ENRON Ethical Breach - Research Paper Example

Its stocks continued to increase at a modest rate, but in 1999 – 2000, investors saw a sudden 87% increase in 2000, which coupled with the company being named the most innovating company in America, meant the future prospects for the shareholders seemed excellent. Unfortunately, it was revealed in October 2001 that this almost sudden increase in investors’ confidence was due to accounting loopholes and fraudulent auditing, which allowed the company’s shares and returns to be appearing more favorable than they actually were.

This ethical breach included the involvement and dissolution of Arthur Andersen, one of the most famous auditing firms of the world at the time. There is no reason to believe that Enron participated in corrupt practices since its inception in 1985, rather, evidence indicates that the ethical breach that lasted about a decade began several years later, when Jeffrey Skilling was hired and a team of executives was developed to cater to the accounting needs of the company. Since most of the work done by this group of individuals was either difficult to understand, or too complex to be looked into, many loopholes, special entities that otherwise would not have been allowed, and poor financial auditing allowed billions of dollars of debt to be hidden from the public eye.

Obviously, an act that is criminal for such a huge public company to carry out. This lack of “visible debt” meant the company continued to prove profitable, and confidence coupled with investment continued to increase. Studies that were done on the ethical breach carried out by the company showed that it was not the method of corruption employed by people running the company, or the auditors in charge of producing honest financial reports. Rather, it was seen as an accumulation of negligence and misleading details in reports that finally spiraled out of control, and resulted in the demise of a company that not long ago had proved to be immensely promising.

The ethical breach that has been described as one of the biggest scandals of corporate America involved misrepresentation of financial statements and records that enabled the firms returns and revenues to appear higher, losses to appear lower, and balance sheets to skew towards favorable performance. The auditing firm, Arthur Andersen, clearly did not do their job properly, and they were possibly influenced by Enron into reporting heavy inflow of cash, and putting away the liabilities and debts that the company had undertaken.

Other than the fact that the executives entered deals which were extremely complex and bewildering to be clearly understood by many people, the “clever” accountants that worked for the company used many unethical practices to achieve their ends (McLean & Elkind, 2004). Enron misrepresented revenue recognition to make it seem as though they were bringing in more cash than they were on their services. For example, until September 2001, just a month before their exposure, Enron reported revenues of over 138 billion dollars.

Moreover, the company switched from straightforward presentation of revenues (selling price minus costs) and employed the Mark-to-market accounting, which they believed showed the true economic value of their company. Investors were often given