Enron, an energy company was regarded as one of the most potential companies in the 90’s. However, they went bankrupt for a month. As the truth came out, people found that this company were unethical. The top people in the company used the new policies released in the U.S. to defraud all the money from their stockholders into their own pockets. Many people said that Enron’s behaviors were unethical but it seems like most people in Enron do not realize that what they are doing is unethical. From my perspective, Enron’s employees did unethical practices because they didn’t use the right ethic theory and their ethic was derived from the wrong starting point.
There is one practice that made me impressed, the rule to lay off employees. This practice was raised by Jeffery Skilling, the CEO of Enron, he called the system the Performance Review Committee(PRC). He believed that a person’s ability can be graded and the system will classify the people into five levels. Some people must be graded as a five and then they will be fired. As a reward, the people who are graded at the first level in the company can get a five million dollar bonus(Enron: The smartest Guys in the Room). As a result, in order to stay in the company, employees try everything to keep their level and ascend to the top level.
The practice made the employees ruthless. “If I’m on the way to my boss’s office talking about my compensation, and if I step on somebody’s throat on the way that doubles it, well, I’ll stomp on the guy’s throat. That’s how people were(Enron: The smartest Guys in the Room),” said Charles Wickman, the Ex-trader of Enron. I think under that working environment, because people were so stressed, they think if they do not stomp on each other, their condition will be bad. One result is that they might get less compensation but the worst result is that, there were going to lose their job. However, since the compensation is so alluring, they prefered to stay in the company and kick other people out, rather than follow the traditional ethics and lose their job.
John Stuart Mill had come up a theory of ethics, which he called Utilitarian Ethics. Utilitarian Ethics declares that a right decision is the decision that can bring the maximum happiness for all the humans involved in the incident, and reduce the pain to the minimum(Mann, Roberts, 30). This practice is unethical according to Utilitarianism. It means every year some people had to be fired no matter how hard they worked. The practice forced employees to discard their kindness, and act like a wild animals. You have to kill other vulnerable animals, then you can survive. The practice awakened people’s greedyness and desire. Though someone stays, someone leaves. This condition is against what Utilitarianism says, maximizing the overall happiness for all humans. Since a company is like a group or family, people in the team should work together and unite as one. Someone did not get happiness in this practice and the result might make people doubt themselves or their working competence. As an outsider of Enron, we use Utilitarianism to judge it and think it is unethical. However, as an insider of Enron, they might have a different opinion.
Their behavior could also be explained by another theory of ethics, moral relativism. Moral relativism states that a person may accept an ethical rule that is against their original rule to make a decision in a certain circumstance(Mann, Roberts, 30). Moral relativism has two types: cultural and individual(Mann, Roberts, 30). The ethic of Enron is cultural relativism. Cultural Relativism suggests that whether a decision is right or wrong is based on what the society’s norms are(Mann, Roberts, 30). Enron is a small society. In the company, everyone knows that stomping on others is a common way to reach a higher level, so they accept it and think their behavior is right and ethical.
From my perspective, Enron’s cultural relativism was derived from the traps of ethics. First, they follow blindly the company’s authority figures. People followed an order regardless of whether it is right or wrong because they were afraid to be punished, or because they respected and believed in their authority(Mann, Roberts, 30). Employees respect Skilling because he helped Enron make a lot of money. This respect made Skilling a model in employees’ mind. “When Jeff got Lasik on is eyes, everybody at Enron got Lasik”, said by Mimi Swartz, the Executive Editor of Taxes Monthly Magazine(Enron: The smartest Guys in the Room). Employees got lost in following: Skilling is right, I’ll follow everything he does or said. Therefore, they agreed with the PRC system and chased the highest level even though the system is brutal. Also, they were afraid that they will be punished if they went against Skilling.
