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Business ethincs essay

In the beginning of XXI century, there emerged several financial and ethical scandals related to large corporations which have significantly impacted the world’s approach to business ethics and financial auditing, and had a negative effect on many stakeholders associated with these companies. The purpose of this paper is to consider the cases or Enron Corporation and WorldCom, to identify factors which led to the demise of these companies, consider ethical violations in accounting practices of these companies and describe the role of business ethics in strategic financial planning.

Enron Corporation operated in the sphere of natural gas, electricity, pulp and paper, and communications. It was considered one of the most successful companies and claimed more than $100 billion revenue in 2000 (Financial Crisis Inquiry Commission 2011). However, these revenues were shown due to accounting fraud, and not due to the real results of operations of Enron. In the end of 2001, Enron went bankrupt, and its dissolution was one of key factors which led to the creation of the Sarbanes-Oxley Act in 2002 (Gitman 2009). Another company shady accounting practices of which resulted in the creation of the SOX act was WorldCom. It was an influential telecommunications company, which went bankrupt in 2002. CEO of WorldCom used WorldCom stock to finance personal activities, and in order to cover margin calls manipulated accounting information, demonstrating false profitability of the company and artificially increasing the price of WorldCom stock.

For Enron, the leading cause of its failure was corporate culture cultivating greed and deception. The idea of getting results regardless of the cost and methods was populated by Enron management, and showing the appearance of value instead of the real value became acceptable in this culture. Enron’s Board of Directors did not fulfill its duties with regard to the company’s shareholders. Top managers of Enron were concerned only about their greed and own interests. Enron deception involved not only the company’s management, but also the external auditing firm Arthur Anderson. Corrupt political candidates were also involved in the fraud, and let Enron gain access to powerful connections (Financial Crisis Inquiry Commission 2011). Another factor created by political corruption is the gas and electricity deregulation legislation, which was strongly sponsored by Enron.

Among the factors which led to WorldCom bankruptcy there are declining customer and phone service in the end of 1990s, which led to the decline of the company’s stock, failed merger with the Sprint Corporation which was deemed illegal by the US Department of Justice (Financial Crisis Inquiry Commission 2011), excessive spending on personal business activities performed by Bernard Ebbers, corporate loans provided to WorldCom CEO, and accounting fraud performed by WorldCom CEO, CFO, Accounting Director and Controller in order to mask the financial decline of WorldCom. In the case of WorldCom, internal auditing procedure revealed the fraud, and the scale of the fraud was not as large as in the case with Enron.

Enron top management and other parties involved (political candidates, top executives and external auditing agency) have undertaken multiple ethical violations. The main of them were misrepresentation of earnings, modification of balance sheet in order to show high performance, asset values were often inflated, and liabilities were hidden by various accounting practices and written off (Financial Crisis Inquiry Commission 2011). Enron’s management used aggressive accounting practices and reported all values of their trade as revenue, thus inflating trade revenue. Their mark-to-market accounting approach showed present value of net cash flows for long-term contracts (Financial Crisis Inquiry Commission 2011), which gave the opportunity to show misleading reports for investors. The use of smaller companies (special purpose entities) allowed Enron managers to hide their debts (Financial Crisis Inquiry Commission 2011). Finally, whistleblowers did not act properly for Enron, and though many employees were suspicious of the problem, there were quite a few complaints about Enron. This ethical problem was conditioned by the company’s low and overly competitive business culture.

Regarding WorldCom case, it is possible to identify four ethical violations in accounting practices which took place in the 1999-2002 period. First of all, four key persons in the company agreed to use shady accounting methods in order to raise the company’s stock and show “profitability” to the shareholders. Secondly, these persons acted not for the benefit of the company, but tried to maximize their own profit at the expense of the company’s shareholders. Thirdly, expenses for interconnection with telecommunication companies were underreported (Financial Crisis Inquiry Commission 2011), and instead of treating these as expenses, WorldCom direction capitalized these costs. Finally, they have added counterfeit accounting entries, related to non-existent corporate accounts with unallocated revenue (Financial Crisis Inquiry Commission 2011), thus inflating revenues of the company and creating the illusion of profitability.

The examples considered above illustrate how unethical business and accounting practices have led to bankruptcy and decline of Enron and WorldCom, as well as many involved entities such as Arthur Andersen auditing firm. These examples show the crucial role of business ethics for the company’s operations. Ethics plays an important role in strategic planning, because it is required to achieve the company’s goals such as maximization of shareholder wealth and future growth (Gitman 2009). Ethics determines the culture of the company and also significantly affects its reputation, and the companies should pay close attention to corporate ethics as key element of strategic planning.

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