The 21st century is remarkable for the enormous number of corporate scandals in the world. It has been estimated that such famous companies as Enron, World Com and Global Crossing have experienced an appreciable economic breakdown due to commercial fraud and corrupt. Correspondingly, the scandals have led to the notorious reputation and long-term economic stagnation of these companies. The purpose of the study is to identify and analyze the series of corporate scandals that have damaged the credibility and fair reputation of major corporations. In order to clarify the issue, it is necessary to describe the notions of “corporate scandal”, “business ethics” and “corporate social responsibility”; to identify the causes and consequences of corporate scandals; to estimate who has to bear the responsibility for economic decline of the leading corporations.
The phenomena of business ethics and corporate social responsibility have been widely used in order to oppose the corporate violation of law. These terms have much in common, considering their origin and purpose. The definitions of these notions will be beneficial for improvement of the ways to run business.
Business ethics can be defined as a method of running business that adapts to legal codes, intentions, and expectations. The nature of business ethics is versatile. Business ethics originated in the USA in 1980s, and it started evolving in Europe several years later. Nowadays, despite the great differences between the South and the North, many American and European business schools have specific lessons based on the codes of business ethics. Some companies and corporations, including “The Body Shop” and “The UK Cooperative bank”, train their employees and employers. These companies suppose that knowing and applying the codes of business ethics is a successful marketing tool. The leadership of these companies considers that the role of ethics should be analyzed in every process of decision- making.
The opponents of this phenomenon stress that ethics has nothing in common with business because it does not belong to ethical issues. Furthermore, many scientists argue that ethics will definitely deprive businesses of profit. That means the companies do not follow the principles of ethics.
Companies are obliged to disregard the rules of ethics in order to be prosperous and gain profit. The business should be conducted according to the values and morals. However, not all values are ethical or honest and fair. Therefore, ethic is a system of rules that help people to distinguish what is right and wrong. First, business ethics is important for companies’ cooperation. In addition, it depends on the following features: justice, responsibility, honesty, and fairness.
The issue of business ethics should be discussed from two different perspectives. Firstly, ethics should be based on individual beliefs. Secondly, it has to meet standards of the society. Consequently, business ethics is connected with individual ethics as well as with that of the whole society. In the modern world, many businesses face ethical issues on everyday basis while selling goods and services and even in the process of dealing with the employees or customers. It is favorable for companies to run their businesses based on the code of ethics.
Having analyzed the notion of business ethics, it is necessary to differentiate the major goals that it aims to achieve. In such a way, the code of ethics includes the following principles:
- encourage each company to be just and honest while cooperating with other individuals and companies;
- promote fair, just, and honest way of running business affairs;
- guarantee security and protection of business interests and confidential information;
- prevent illegitimate acts and wrongdoings of businesses;
- meet expectations of shareholders;
- reach high standards;
- speak in support of reputation of businesses;
- fight against unethical employees and business organizations.
Another phenomenon that deals with business ethics is the notion of “corporate social responsibility”. In the course of time, the notion of CSR has been subjected to considerable modifications and is still developing with the expectations of the society. Nowadays there is no generally accepted definition of this term. The businesses have an opportunity to manifest CSR through their values, morals, and contributions. Socially responsible business organizations pay attention to the way they treat the clients, shareholders and, employees. The companies, that run their business affairs based on the principles of CSR, presume that it is important to be responsible for their customers. The phenomenon of CRS is characterized by the following principles:
- ensuring risk-free and healthy working environment;
- acceptance of numerous labor policies;
- avoiding exaggerated prices;
- escaping inadequate and untruthful data in advertising;
- health protection;
- environmental responsibility.
Having analyzed the notions of “business ethics” and “corporate social responsibility”, the conclusion is that the companies and other businesses that widely employ these strategies are able to increase the profits and to preserve fair reputation. Considering the suggestion of the many experts, the idea of corporate social responsibility can be regarded as optional or voluntary practice. The importance of business ethics and CSR can be viewed from two basic perspectives, namely positive and negative. Due to the positive factor, the good business ethics is a pledge of successful business. According to the negative point of view, ethics is usually followed by the companies for the single reason that violation of the code of ethics is too expensive and leads to unscheduled expenses. The beginning of the 21st century has proved that violation of the rules of business ethics and the principles of CSR has resulted in numerous corporate scandals that severely damaged the credibility and reputation of enormous corporations. The financial collapse of Enron can be considered as a classic example of negligence towards the code of business ethics and social corporate responsibility.
