Ethics and Governance: A Case Study on the Enron Corporation Scandal

This report provides a comprehensive analysis of the Enron Corporation's unethical activities and subsequent bankruptcy, applying various ethical theories and models to understand the scandal. The report examines ethical egoism, deontology, the AAA Model, and the Ferrell, Fraedrich, and Ferrell model to identify the ethical failures within Enron. The AAA Model is applied to evaluate different courses of action, concluding that disclosing the company's true financial position was the most ethical choice. The report further explores the application of Ferrell, Fraedrich, and Ferrell's model, considering moral intensity, individual factors, and organizational culture. The analysis highlights the importance of ethical decision-making, corporate governance, and the consequences of prioritizing self-interest over ethical conduct. The report emphasizes the need for accountants to adhere to ethical principles when facing dilemmas, drawing lessons from the Enron case to prevent similar failures in the future.

Enron Corporation
Corporate Governance and Ethics
1-12-2020

Executive Summary
The purpose of this report is to analyse the unethical activities and behaviour adopted by the
top executives at Enron Corporation which resulted in its bankruptcy by the application of
different theories and models. The theories that have been used to present the situation in the
company are Ethical Egoism, Deontology, AAA Model, and Ferrell, Fraedrich, and Ferrell's
model of the ethical decision-making process.
The main reason of conducting this analysis is to identify what theories are followed and
unfollowed by the company and what available options can be used by the accountants in the
decision-making process of the Enron case. The AAA Model has been used in this report in
which two options are provided. From the detailed analysis of both the options that is to hide
the debts of the company or to disclose the real position of the business in the market. The
final decision has been made is to disclose the real position of the company in the market.

Contents
Executive Summary...................................................................................................................1
Introduction................................................................................................................................2
Part A.........................................................................................................................................2
Overview of the Enron Scandal..............................................................................................2
Theories of Egoism.................................................................................................................3
Theory of Deontology............................................................................................................3
Part B..........................................................................................................................................4
The American Accounting Association Model application on Enron Case...........................4
The scenario for the Model.................................................................................................4
Step 1: Facts of the Enron Scandal Case............................................................................5
Step 2: Ethical Issues of the Case.......................................................................................5
Step 3: Norms, Values, Principles related to Enron Case...................................................5
Step 4: Alternative Course of Action for the Case.............................................................6
Step 5: The Best course of action consistent with the values, norms, and principles of the
Case.....................................................................................................................................6
Step 6: Consequences of each course of action..................................................................6
Step 7: The Final Decision..................................................................................................7
Part C..........................................................................................................................................7
Ferrell, Fraedrich, and Ferrell application in Eron case.........................................................7
Moral intensity....................................................................................................................7

Individual factors................................................................................................................8
Culture of organization.......................................................................................................9
Conclusion................................................................................................................................10
References................................................................................................................................11

Introduction
The purpose of this report is to identify the possible unethical or illegal moral behavior
adopted by the employees of the Enron Company and the guidance that accountants need to
apply when confronted with ethical dilemmas. In order to identify all these aspects, this
report has conducted detailed research of the Enron Scandal and its negative impact on the
business as well as society. The theories that have been applied in this report are Egoism and
Deontology, AAA Model, and Ferrell, Fraedrich, and Ferrell Model. According to the AAA
Model, the better outcome of this case would be is the disclosure of the poor position of
Enron in the market.
Part A
Overview of the Enron Scandal
The story or the scandal case of the Enron Corporation portrays a business that touched
dramatic heights of growth just to face a dizzying fall. The collapse of the fated company
impacted a huge number of employees and trembled Wall Street to its core. The time when
Enron was at heights the worth of its share was $90.75, but when it was declared to be
bankrupt in the year 2001, the worth of its share was $0.26 (Smith, 2018). This company was
formed by Kenneth Lay in 1985, but after many years when Jeffrey Skilling joined the
company and developed a team of executives who with the use of accounting loopholes, poor
financial reporting, and special purpose entities were capable to hide huge amount in debt due
to different failure of deals and projects. Andrew Fastow the Chief Financial Officer of the
company along with other executives not just misled the board and the Audit Committee of
the company related to accounting practices, but also stressed Arthur Andersen to overlook
the issues (CNN, 2019).

Theories of Egoism
From the ethical perspective, the use of ethical egoism theory has been done in order to
identify how and why a culture of self-love arisen in Enron. As per Westacott, (2019), ethical
egoism is the principle that it is ethically always right to consider one’s self-interest. As per
the parameters provided, four types of ethical egoism are psychological egoism, universal
ethical egoism, individual egoism, and personal egoism (Österberg, 2012). Out of four types,
the universal ethical egoism is considered to be closely linked with the culture developed at
Enron during the scandal. The universal ethical egoism theory every person is focused on
serving their self-interest. In this, every person seeks for the aspects that can increase their
utility or carry their happiness, even when it is harming the interest of others (Hinman, 2012).
Strangely, the Enron leaders were all complicit in this form of ethical egoism. They deduced
that the short-term negotiations propagating the long-term expansion of self-interest in the
organizational culture of the company were certainly imitative of ethical corporate behavior.
In the company, the chase of rationalized self-interest was so high due to which the concept
of compromise became just a terminology related to the way of doing ethical business in a
free market economy. The ethical compromise and self-interest offered a platform to the
employees and the leaders of Enron Company to validate their behavior similar to the Peer
Review Committee policy of “rank and yank”.
Theory of Deontology
Another ethical viewpoint from which the culture development at Enron can be seen is mixed
deontological ethics. Willian Frankena developed mixed deontology. Under this theory, the
first principle illustrates that human beings are strived to perform good things deprived of
asking for any measurement or weight of their good or bad behavior (Nahser, 2018).

