Aug 26, 2011 - 3 Comments - economy, ethics, industry -

Wrong is still wrong: Arthur Andersen, Enron and now


Go to jail

Go to jail

Enron had 85,000 employees that depended on a reliable form of income to provide a livelihood for them and their family. With a company that produced 9.3 billion dollars in 2002, Enron’s employees had a valid assumption that their company would be in existence for many years, providing them with a secure future. Enron’s immoral accounting, along with Arthur Andersen’s unethical auditing resulted in both companies crumbling. Enron dissolved with its 85,000 employees losing their jobs. Companies have two paths to choose from: 1. The Enron path or 2. the path of accountability. Only one path is sustainable, that of accountability. The other path leads to bankruptcy, unemployment and as we see in the sub-prime loan debacle a long-standing recession. I, personally am pro-business but I am against anti-competitive practices, collusion, fraud, conflicts of interest and unethical business practices. Free-market principles assumes a level playing field.

Concealment is an issue, the -my company is too big for me to know about is not a reasonable excuse. As with the current sub-prime mortgage crisis, the short-term ramifications for fraud and concealment maybe quite positive for shareholders, because debt would be set aside and off record, as it was then. However, the long-term ramifications include many negative consequences. Long-term consequences include what we are going through right now, escalating corporate debt that eventually must be reconciled with the public books. Eventually the sand under the carpet gets so big you can’t hide it anymore. A company suddenly hit by a massive accounting reconcilement can drive its shares to junk status defaulting its stockholders. We have only to look at the current share prices for Fannie Mae and Freddie Mac. Financial fraud is immoral and goes against free market principles. They need to be held accountable, our future economy is at stake.

What is at risk from a company’s lack of fiduciary responsibility?

Enron stock and jobs

Enron stock and jobs

What is at risk is our income, the companies prestige, the truth, personal and company lively hood, and people’s careers. It sets a precedents that you can get away with cheating. Arthur Andersen had an obligation to society to prevent fraud and offer guidance to companies that need professional guidance. Their task was in part to root out financial instability for the company they worked with. Arthur Andersen was entrusted with these obligations by virtue of their licensing by the government. To violate this trust, which is an extension of the communities trust, would mean their licensing would have to be revoked, which is just what happened. They had an obligation to perform due diligence. Enron had an obligation to use standard accounting principles being compliant with the corporations money. They had a cultural imperative to provide a lasting financial incentive for the community to accept the company into their area and to build a relationship with those who would be employed with them. Unfortunately, they violated the communities trust and hurt their employees and their employees families.

Companies are bound by a social contract to the community, but why? Why should they be?

Corporate policies as well as many others in the US are characterized as being limited in scope. They are derived from federalist ideology. The founders of our nation provided built-in protections for our personal autonomy and our property, with rules that allow us the greatest individual freedom deemed prudent for a law-abiding society. English community laws and the puritan ethic transferred over to the American culture. The French Enlightenment, German idealism and the ethical theories of Kant and George Hegel added intellectual layers to this mix of rights and limits. Individual liberties are paramount in Lockean theory, where we agree to become a society only after we agree to a social contract. Its goal then is to provide protection of those personal rights, to protect our autonomy and our free will. Opposite Kant and Hegel’s theory of deontology stood the theory of Utilitarianism. Jeremy Bentham first outlined utilitarianism. Under utilitarianism a person should act toward maximizing society’s benefits through personal acts. With utilitarianism each personal action should benefit the greatest number of people. With utilitarianism the goodness of an act can be measured by taking the pain produced from the act from the good produced by that act. If the sum-total of that act is positive or good for the most people, it was a just act. When acting then we should look for the most good produced.

