Bigger Than Enron, Movie Review Example

The documentary offers an interesting outlook at the unethical events that marked the collapse of Enron. It reveals the level of financial reporting scandals that were perpetrated at Enron leading to bankruptcy. It is indicated that financial analysts, Enron staff, bankers, company executives and auditors, who were tangled in the mix, were aware that the market value of Enron was misrepresented. They also knew that the company’s financial statements did not reflect Enron’s true financial status. The film shows clips of the key perpetrators in the scandal, such as Enron’s executive heads, Jess Skilling and Ken Lay, FASB chairman Jim Leisenring and SEC chairman Arthur Levitt, who had piled pressure on Congress to hide reporting of stock options as expenses. The documentary also shows clips of Arthur Anderson partners, Joseph Berandino and James Hooton, who retained Enron as their client, amid corrupt accounting practices. Sherron Watkins, the whistleblower, is also shown. Enron’s financial staff, who prepared the financial statements and financial mechanisms along with auditors from Arthur Anderson who endorsed Enron’s financial statements, operated under the moral veil of deception, by constantly defending their actions as not being unethical. In reality, Enron financial staff had manipulated the whole scenario by subverting Generally Accepted Accounting Principles (GAAP) and FASB rules by hiring former FASB staff, who had set out accounting rules in “gaming the system.” Additionally, accounting firm, Arthur Anderson, which was duty-bound to have oversight of Enron’s accounting practices and which was supposed to maintain the integrity, was discovered to have instead facilitated the fraud at Enron. This allowed them to bend ethical guidelines for personal gain.

Overview

From the documentary, two topics of interest are obvious. These include manipulation of rules and ethical guidelines for personal financial gain and lack of accounting transparency. This report is based on the assumption that self-deception and lack of transparency can lead to “ethical fading,” which leads to unethical business practice.

Topic 1: Self-deception and ethical fading

The scandals at Enron within an auditing perspective and rules-based accounting resulted from acts of self-deception. As pointed out by Messick and Bazerman, self-deception is the state of being unaware of the processes that lead to form certain opinions and judgments. Basing on the self-perception rationale, Enron’s staff along with the Anderson auditors used an accounting approach that, although may have abided by the accounting rules, violated the purpose of having an objective, transparent and accurate financial reporting (Bazerman and Watkins 43).

Causes and Consequences of Self-deception

As stated by Satava, Caldwell and Richards (273), self-deception can cause moral significance of the decision to fade, as a result, allowing individuals to behave corruptly while simultaneously not realising that they are doing so. Indeed, this translates the occurrences at Enron. For instance, Enron staff was convinced that they were doing what should exactly be done in adhering to the rule-based accounting frameworks, since their morality was in harmony with a legally-based intentional amoral management model. This depicts the role of self-deception in ethical fading. Tenbrunsel and Messick (224-226) explain that the self-deception enables one to behave self-interestedly while simultaneously believing in the falsehood that an individual’s moral principles were maintained.  The outcome of the internal fraud game is that ethical components of the decision get to “fade” into the background. Additionally, moral implications become obscured. Tenbrunsel and Messick (224-226) identified forms of self-deception to include errors made in perceptual causation, decision-making and offensive language that are triggered by greed or feeling of self-importance. This reflects the events that characterised scandals at Enron. Ethical fading describes the process through which the moral aspects of ethical decision fade into those that are empty of moral significances or implications.

An ethical decision entails the trade-off between moral principles and self-interest. Hence, when the moral implications or significance of  the decision are disguised, avoided or obscured,  individuals tend to conduct themselves in an egotistical manner while at the same time upholding the belief that they are ethical persons (Tenbrunsel and Messick 224-226). Hence, self-deception by the Enron staff and Anderson auditor can be perceived to inhibit morality. For instance, Enron’s financial staff adhered to the accounting rule-based framework, since their conception of morality was in consistency with a legally-based intentional amoral management framework. However, this facilitated grounds for corrupt tendencies.

As stated by Tenbrunsel and Messick (224-226), the “amoral management model created a form of moral arrogance or hubris” at Enron.  Arbinger defines moral hubris as the “self-deceit that is anchored in a form of abstract greed.” Taking a similar perspective, Tenbrunsel and Messick (224-226) explained that the moral hubris may trigger imaginary profit motivation, which leads to ‘abstract greed.” Bazerman and Watkins (43) also explained that the end outcome of self-deception is distortion of the moral implications or ethical rule, or ethical fading. In regards to Enron’s financial staff, the team worked agitatedly to exploit the rules and to come up with a reasonable rationale for their corrupt conducts. Afterwards, the staff became convinced that it did what should exactly be done in adhering to the rule-based accounting frameworks. To the best of their knowledge, this was since they believed that their morality was in harmony with a legally-based intentional amoral management model.