Second, money is also a big factor for the form of Enron’s cultural relativism. Skilling had said that “money was the only thing that motivated people(Enron: The smartest Guys in the Room).” On the one hand, employees were forced to accept the practice; on the other hand, their desire of money also encouraged them to accept the practice and do something unethical. If you can defeat a certain percentage of people, you are enrolled in the highest level and you can get a 5 million dollar bonuses. In the nineteenth century, 5 million is such an attractive number. Money leads people to move towards darkness. They began to use tricks or some means to get the thing they want.
Because of these two factors, the ethic of the company went into a wrong way. Employees valued profit and discarded mercy. When the idea takes root in mind, nobody will think it is wrong, because this is the norm of the company. Their cultural relativism tells them that it is ethical.
Enron’s norm is not the norm of the society people live in. From most people’s view, the practice does not care about people’s feelings and it is too brutal, like an arena. It makes people become immoral. As a system which governs a number of people, it should give consideration to a major part of people. It should be tolerant to everybody. For Enron, since they are familiar with the system and get used to it, they have no comments about this system. However, their ethic is derived from the wrong point of view. Following orders and money are the traps which give Enron employees an illusion that what they are doing is right, and employees do not realize that they are being mislead. Therefore, the practice will never be ethical in society, because a real ethic is formed in a positive intention.

Enron, the seventh largest public company in the United States by 2001. As a big company like Enron, there must be some business risk in their operation. Enron need to treat the risks seriously otherwise they can increase the likelihood of the material misstatements in company’s financial statement.
The first business risk Enron faced is the technology requirement and online huge cash inflow. In 1999, to survive in the century of internet boom, Enron launched a web based commodity trading site, Enron online. Enron become the first company provide online trading service among the world. The online trading system brings Enron a gross revenue of $101 billion however the cost to get this result must be very high. Enron need to improve their technology to make sure the business can run smoothly and able to access with a high-speed internet bandwidth and hire a lot of experts in the area of actuarial science, mathematics, physics, meteorology, and economics to make sure that they can manage the business risk by running the new online economy. The high cost become a business risk faced by Enron since it need a huge amount of cash to support the running of the online system. In the other hand, Enron online is handling more than $1 billion of transactions daily. A huge amount of cash inflow coming and monitored by the online system daily is the risk faced by Enron. It will cause an increasing in likelihood of a material misstatement for the financial statement once the system is fail or one of the transactions being missed.
Besides that, the next business risks Enron faced is lack of independent of external audit firm. Enron is one of the largest client of the accounting firm, Andersen. Andersen provide the external financial statement audit work and also the consulting service which is on Enron’s internal audit function. Andersen has been paid with a total amount of $52 million for the external financial statement audit and the internal audit function. As an external auditor, Andersen should only provide Enron external audit service to make sure they are independent. However, Andersen also provide internal audit service at the same time. Therefore, Andersen is not independent with Enron. It becomes a business risk that faced by Enron and the risk can increase the likelihood of material misstatement. It is possible that Andersen may miss some material misstatement such as sale overstated, cost understated and omission of some expenses that will cause Enron’s profit in financial statement up or down due to their own benefits come from Enron since they are not independent. For example, when Andersen was auditing for Enron’s 1997 results, they found that $51 million of the adjustment should be done in Enron’s book but Enron refused to make the adjustment since it will reduce their 50% annual income. Andersen decided that the adjustment is not material and just let it go uncorrected. If the $51 million adjustment is justified as a material misstatement, Enron’s 50% annual income will be cut down, from $105 million to $54 million, the profit will be cut down by $51 million too.
Last but not least, the third business risk that Enron faced is the high degree of borrowings. Enron set up the “Special Purpose Entities”, sell off their assets in a share terms at over $100 per share, receiving an outside investment loan in a sale of assets term and without recording the liabilities on the company’s balance sheet. In result, Enron get a huge fund with the heading of sale of assets and no recognize as a liability but it actually is a borrowing fund received from external investor by sell off assets to “Special Purpose Entities”. Enron rely on a large amount of borrowing funds but never record them as a liability. Enron’s financial statement looks highly profitable and growth well, the stock valuation is also increasing continuously. This is entirely due to the existence of “Special Purpose Entities”. However, the “Special Purpose Entities” can cause a business risk for Enron since the borrowing fund will increase as long as the “Special Purpose Entities” running. The more investors to invest in the company, the more liabilities incurred without record on the balance sheet while the cash inflows are coming in. The likelihood of material misstatement in the financial statement will be increased.