The Scope and Cost of Corporate Scandals
Even before several collapses of Enron and Global Crossing corporations, the humanity has witnessed a huge number of enormous accounting scandals of various corporations and companies. Such well-known corporations as Rite-Aid, McKesson, Livent and others were blamed for bankruptcy and brought to the court. The major reason for criminal indictments was the fact that many companies were redrafting their profits due to the discovery of financial manipulations that had many negative effects.
The period from 1987 till 1997 can be characterized as a stage of corporate scandals presage. At that time, Securities and Exchange Commission in the United States of America checked more than 300 companies for fraudulent reports in the sphere of financing. Consequently, the tests provided the data that demonstrated a sharp decline in the corporation standards. However, media did not pay attention to these business frauds since most of the companies were not included to the list of New York Stock Exchange and possessed less than $100 million in assets. The continuing deterioration of corporate scandals resulted in the increased level of earning restatements. It is important to note, that only 44 companies issued the number of these restatements in 1995 and, finally, by the last year of the 20th century earning restatements had extended to more than two hundred.
In 1998, the corporate scandals reached the level of New York Stock Exchange. Despite the fact that Cendant Corporation was formed in 1997 through the merger of two large corporations, such as CUC and HFS Inc., a few months after the corporate merger an enormous accounting fraud was revealed. For example, in April 1998, Cendant Corporation, a well-known provider of services for businesses and consumers within the spheres of real estate and tourism, inflated the earnings by $115 million. Two months later, the Cendant corporation issued one more restatement that constituted $400 million of inflated earnings.
In 1999, an American corporation, named McKesson, that distributes pharmaceutical products and medical supplies, stated that extra $328 million in reported revenues had to be gathered. Consequently, the SEC announced a criminal charge to the McKesson.
The year of 2001 is famous for a complete crash of Enron Corporation. This company was situated in Houston, Texas. Before the company was bankrupt in 2001, it employed more than 20 000 of people and was considered one of the major companies that supplied natural gas, electricity, pulp, and paper. At the end of 2001, Enron was accused of systematic and thought-out accounting fraud that, consequently, resulted in the collapse. The corruption of Enron Corporation is the largest fraud and bankruptcy in the history of the United States of America. After this shameful fraud, the vast number of manipulations and accounting scandals became obvious and usually led to criminal persecutions and investigations.
Global Crossing, an enormous telecommunications corporation that supplied the services of computer networking worldwide, became bankrupt due to more than $48 billion of inflated earnings. According to the statistics, the bankruptcy of Global Crossing can be regarded as the sevenths largest in the history of the USA.
The corporation Xerox was famous for production and distribution of color as well as black-and-white printers, digital production printing presses as well as many other goods and services. This corporation is famous for inventing computer accessories such as mouse and desktop computing. Since the period of its foundation the company was regarded as a stable and reliable one, until $6,4 billion of overstated earnings were revealed in 2002.
The corporate scandals of such companies as Enron, McKesson, Global Crossing, Tyco and many others influenced the reputation and credibility of these corporations in a negative way. Due to collapse of many powerful corporations, financial officers were successful in earning billions of dollars, and the employees were constantly losing their workplaces. Furthermore, corporate scandals caused numerous problems in the sphere of accounting.
Enron’ Policies and a Key to Success and Collapse
Notorious collapse of high-profile Enron Corporation has been a widely discussed subject and debatable issue among investors for more than a decade. For most citizens of the United States of America Enron Corporation has become an example or a symbol of the largest corporate accounting fraud in the history. The failure of Enron is the biggest collapse in the history of the USA. In order to avoid similar collapses in the future, the causes of consequences of Enron demise should be analyzed. Moreover, ethical, legal and social responsibility issues should be considered to in order to define who bears moral responsibility for the breakdown. Determining the factors that caused the collapse of corporation will be favorable for understanding the way business ethics and corporate social responsibility influence the corporate scandals.
For relatively long period, Enron Corporation was very profitable and successful since it was involved in the chain of energy supply. The company focused primarily on the distribution of natural gas and coal. The success of this corporation depends on the fact that it actually consisted of two branch offices. The first one was engaged in energy supply that bought pipelines and electrical power plants. The second branch functioned as a separate financial establishment that performed usually wholesale transactions. Enron Company was unique due to its ability to carry risks in complex operations. The corporation encouraged innovations and experimentations.
The breakdown of Enron is more than the incident of personal irresponsibility, dishonesty, and violation of business ethics. Due to the collapse of Enron, more than 4 000 of employees refused from their jobs. Furthermore, many businessmen wasted their deposits and investments. President George Bush considered that the collapse of this energy giant was the individual irresponsibility that is inadmissible in the sphere of business.
Enron energy giant is the biggest audit scandal. Scientists estimate that the main reasons for the financial bankruptcy of this corporation include the following features:
- inefficient management;
- difference in interests;
- lack of truthfulness and responsibility;
- accounting fraud;
- negligence of business ethics.