In the case of Enron and Arthur Andersen, the good produced only benefited a few corporate leaders. while the bad produced hurt hundreds of thousands of people directly and indirectly. Kant however, viewed autonomy as the principle that makes us unique. We observe laws by setting personal limits on ourselves. We can act any way we wish according to Kant, but we should act with good will, because those laws which are good are universal. These universal laws are called categorical imperatives. According to Kant your action is good if it follows a universal law. A law can be found universal and thus good if it does not defeat itself or contradicts itself. Again under Kantian ethics the actions of Enron and Arthur Andersen were wrong because stealing would result in a contradiction in conceivability. The ability to steal assumes that property exists to be stolen, but if stealing was okay, or rather universalized, then there could be no property, and so the proposition has logically negated itself, therefore stealing is wrong. Under Lockean, Kantian or utilitarian ethics what Enron did was wrong, what Arthur Andersen did was wrong. What corporation and people did during the sub-prime melt down was wrong, even if there were not laws to prevent such actions it is still wrong.


Andersen revenue

Andersen revenue


Deontology or Kantianism views us as free agents with the moral freedom to do good or bad, good being universally acceptable. Should a person reveal corporate fraud even if it means losing their job, their friends, their income, career and wife or should they keep quiet hoping no one finds out and perhaps even make some money off it? Of course federal prison is a possibility as well. Corporate executives and employees may have to debate these decisions. Unfortunately, these decisions are real and have real wide-spread consequences. Corporate executives had to decide right from wrong at Enron, Author Anderson and many other companies since. Sound company policies are assumed during incorporation and during the offering of shares to purchasers. These purchasers become owners of the company. Employees thus work for these new owners. If fiduciary roles are an obligation to stockholders, then they are also an obligation to their employees, who in part work for the owners so they can maintain profitability. Management’s breach to one or the other can crumble all three.

A Libertarian view of proper ethics melds both equality and liberty so that a balance of the two exist, such that neither one should over power the other. Libertarians view society to be ideal when maximum personal freedom exists. Liberty to them is not as much freedom, but rather the absence of force to compel a person to make a decision against their own will. According to the libertarian view of ethics, unethical behavior is when one person or a group of people interfere with another’s persons affairs in such a way that the person’s decisions are influenced by those outside forces. Libertarians view the minimization of coercion a focus. Libertarians stress the expression of a person’s life, the maximization of their free will and the personal ownership of property. They believe that the only true function of a government is to prevent fraud and the taking of a person’s property and the ability for them to choose by force. Any other action is delegated to the individual’s responsibility. How they choose to live is their business. Libertarians promote laissez-faire capitalism, the governments only responsibility to prevent fraud of one company against another or the individual. Again Enron’s and Arthur Andersen’s executives took property and the ability to choose from their employees, including their families by how they acted. They took away the ability to obtain real financial information from their stockholders and their employees. The it was legal at the time theory does not and will not ever hold true. If anything each one of these ethical theories proves that what these companies did was wrong. If anything these ethical theories provide a framework for ethical behavior corporations must follow whether something is legal or now. Just because it is legal does not mean it’s ethical, just because it is not illegal now or there is not a rule against it does not mean their won’t be one later.

Enron and Arthur Andersen should have strived to pass the universality test in that they should have set an example for other corporations to follow. They as companies were obligated to their shareholders to produce quality products for consumers, which provide value for them. They should have strived to protect their employed, strived to stop preventable harm when it was still possible. This preventable harm includes short-term gains for long-term financial instability. Even civil libertarians would agree that they took freedom of information from their stockholders. Issues of accounting fraud were unfortunately resolved in the case of Enron and Author Anderson by an investigation by the SEC and by both companies eventual collapse. There is a case history for companies to learn by, but still today moral accountability to shareholders and employees is lax. Author Anderson had a fiduciary duty, it was mandated to confirm Enron’s accounting rules, to audit them objectively. Enron had the fiduciary duty to practice sound accounting principles. Using off the books accounting principles to hide a firm’s true financial position and its flow of money is wrong. Unfortunately, it is done time and again.

We see it now with the sub-prime mortgage crisis. We pass laws to make what happened illegal and then companies find loopholes around those laws which then are legal. Again, it may be legal now, but ethics is ethics, it is unchanging and companies have an obligation to obey them. Companies should have learned from Enron, they should have learned that stealing destroys the companies they run. We should have learned that letting them get away with it because it is questionable but may be legal is still ethically wrong and will hurt us and our families. We only have those 85,000 unemployed Enron employees to understand what can happen. Must we go through more pain after this sub-prime mortgage crisis ends to learn wrong is wrong?


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