Jeffrey (57-61) opined that ethical principles should not be viewed as subjective measures that vary depending on economic, social and cultural conditions. Rather, they should be viewed as subjective measures that cut across cultures, nations, religions and economic times. It is argued that since Enron ethical guidelines did not meet these criteria, they provided grounds for manipulation of guidelines for personal gain. Satava, Caldwell and Richards (273-4), suggests that the duties owed by auditors and accountants are central and crucial and should be based on ethical principles that are not subject to change despite the company involved or the financial benefits anticipated. Second, there should be a duty to society that covers the stakeholder and public interest. Hence, it should be argued that the ethical foundation of financial reporting and auditing should be beyond the rule-based model, such as the one that dominated the auditing process at Enron.

Topic 2: Accounting Transparency

Satava (274-275) suggests that ethics implies transparency in accounting in addition to other financial affairs and creation of trust among the shareholders, customers and investors. It is argued that accounting transparency shows the accountability of an organisation’s management and the company’s ethics (Arjoon 1-3). Despite this, several companies often face bankruptcy and insolvency because of accounting fraud resulting from lack of transparency in accounting. For instance, Enron became bankrupt while Arthur Anderson faced de facto insolvency. Arthur Anderson has been criticised for lacking transparency in its auditing practice. Among its famous clients who perpetuated the largest fraud in the history of accounting includes Enron, WorldCom, Waste Management, Sunbeam and Foundation Arizona.

To effectively pursue an ethical analysis of Enron’s lack of transparency, a clear idea of ethics is crucial. Ethical principles do not consist of what motivates people to act for the good. Rather, it is concerned with the rationale behind the actions they take. To this end, Dembinski et al. (54-55) warns that in the analysis of such scandals, motivation should not be confused with the justification that the concerned parties give on the basis of principles. When the affected parties who were in charge of Enron’s finances were blamed for setting up special purpose entities to hide the company’s misfortunes and make its financial status appear stronger, the principle behind such claims was transparency (Dembinski et al. 54-57).

Further cases of lack of transparency is shown by Enron’s decision to hire several Certified Public Accountants (CPAs) and accountants who had developed accounting rules with Financial Accounting Standards Board (FASB) (Cunningham and Harris 32).  The accountants researched on new techniques to help the company to exploit loopholes in the GAAP to the company’s advantage. FASB is a private organisation set up by the Securities and Exchange Commission to create generally accepted accounting principles (GAAP) for companies that trade publicly. GAAP are designed to instruct publicly trading companies on how to prepare financial reporting. This created grounds for lack of transparency in financial reporting (Cunningham and Harris 28-32).

Enron violated GAAP through incorrect accounting for SPEs and failing to use equity methods of accounting, providing complete disclosure, eliminating the effect of the transaction among entities and unfair financial reporting procedures. Some analysts have suggested that by being able to manipulate GAAP, Arthur Anderson and Enron viewed GAAP as rules rather than ethical principles, interpreted GAAP aggressively, failed to consider fairness principles and disregarded the legal precedent that emphasised fairness over detailed rules. Due to these, Enron failed to show a fair, transparent and true picture of its financial statements. Anderson verified the accounts despite the inaccurate financial statements. As a result, Enron’s stockholders lost an estimated $25 billion when the company went bankrupt (Cunningham and Harris 28-32).

In other case of lack of transparency, WorldCom and Arthur Anderson also violated the ethical principle of transparency in accounting. In June 2002, WorldCom, a US-based telecommunications company, declared publicly that it had overstated profits by $3.8 billion. Arthur Anderson, which audited the company’s accountants, was implicated by the circumstances in the scandals since it had failed to detect the errors of this magnitude. Questions arose why the company had failed to use more aggressive accounting practices and standards (Lyk and Jickling 1-2). Tyco Laboratories was also involved in unethical practices classifiable as lack of transparent accounting. Upon investigation into the company’s finances by Securities and Exchange Commission, it was discovered that the company’s stocks had been overrated and that the executive management had sold close to $100 million and misrepresented figures to the public and the investors (Eric n.p.). In another scandal, Waste Management Inc, a Texas-based, waste management company, was discovered to have engaged in unfair financial reporting practices between 1992 and 1997, when the company’s executive colluded with Arthur Anderson, which misstated the company’s earnings.

The scandals perpetuated by Arthur Anderson, Tyco, Enron and Waste Management led the United States government to enact ‘Sarbanes-Oxley Act’ (SOX) in July, 2002. The Act set up the Public Company Accounting Oversight Board (PCAOB) to restore transparency in financial reporting (Wegman 1). Revelations that concerned Arthur Anderson’s performance resulted to the eventual collapse of the company. Evidence from the cases suggests that the Anderson had failed to fulfil its professional responsibilities in respect to auditing financial statements. The company was charged with obstruction of justice. Given the large number of the company’s employees who were involved in the scandal, the company was immediately put out of business, since the SEC is not permitted to accept audits from convicted felons. In August 2002, it surrendered its CPA license as 85,000 employees were put out of business. The scandals resulted in de facto dissolution of Arthur Anderson (Cunningham and Harris 28-32).