The Enron Corporation is characterized by the lack of truthfulness of the management towards employees. Considering the opinion of the executives, the managers of Enron had to protect reputation of the company at any price. Furthermore, according to the code of ethics, the corporation was obliged to provide the compensation to all employees and investors who went bankrupt due to the collapse of the company. Good faith and complete disclosure were the unique possible solutions in order to preserve good reputation.
Moreover, many scientists, who were interested in this issue, supported the idea that the collapse of Enron happened due to the conflict of interests and irresponsibility of management. Arthur Anderson, an auditor and consultant of the corporation, bears the most responsibility for the accounting crash. His reputation was completely damaged in January, 2002, when the workers of the company deleted the documents and correspondence of Enron. The behavior of employees affected the reputation of Anderson in a negative way. Consequently, the reputation of Anderson was annihilated together with the collapse of Enron energy giant.
After discussions concerning the causes of Enron collapse the questions arise. Who was to blame for the bankruptcy of Enron? Who had to carry the moral responsibility for employees and investors who lost their money? These questions can be analyzed from two opposite perspectives, namely individual and corporate. First, the success of each company depends on the right decisions and solutions of employees and managers. Therefore, they always seem to bear moral responsibility. Consequently, Kenneth Lay, the chairman of the board, Jeffrey Skilling, and Andrew Fastow were engaged in the secret operations concerning the transference of property. Furthermore, the Chief Financial Director of the corporation, Andrew Fastow, neglected the code of business ethics and was blamed for malfeasance in office. Moreover, following the order of Kenneth Lay, a group of workers committed several illegal operations. These employees knew that they had to perform a well-planned criminal act and, nevertheless, they did not reject the offer. That means they violated moral duty and were also involved in the breakdown of the corporation. On the contrary, from the corporate point of view, if the board of directors, shareholders and employees paid more attention to the work of chief executive officer and chief financial officer, the Enron Corporation would have definitely avoided errors and circumvent penalties.
Lessons from the Collapse of Enron Corporation
The crash of Enron energy giant annihilated the confidence in the sphere of financial markets on the territory of the USA and in the whole world. The board of directors of Enron appeared to be inefficient and did not manage to protect the interests of investors and workplaces of employees.
The following improvements could save the reputation of Enron as well as many other companies such as World Com, Tyco International, and Global Crossing. The list of advancements includes the following steps: business transparency; discipline and responsibility; loyalty and confidence; organizational trust.
The following problem areas have led to the loss of credibility and reputation of Enron:
- deregulations in the sphere of electric power;
- inability to provide transparence and full disclosure of business operations;
- accounting fraud;
- “ethical” bankruptcy;
- violation of moral values;
- violation of business ethics;
- negligence of the rules of corporate social responsibility;
- failure to protect interests of investors;
- inability to save workplaces of employees;
- ineffective accounting courses and programs;
- limited training of employees and the board of directors on the questions of business ethics.
After analysis of the cost and scope of the corporate scandals, it is possible to make the conclusion that the phenomena of “business ethics” and “corporate social responsibility” have a crucial role for determining failure or success of each company or corporation. According to the above discussions, the notion of “business ethics” can be defined as a voluntary method of running business affairs. The biggest emphasis on the phenomenon of business ethics has been made since 1980s. The notion of “corporate social responsibility” has changed in the course of time. There is no generally agreed explanation for CSR since it does not have to meet the law. The concept of corporate social responsibility is to prove that CSR is beneficial for avoiding the risk of profit and reputation loss.
In order the company gains good profits, business courses and lessons about business ethics should be available to the employers and to the employees. Furthermore, the leadership should develop a series of additional theories and studies concerning unethical behavior and practices. The presence of independent experts in financial sphere would be beneficial for every company. Transparency of business affairs and public discipline are the key points for avoiding accounting frauds and collapse. Leadership and employees bear the moral responsibility for performance of the business. Healthy working environment and culture positively influence the progress of the company. More governance from the leadership could have prevented Enron from the crash. The behavior of management and employees has to be controlled in order to increase the efficiency of work. The ignorance of the code of business ethics and corporate social responsibility had strikingly negative results not only on Enron energy giant, but on the whole economic situation of the USA. Consequently, violation of business ethics should have a primary focus since it can lead to various types of wrongdoings, including accounting fraud and corporate scandal.
About the Author
Nancy Bauman is a financial analyst and accounting expert. She is also an expert on business ethics and is constantly participating in university conferences as a member of the Educated Youth Movement. She regularly contributes articles related to business and loans at advanced-writer.com