Group Member : Ghianinda Miharja (29118228)

Riri Lazzoria Eka Putri (29118218)

Gema Rendrahadi (29118194)

Abiyan Satrio Pratomo 29118155 YP-59-A

Enron Scandal and Public Accounting Firm (Arthur Andersen)

Overview

Enron Corporation is a company which affiliation between InterNorth (channeling natural gas
through pipelines) and Houston Natural Gas on 1985. Their core business is energy supply
industry that based in Houston, Texas, and the dissolution of Arthur Andersen, which was one
of the five largest audit and accountancy partnerships in the world. The Enron scandal,
revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation. In
addition to being the largest bankruptcy reorganization in American history at that time,
Enron undoubtedly is the biggest audit failure. It is ever the most famous company in the
world, but it also is one of companies which fell down too fast. In this paper, its analysis the
reason for this event in detail including the management, conflict of interest and accounting
fraud. Meanwhile, it makes analysis the moral responsibility From Individuals’ Angle and
Corporation’s Angle.

Analysis Regarding Theories of Ethics

 Deontological
The Enron scandal reveals ethical violations due to accounting fraud. Based on
deontological ethical theory that assesses the morality of an action based on
compliance with the rules, it can be said that obeying the rules is more important than
the results. The fraudulent financial reports made by Enron clearly violate
deontological ethics, where they choose to lie to the general public or shareholders
that they are a good company. In fact they have a lot of debt. People in Enron
companies who choose not to behave in an appropriate manner ethically do not have
an obligation to do what is right. This brings a lack of ethics for the company. If those
employed by a company cannot run a business with the right ethics, then the business
will, like Enron, eventually fail.
 Consequentialism
Consequentialism is the class of normative ethical theories holding that the
consequences of one's conduct are the ultimate basis for any judgment about the
rightness or wrongness of that conduct. Thus, from a consequentialist standpoint, a
morally right act (or omission from acting) is one that will produce a good outcome,
or consequence. If we refer, Enron business practices just makes the company
bankrupt and destroyed, and has negative implications for many parties. The parties
that being disadvantaged from this case is not only the investors, but also the
employees which already invest their retirement funds in stocks company, and the
investors in share market generally. Billions of dollars wealth investors erased
instantly with the launch stock prices of various company on a stock exchange. When
 viewed from agency theory , Andersen as the public accounting firm has destroyed
the trust from the stock holder or principal to give a fairness information about
responsibility from the agent in carry the mandate of principal .The agent in this case
management Enron have acting rationally to their own interests (self interest
oriented) by forgetting a norm and ethics healthy businesses. That’s why, because of
those lies and unethical business practices, Enron and Andersen got debt and misery
for many parties in the judicial process and lawsuits.
 Virtue
Virtue ethics focuses on a person's character rather than the rules and consequences
that will occur. In the 1990s Enron grew rapidly, the obsession with stock prices and
bonuses also grew out of control. The top executive, Jeff Skilling, allows this type of
unethical behavior to develop under his leadership. However, he did not act alone.
There are many other top-level employees involved in the same types of push
behavior as Skilling. They faked transactions to enlarge their own bonuses. They act
outside the limits of moral obligation because they only think about how much money
they will get is not a problem of what the consequences will be. This is a classic ethical
case against greed. This desire to make more money shifted the motivation of
employees to run Enron in an ethically appropriate manner. This is contrary to the
ethical nature of virtue. Virtue does not exist because this particular employee does
not have the character type to run Enron with appropriate ethics.

Conclusion

From analysis described above, we can conclude that Enron and KAP Arthur Andersen have
violated a code of ethics that should be a guideline in carrying out their duties and not to be
violated. It may be that the violation initially brought benefits to Enron, but eventually it could
bring down credibility and even destroy Enron and KAP Arthur Andersen. In this case, the KAP
that should have been able to act independently was not carried out by KAP Arthur Andersen.
Because of their actions, both of them reap the destruction in which Enron went bankrupt by
leaving billions of dollars in debt while KAP Arthur Andersen himself lost his independence
and trust from the community towards the KAP, also affected employees working at KAP
Arthur Andersen where they found it difficult to find work due to this case.

How to prevent

- Apply or adopt another trusted audit standard quality of public company.

- Investigate the Public Accounting Firm and their employees then do disciplinary
hearings, and using penalties if necessary.
- When assigning executives, the company has to be careful to consider the track record
to measure the tendency of unethical leadership. This can be done by applying
psychological test, and look into their past track records.
- The major ethical issue in this case is manipulation and fraud. To prevent these, the
company should embed ethical values into its company culture so that every
element of the entire organization act in a ethical manner. This can be done through
employee trainings.