A Collapse Due to a Lack of Ethics

A Collapse Due to a Lack of Ethics

Chadd R. Castrilli

Southern New Hampshire University

Abstract

This paper discusses the weaknesses of the decision-making process and correlates them with the ethical behaviors of company leaders. Specifically, it identifies the actions of Enron’s CFO, Andrew Fastow, and how his decision-making process created an unethical environment and that behavior laid the groundwork for Enron’s demise. Then, this paper explores the impact of unethical behavior on the communications process by company leaders and the resulting impact of those decision on overall company goals and strategies. In this section, it is identified that the Board of Directors acted in a way that is against their fiduciary responsibility to their stockholders and how the executives, after mismanaging the company into insolvency, failed to warn non-executive employees in the organization which resulted in a total loss of their non-executive employee’s retirement savings. Finally, this paper will identify two recommendations for best practices of ethically based communications decisions. The implementation of the FAIR test and the creating and implementation of a Code of Ethics, namely.

Weaknesses and Ethical Behavior

There were many weaknesses of the decision-making process that correlate to the unethical behavior of company leaders of Enron. First, “Andrew Fastow, the Chief Financial Officer, misled Enron’s board of directors and audit committee on high-risk accounting practices and pressured their audit and accounting firm to ignore the issues” (Fry, 2016). Mr. Fastow’s egregious and unethical behavior led the groundwork for even more poor decision making that allowed greedy executives to use Enron as if it were their own personal piggy bank. Secondly, “the Enron Board of Directors approved an unprecedented arrangement allowing Enron's Chief Financial Officer to establish and operate the LJM private equity funds which transacted business with Enron and profited at Enron's expense. The Board exercised inadequate oversight of LJM transaction and compensation controls and failed to protect Enron shareholders from unfair dealing” (United States Senate, 2002). Enron’s board knowingly allowed Enron’s CFO to operate a second company that could profit from Enron. Essentially, Mr. Fastow used the LJM private equity fund to extract money from Enron, contributing to its eventual bankruptcy, so he could profit via LJM.

Impact of Ethical Behavior

The unethical behavior of the company’s leaders had a profound impact of the overall company goals and strategies. After the CFO, Andrew Fastow, misled Enron’s Board of Directors and audit committee on high-risk accounting practices, the Board of Directors were pressured into further misdeeds because of their lack of ethics and because of their greed. They did this by “allow[ing] Enron to conduct billions of dollars in off-the-books activity to make its financial condition appear better than it was and failed to ensure adequate public disclosure of material off-the-books liabilities that contributed to Enron's collapse” (United States Senate, 2002). They first made the mistake of providing poor oversight and followed that up by making a larger mistake which was condoning further unethical behavior to attempt to conceal the original misdeed. So, Enron’s goals and strategies become to conduct as much business as possible as quick as possible and hide all of its bad deals and debt in these off-the-books accounts. In another example, and to almost add insult to injury, “top Enron executives sold their company stock prior to the company’s downfall, whereas lower-level employees were prevented from selling their stock due to 401K restrictions. Enron filed for Chapter 11 protection in December 2001 and instantly became the largest bankruptcy in U.S. history at that time. This left thousands of workers with worthless stock in their pension. The lower-level employees lost their life savings due to the collapse” (Fry, 2016). The company’s leaders failed to communicate to the rest of the organization about the company’s pending collapse. While the executives withheld this information, the ensured their own financial survival.