own financial statements since these firms were legally deemed separate (Healy & Palepu, 2003). Subsequently, Enron’s high management testified to having breached the accounting requirements separating the companies for some of its executives held the shares of special enterprises. The revelations induced Enron’s leaders to recognize that actual profits of Enron had been pitifully small.
Fairness of Rewards Gained by Enron’s Leaders and Top Workers
The Merriam-Webster Dictionary explains “fairness” as something following accepted and extensively recognized rules and principles, reflected in “impartiality and honesty” (n.d.). These morals are far from being consistent with the compensation and reward policy launched at Enron. There is no point in mentioning that actions mean more than words and this creed was broadly used by Enron’s leaders. A good practice is constituted where companies reward its workers for good and high performance, but the entrapment here is what values and traits are appreciated by the top management for the results to be rewarded.
Enron may play as an example of setting, expecting, and rewarding patterns of behavior which ought not to be followed by other companies. The firm’s high management repeatedly claimed at internal meetings of employees that “you can cheat, you can lie, but as long as you make money, it’s all right” (Sims & Brinkmann, 2003, p. 250). The aforementioned statement was actually carried out: trade agents of the company on stock markets could be granted an annual bonus accounting for around $1 million, workers appraised for high results could receive very long vacations in violation of human resources regulations, and the management even practiced an invitation of top employees to spend holidays with Enron’s executives (Sims & Brinkmann, 2003).
In addition, prior to initiating proceedings for bankruptcy, Enron paid the “retention bonuses” to a few hundreds of employees belonging to the firm’s high management category. Each of the bonuses was estimated to amount to thousands of dollars and even millions (these bonuses are presumed to have been paid as a gratification for the assistance in establishing and managing the special enterprises) (Sims & Brinkmann, 2003)! The essence of the story is that where monetary rewards and appraisals stimulate the immoral pattern of conduct, such a company will become a place where evil resides. These rewards were unfair because they went against the moral standards and expectations accepted by society.
Honor of External Analysts Rating Enron
Honor is generally understood as a “good reputation”, “public esteem” earned for complying with distinctive moral principles in actions (Merriam-Webster Dictionary, n.d.). This is absolutely not about trading analysts who rated and evaluated Enron’s shares. Beginning from 1975, financial institutions did not set fixed fees for researching, evaluating, and recommending shares of companies and therefore, the “underwriting initial public offerings” constituted the main source of earnings for investment banks (Healy & Palepu, 2003, p. 20).
Relying on this circumstance, investment banks were interested in boosting an interest in and value of large companies affiliated with them. Within this story which unfolded around Enron, analysts of investment banks played not the last role in facilitating fraudulent activities. In particular, in the late October, 2001, financial organizations, regarded credible and reliable by many, including Merrill Lynch and Lehman Brothers, assertively recommended potential investors to acquire Enron’s shares (given two months left before bankruptcy case was initiated) (Healy & Palepu, 2003). The explanation proved to have been very simple: Enron paid the investment banks high fees for recommending its shares to potential buyers and the analysts working for these affiliated banks were extremely interested in selling as many Enron’s shares as possible for the opportunity of being awarded exorbitant compensation from their employers.
Hence, the author has exemplified how such ethical virtues as truthfulness, fairness, and honor were neglected and ignored by Enron’s top management and executives, and Enron’s external agents. The case study has particularly demonstrated that fictitious numbers in the company’s financial statements disregarded the principle of truthfulness, unimaginable bonuses of executives and other top managers compromised the standard of fairness because society expects to observe such high compensations being paid to executives for good deeds, but not for concealment of actual data and profits; trading analysts’ pursuit of financial reward incented them to forget about the honor and responsibility attached to their profession. All this happened owing to the lack of corporate social responsibility – both within Enron and its partners.
Healy, P.M., & Palepu, K.G. (2003). The fall of Enron. Journal of Economic Perspectives, 17(2), 3-26.
Merriam-Webster Dictionary. (n.d.). Retrieved from http://www.merriam-webster.com/
Sims, R.R., & Brinkmann, J. (2003). Enron ethics (or: Culture matters more than codes). Journal of Business Ethics, 45(3), 243-256.