The second principle of this theory is justice. According to this principle, a human being must
treat every person with respect because this is something that everyone owes (Nash, 2002). In
the Enron case, it has been noticed that the beneficence and justice principles were nor in
conflict as well as nor exist in spite of the strong motto of the company that is to "Respect,
Excellence, Communication, and Integrity. Besides this, they also commit that arrogance and
ruthlessness are not part of this organization (Kunen, 2002). The leadership of Enron has not
followed all the ethics that the company claimed. Therefore, this non-alignment between the
actions and words has resulted in a major problem of culture for the leadership in the
company. In all, the culture adopted by the leaders of Enron was all against the mixed
deontological ethics which supported in determining the cultural atmosphere at the Enron
Corporation.
Part B
The American Accounting Association Model application on Enron Case
The American Accounting Association model has been introduced in the report presented in
the year 1990 by Langenderfer and Rockness. With this report, they both introduced the
logical procedure comprised of seven steps for the decision making that majorly take into
account the ethical issues (ACCA Global, 2019). The following are the seven steps that are
applied in the case of Enron in order to support an accountant in making an ethical decision.
The scenario for the Model
The Enron Corporate has been bankrupted in the year 2001, due to the illegal actions and
activities performed by its top executives. They got involve in hiding a huge amount of debts
of the company which was the result of different failed projects and deals. Even Sherron
Watkins who was the Vice President at Enron Corporation was threatened to not to disclose
the facts in front of government and public (Fry, 2016). But she showcased her moral

dimensions and ethical leadership and took a step towards ceasing this illegal act in spite of
the fact the truth may impact her career too.
Step 1: Facts of the Enron Scandal Case
The main fact of the Enron Scandal Case is that Jeffrey Skilling the CEO of the company was
involved in this scandal in which he developed a team of executives who used different
accounting loopholes, poor financial reporting and special purpose entities for hiding billion
dollars debts from different projects. Besides this, the Chief Financial Officer of the company
was involved in misleading the Audit Committee and Board of Directors and also increased
pressure on Arthur Andersen for ignoring such issues. In fact, the share price of the company
when it considered being the leading firm was $90.75, but at the time of bankruptcy, the
prices went down to $0.26 (Barrionuevo, 2006).
Step 2: Ethical Issues of the Case
The major ethical issue that has been identified in the scandal case of Enron is that the top
management like CEO and CFO of the company were involved in hiding the billion-dollar
debts of the company and were only concerned about their interest and benefits irrespective
of the fact that these activities were harming the interest of the shareholders (English, 2002).
Step 3: Norms, Values, Principles related to Enron Case
The motto of Enron is to “Respect Excellence, Communication, and Integrity. Besides this,
the values and vision of the company are to treat others like the employees of the company
treat themselves. Also, they specify that they do not tolerate disrespectful or abusive
treatment at the workplace (Kunen, 2002). However, the results are against these company
statements. The main culprits who disrespected and did not adhere to the values and vision of
the company were the top management who are seen as the ideals to be followed.

Furthermore, the main principle of the company is to work for providing maximum returns
and interest to the shareholders. However, the parties involved in this Scandal that was CEO,
CFO, accountants, and other employees were focusing on their self-interest.
Step 4: Alternative Course of Action for the Case
Option 1: The first possible option for the case is to hide billion dollars of debts resulted from
different failed deals and projects by the use of accounting loopholes and poor financial
reports.
Option 2: The second possible and ethical option that can be used about the above Enron case
is to disclose the real image of the company in the market i.e. it is facing huge losses.
Step 5: The Best course of action consistent with the values, norms, and principles of the
Case
As per the above steps, it has been identified that the norms and values of the company are to
give respect to the integrity, communication, and excellence of every individual. Besides this,
the principle of the company is to work for the interest of shareholders and not for their
interest. Considering these values and principles, the best source of action that can be selected
is to disclose the real image of the company in front of the board of directors, audit
committee, and the general public such that it does not majorly harm the related parties like
shareholders and stakeholders. Besides this, this disclosure would have not negatively
impacted the career path of top executives like Jeffrey Skilling, and others.
Step 6: Consequences of each course of action
Consequences of Option 1
The main consequence of option 1 that is to hide the losses of the company is bankruptcy and
lawsuit against the involved parties to misguide the shareholders and customers of the
company.

