Ethics

Enron was one of the biggest and most well known corporate frauds of the twenty first century. It was the result of the senior management going to any extent necessary to keep their organization from going bankrupt. The problem had its roots in the formation of Enron from the merger of Omahas InterNorth natural gas company and the much smaller Houston Natural Gas (HNG) which resulted in Enron having a he debt from the time of its formation. The initial attempts to get out of this debt were legal but as time went, the companys dealings became more and more questionable, unethical and in the end, even illegal.
The first attempts to reduce the companys debt were made by Jeffrey Skilling who formed a Gas Bank to take advantage of lack of any long term planning in the natural gas industry. Soon, this Gas Bank had attracted 35 natural gas producers and 50 users, which generated immense value for Enron. However, this value could not be reported in the balance sheets and so Skilling got Securities and Exchange Commissions permission to use mark-to-market accounting, a practice which would help Enron report the value of his holdings based on the current market value rather than the original purchase price. A questionable practice, it was approved under the assumption that external auditors, Arthur Anderson, would carry out their duties meticulously. Unfortunately, Enron was one of Arthur Andersons biggest clients and they could not afford to lose the fees they got from Enron. As a result, the accounting discrepancies went unreported.

Meanwhile, Andy Fastow was using Special Purpose Entities (SPEs) in extremely unethical ways to keep Enron from going bankrupt. Legally, Enron could have no more than 97 stake in an SPE and an Enron employee could not have managerial controls in the SPE. Although initially, Fastow just remained within these legal limits, during the later years, he blatantly broke the law with Enron having as much as 99 stake in some SPEs and Fastow, who was at the time the CFO of Enron, also heading these SPEs. Thus through a web of over a thousand legal and illegal SPEs and creative accounting, Fastow and Skilling managed to fool the investors and keep the balance sheets artificially inflated which helped raise the companys stock price.
It is obvious from these case details that senior management of Enron, especially Fastow and Skilling were acting unethically and illegally. Even Ken Lay, though not directly involved in the fraud, aided and abetted the other two by not keeping a proper control over their workings and not paying attention to some obvious warning signs. For example, when Sherron Watkins pointed out Fastows accounting manipulations in an anonymous letter to Lay, he chose to ignore it and later even considered firing Watkins instead of addressing the issue. Thus, while Fastow was clearly carrying out illegal activities, he was being encouraged in this by the unethical practices of Skilling and Lay.

The Utilitarian principle of ethics states that an ethical act is one which produces the greatest good for everyone. Enrons senior management was clearly in violation of this ethical principle as they were functioning to maximize their own profits. When Skilling initially adopted the mark-to-market accounting, he took permission from SEC and hence he was well within his legal rights. However, this practice was unethical since it did not reflect the companys true financial positions and hence kept the investors in dark. Later, when faced with cash problems, he and Fastow resorted to SPEs. Although an SPE is a legal entity, Fastow was using them in a very unethical way. By funding the SPEs with as much as 97 Enron stock, he was not only pushing the legality of the SPE but it was also unethical as he was not using real cash but the companys market value to fund the SPE. Thus, he managed to raise cash for Enron through a practice which inherently misrepresented the companys true financial position.

It may be argued using the principle of Deontology that senior management was carrying out their duties towards Enron. According to this principle, it was their duty to see that company was constantly maximizing its profits and producing maximum wealth for the shareholders. Since Deontology is not concerned with consequences, according to this principle Enron management was not doing anything illegal since they were only carrying out their duties and doing what they perceived was in the best interest of the company.
There was also an expect of ethical egoism in the actions of the senior management since their actions were clearly aimed at maximizing the profits for Enron and the top management and its long term consequences to shareholders were ignored. It may also be argued that the management was actually acting with the view of maximizing the profits for all stakeholders and thus acting in the interest of the greatest good. However, this argument does not hold good in the case of Enron, since they were clearly cheating the investors and the regulatory bodies and the accounting practices were reflecting profits which could never be realized.
Also, once it became obvious that the company was headed for failure, the senior management quickly sold their shares to make as much profits as possible. This was clearly insider trading and while they advised others to buy as much company shares as possible, they themselves were baling out.
Thus, the senior management was clearly violating the Utilitarian principle of ethics which requires actions to result in the greatest good for all.