In conclusion, the business risks that faced by Enron which may increase the likelihood of material misstatement in the company’s financial statement are the technology requirement and online huge cash inflow daily, lack of independent of the external audit firm and the high degree of borrowing fund without recorded.

Enron, the seventh largest public company within the united states in 2001. As an large company like Enron, there should be some business risk in their operation. Enron have to treat the risks seriously otherwise they will increase the chance of the material misstatements in company’s financial statement.
The first business risk Enron faced is the technology demand and on-line huge cash flow. In 1999, to survive within the century of internet boom, Enron launched an online based trading web site, Enron online. Enron become the first company offer on-line trading service among the world. The web trading system brings Enron a gross sale of $101 billion but the cost to induce this result should be terribly high. Enron need to improve their technology to make sure the business will run smoothly and ready to access with a high-speed web bandwidth and hire lots of specialists within the area of actuarial science, mathematics, physics, meteorology, and economics to make sure that they will manage the business risk by running the new on-line economy. The high cost become a business risk faced by Enron since it need an enormous amount of money to support the running of the web system. In the other hand, Enron on-line is handling over $1 billion of transactions daily. A large quantity of cash flow coming and monitored by the web system daily is the risk faced by Enron. it will cause an increasing in probability of a material misstatement for the balance sheet once the system is fail or one of the transactions being missed.
Besides that, the next business risks Enron faced is lack of independent of external audit firm. Enron is one of the biggest client of the accounting firm, Andersen. Andersen provide the external financial statement audit work and also the consulting service that is on Enron’s internal audit function. Andersen has been paid with a total amount of $52 million for the external financial audit and the internal audit function. As an external auditor, Andersen ought to only provide Enron external audit service to make sure they are independent. However, Andersen also provide internal audit service at the same time. Therefore, Andersen is not independent with Enron. It becomes a business risk that faced by Enron and therefore the risk will increase the likelihood of material misstatement. It is possible that Andersen might miss some material misstatement like sale overstated, cost understated and omission of some expenses that will cause Enron’s profit in financial statement up or down due to their own advantages come from Enron since they are not independent. For instance, when Andersen was auditing for Enron’s 1997 results, they found that $51 million of the adjustment should be done in Enron’s book however Enron refused to make the adjustment since it will reduce their 50% annual income. Andersen therefore determined that the adjustment is not material and just simply let it go uncorrected. If the $51 million adjustment is justified as a material misstatement, Enron’s 50% annual income are going to be cut down, from $105 million to $54 million, the profit will be cut down by $51 million too.
Last but not least, the third business risk that Enron faced is the high degree of borrowings. Enron set up the “Special Purpose Entities”, sell off their assets in a share terms at over $100 per share, receiving an outside investment loan in a sale of assets term and without recording the liabilities on the company’s balance sheet. In result, Enron get a large fund with the heading of sale of assets and no recognize as a liability however it actually is a borrowing fund received from external investor by sell off assets to “Special Purpose Entities”. Enron rely on a large quantity of borrowing funds but never record them as a liability. Enron’s financial statement looks extremely profitable and growth well, the stock valuation is also increasing continuously. this is entirely because of the existence of “Special Purpose Entities”. However, the “Special Purpose Entities” will cause a business risk for Enron since the borrowing fund will increase as long as the “Special Purpose Entities” running. The more investors to invest for the company, the more liabilities incurred without record on the balance sheet while the money inflows are coming in. The likelihood of material misstatement within the financial statement are going to be increased.
In conclusion, the business risks that faced by Enron which can increase the probability of material misstatement within the company’s financial statement are the technology demand and on-line huge cash flow daily, lack of independent of the external audit firm and the high degree of borrowing fund without recorded.

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