Ethics in Financial Reporting

The pinnacle of all financial scandals is arguably the “perfect storm” associated with the former Enron Corporation, which became public knowledge in October 2001. The news of this scandal destroyed a company that had established a stellar reputation for innovation in the energy industry and for generosity in the Houston community. Collateral damage affected its top-level managers, its auditor Arthur Andersen, and the financial reporting firms that apparently cooperated in the deceit. Add in the losses incurred by investors, employees, customers, suppliers, local non-profits, and the families directly impacted by this event, and the adverse effects of the scandal can be seen as truly widespread. Finally, the scandal exposed the whole financial community to a tarnished reputation and loss of faith among its constituents and lawmakers, leading to the passage of the Sarbanes-Oxley Act, which required costly reforms to the whole financial reporting process for publicly held firms.

A sampling of the practices exposed during the Enron investigations:

• Boosting reported profits and hiding debts totaling over $1 billion by improperly using off-the-books partnerships.
• Manipulating both the Texas and California power markets.
• Deceiving potential energy customers with questionable claims regarding potential savings.
• Bribing foreign governments to win contracts abroad; manipulating California energy market.

Ultimately several Enron executives were convicted of felonies. CEO Kenneth Lay’s successor, Stephen Cooper, said Enron might face $100 billion in claims and liabilities, and the company filed for Chapter 11 bankruptcy. Its auditor, Arthur Andersen, was convicted of obstruction of justice for destroying Enron documents and forced out of business. In the background of these events, it’s interesting to note that both Enron and Andersen had codes of ethics that were widely heralded among business ethics experts but also were reported to have highly competitive organizational cultures that rewarded achievement with little or no oversight regarding potential misconduct by individuals or units within the organization.

Case Assignment

Review the background readings. You’ll also find a lot of material devoted to the Enron and other financial scandals that have occurred during the last decade or so. Just Google “financial reporting” to start your research. The following item is a place to start:

Folger, J. (2011). The Enron collapse: A look back. Investopedia, December 1. Retrieved May 16, 2014, at http://www(dot)investopedia(dot)com/financial-edge/1211/the-enron-collapse-a-look-back.aspx

Answer the following questions:

1. Identify one of the examples of financial reporting misconduct associated with the Enron scandal.
2. Identify the stakeholders likely to be affected by that misconduct (including those who may have benefitted) and explain the likely impact it had on them.
3. From a deontological as well as a utilitarian perspective, what would have been the more ethical course of action? (Frame your answer to this question in terms of these ethical principles.)

Write a 2 page paper, not including cover page and reference page. Be sure to set out both the utilitarian and deontological considerations.

Assignment Expectations

Your paper should be double-spaced and in 12-point type size.

Your paper should have a separate cover page and a separate reference page.

Use APA style, and proofread your paper.

Upload your paper by the end of the module.