Consequences of Option 2
The key consequences of the option to disclose the real position of the company in the market
are declining the value of the shares in the market and the position of the company in
comparison to the competitors.
Step 7: The Final Decision
The ethical decision that the accountant can take for this specific case of Enron is Option 2.
The top management should disclose the real market position of the company and the losses
it is facing.
Part C
Ferrell, Fraedrich, and Ferrell application in Eron case
In the literature, this has been witnessed that Ferrell, Fraedrich, and Ferrell have offered a
model in which the ethical/unethical behaviour is considered as product of the ethical
evaluation as well as intentions a process that is generally affected by the intensity of the
ethical issue, individual factors as well as the culture of organization (Ferrell, Fraedrich &
Ferrell 2008). All these elements are considered as vital because they affect the working and
decisions of individuals for the organization.
Moral intensity
Moral intensity is considered as an issue-contingent model of the ethical decision making that
is based on the supposition the entire situation that vary in terms of the moral imperative
present in the entire situation. The moral intensity includes the two components of the ethical
decision-making, ethical perception and behaviour intentions in the context of marketing. It
has been witnessed that moral intensity is the degree of the feeling that the person has for the
consequences of moral choices (Accounting tools, 2019). It has been witnessed in the
research that the presence of the high degree of moral intensity typically leads to the rise in

the person's moral sensitivity as well as a judgment which results in the decisions for not to
get involved in the unethical behaviour. In the Enron scandal of the accounting fraud, there is
a low degree of moral integrity due to which the decisions made by CEO and CFO were
unethical. The accountants and their team focus on increasing the shares of the company due
to which they hide all the debts by using different accounting tools. The decisions were taken
by the persons for their benefits which shows there a perception in which they think of self-
interest instead of the entire stakeholders. CEO of Enron Company wants that their company
remain in top list and investors invest in the company for making the high return which is
possible by hiding the losses (Bhaskar & Flower, 2019). In this, entire activity, the
accountants of the company performed a vital role. Thus, this shows that they want to harm
the interest of the shareholders by safeguarding their self-interest.
Individual factors
Individual factors are considered as one of the essential factors that can affect the ethical
decision-making process which consists of the personal moral philosophy, stage of the moral
development, motivation as well as many other factors. These factors make the Enron
accountants, CEO and another executive to take unethical decisions. In the research, this has
been found that auditor and accountant has one of the major factors that are their own
shameful activity. The accountant hides the loss from the harms at energy business which
makes the auditor shamefaced of hindering the justice (Smith, 2018). Thus, to hide their own
faults the company adopted the unethical approach in which they need to manipulate the
different records and to hide all their activities.
In the research, this has been found that accountant and other employees came to know that
their real performance measure is based on the top ratings. In order to attain the top ratings,
everyone within the organization became instantly motivated to perform the unethical issue.
The employees of the company are regularly rated on the scale of 1 to 5 with 5s usually being

fired within the six months (Dembinski, Lager, Cornford & Bonvin, 2019). Thus, employees
find that motivation for them is high incentive due to which they get involved in the unethical
practice and took the wrong decision that affected the company. In the research, this has been
witnessed that the influence of the firm’s stock price on the incentive system for Enron
employees became increasingly essential during the long financial boom which motivated to
some extent for this decision. In addition, the corporate culture of the company is widely
considered as cut-throat which shows the combined pressure on the employees and they were
not able to meet their personal objectives which made them take a decision.
Culture of organization
There are some of the organizational factors that lead to obstacles to individual ethical
decision making. Culture of the organization is considered as one of the factors that influence
the decision making by people to indulge in the company (Frederickson & Ghere, 2014). The
organization culture factors are considered as the characteristics of the background of
decision which leads to the influence on the ethical decision-making process as well as its
results. In the case of the ethical dilemma, Enron found that the culture of the company is one
of the factors that lead to this decision. Culture of the company is responsible for the
corporate bankruptcies because the culture is described as being arrogant, extremely
decentralised and risk-taking (Medium Corporation, 2019). In the culture of the company, the
code of ethics was merely considered as the façade as well as profit became the only
benchmark. Furthermore, Enron’s culture was its ethical consideration for their stakeholders
as it has been found that their stakeholder lost $11 billion because of the issue of bankruptcy
as they were not aware of the unethical activities of the company. Thus, this clearly presents
that the culture of the company affected the ethical decision.

Conclusion
The above report has provided a detailed overview and the analysis of the Enron scandal by
aligning it with different theories and principles. The analysis of the report revealed that the
top management of the company has adopted unethical behavior by hiding the debts of the
company resulted from failed projects and deals. Therefore, in the conclusion, it could be said
that the leaders and some of the top executives have not adhered to the ethics, justice, and
beneficence that are considered to be very important to run a business. For explaining this the
different models and theories used are ethical egoism, the theory of Deontology, application
of AAA Model, and Ferrell, Fraedrich, and Ferrell's model of the ethical decision-making
process.

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