Theoretical perspectives

The self-interest ethical theory, which relates to the agency theory of governance, argues that key decision-makers, who have superior information, take to self-interest craftily and opportunistically (Tenbrunsel and Messick 224-226). Despite the fact that agency theory suggests that an organisation should offer incentives to ensure that its staff acts ethically, the audit relationship can pile pressure on the auditors to help the client to outwit accounting rules. For instance, Andy Fastow, Enron’s chief finance officer, and his team, manipulated the accounting rules before creating off balance sheet financial instruments that disfigured revenues. Further, they pressured Arthur Anderson’s auditors to corroborate the financial misrepresentations. Despite the fact that these accounting distortions were disastrous to Enron, Arthur Anderson as well as the investing public, they were profitable for the two companies (Enron and Arthur Anderson) in the short-term. This flawed logic caused the two companies to defend a rule-based as well as the short-term gains.

Utilitarian Benefits ethical theory suggested by Sen (143-144) points to the idea that the moral code should be based on the duties owed to the rules and the society that would permit potential conflict of duties owed to stakeholders and the public. In regards to Enron, the perception of the accountants and auditors of the financial benefits and self-interests facilitated self-deception and rationalisation (Tenbrunsel and Messick 224-226). This further permitted the responsible parties to agree to misrepresent the true reflection of Enron’s financial status. It also ignored the moral duties owed to the investing public.

Conclusion and Recommendations

The financial scandals at Enron by way of the implicit ethical deception within an auditing perspective and rules-based accounting indicate a series of acts of self-deception and lack of transparency. Indeed, analysis of ethical patterns in the accounting profession, as drawn from the “Bigger than Enron” case, indicates that self-deception led to the lack of transparent financial reporting. By influencing the decision frame adopted within an organisation, the two can lead to unethical business practices. For organisations to avoid a repeat of what happened at Enron, a principle-based model should be implemented to change the ethical behaviour of financial auditing and reporting. Educating the accountants on ethical principles can increase the possibility that individuals would see the decision as containing ethical dimensions. CPAs should also be encouraged to complete continuing education course on business ethics. This will also enable audit and accounting professionals to confront unethical patterns in their practice. Periodic cultural audit of organizations should also be conducted to monitor attitudes towards principle-based and rule-based ethics. Lastly, in-house training on ethics should be offered at all levels of an organisation.

 Works Cited

Arbinger Institute. “Leadership and Self-Deception.” Berrett-Koehler Publishers: San Francisco, 2000

Arjoon, Surendra. Corporate Governance: An Ethical Perspective. The University of the West Indies St. Augustine: Trinidad, 2008

Bazerman, Max & Watkins, Michael. Predictable Surprises: The Disasters You Should Have Seen Coming, and how to Prevent Them. Harvard Business Press: Boston, 2004

Cunningham, Gary & Harris, Jean. “Enron And Arthur Andersen: The Case Of The Crooked E And The Fallen A.”Global Perspectives on Accounting Education, vol. 3, p.27-48

Dembinski, Paul, Carole Lager, Andrew Cornford and Jean-Michel Bonvin. Enron and World Finance: A Case Study in Ethics. Palgrave Macmillan: Hampshire, 2006.

Eric, Jason. Tyco Scandal Business Case Analysis: The Fall of Dennis Kozlowski and the Impact on the Tyco Company.Yahoo Voices, 2012. 11 April 2014. <http://voices.yahoo.com/tyco-scandal-business-case-analysis-11330744.html>

Lyk, Bob and Jickling, Mark. “WorldCom: The Accounting Scandal.” CRS Report for Congress

Messick, D. M., and Bazerman, M. H. Ethical leadership and the psychology of decision making. Sloan Manage. Rev.37(2): 9–22.

Jeffrey, Cynthia. “Research on Professional Responsibility and Ethics in Accounting. “Emerald Group Publishing: Bingley, 2006

Satava, David, Cam Caldwell & Linda Richards. Ethics and the Auditing Culture: Rethinking the Foundation of Accounting and Auditing. Journal of Business Ethics 64.1 (2006): 271–284

Sen, Amartya, Bernard Williams, Bernard Arthur and Owen Williams. “Utilitarianism and Beyond.” Cambridge University Press: Cambridge, 1982

Tenbrunsel, Anne & Messick, David. “Ethical Fading: The Role of Self-Deception in Unethical Behavior.” Social Justice Research, 17.2 (2004): 223-236

Wegman, Jerry. “Attacking Sarbanes-Oxley: The Constitutional Challenge To The Public Company Accounting Oversight BOARD.” Journal of Legal, Ethical and Regulatory Issues. (Web).