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Twenty Years Later: The Lasting Lessons of Enron

enron case ethical analysis

Michael Peregrine  is partner at McDermott Will & Emery LLP, and  Charles Elson  is professor of corporate governance at the University of Delaware Alfred Lerner College of Business and Economics.

This spring marks the 20th anniversary of the beginning of the dramatic and cataclysmic demise of Enron Corp. A scandal of exceptional scope and impact, it was (at the time) the largest bankruptcy in American history. The alleged business practices of its executives led to numerous individual criminal convictions. It was also a principal impetus for the enactment of the Sarbanes-Oxley Act and the evolution of the concept of corporate responsibility. As such, it is one of the most consequential corporate governance developments in history.

Yet a new generation of corporate leaders has assumed their positions since then; for others, their recollection of the colossal scandal may have faded with the years. And a general awareness of corporate responsibility principles is no substitute for familiarity with the governance failings that reenergized, in a lasting manner, the focus on effective and responsible governance. A basic appreciation of the Enron debacle and its governance implications is essential to director engagement.

Enron was formed as a natural gas pipeline company and ultimately transformed itself, through diversification, into a trading enterprise engaged in various forms of highly complex transactions. Among these were a series of unconventional and complicated related-party transactions (remember the strangely named Raptor, Jedi and Chewco ventures) in which members of Enron’s financial leadership held lucrative financial interests. Notably, the management team was experienced, and both its board and its audit committee were composed of a diverse group of seasoned, skilled, and prominent individuals.

The company’s rapid financial growth crested in March 2001, with media reports questioning how it could maintain its high stock value (trading at 55 times its earnings). Famous among these was the Fortune article by Bethany McLean, and its identification of potential financial reporting problems at Enron. [1] In a dizzying series of events over the next few months, the company’s stock price collapsed, its CEO resigned, a bailout merger failed, its credit was downgraded, the SEC began an investigation of its dealings with related parties, and it ultimately declared bankruptcy. Multiple regulatory investigations followed, several criminal convictions were obtained and Sarbanes-Oxley was ultimately enacted to curb the perceived abuses arising from Enron and several similar accounting scandals. [2]

There remain multiple important, stand-alone governance lessons from Enron controversy of which all directors would benefit:

1. The Smartest Guys in the Room . The type of aggressive executive conduct that contributed heavily to the fall of Enron was not unique to the company, the industry or the times. In the absence of an embedded culture of corporate ethics and compliance, there is always the potential for some executives to pursue “edge of the envelope” business practices, especially when those practices produce meaningful near term financial or other operational results. That attitude, combined with weak board oversight practices, can be a disastrous combination for a company.

Even though commerce has made great progress since then on internal controls, corporate responsibility ultimately depends upon the integrity of management, and the skill and persistence of board oversight. [3]

2. The Critical Importance of Board Oversight . As the company began to implode, Enron’s board commissioned a special committee to investigate the implicated transactions, directed by William C. Powers Jr., then dean of the University of Texas School of Law. The Powers Report, as it came to be known, outlined in staggering detail a litany of board oversight failures that contributed to the company’s collapse. [4]

These included inadequate and poorly implemented internal controls; the failure to exercise sufficient vigilance; an additional failure to respond adequately when issues arose that required a prompt and serious response; cursory review of critical matters by the audit and compliance committee; the failure to insist on a proper information flow; and an inability to fully appreciate the significance of some of the information with which the board was provided. [5]

3. Spotting Red Flags . Amongst the most damaging of the governance breakdowns was the failure to question the legitimacy of the related-party transactions for which so many internal controls were required. These deficiencies served to bring a once significant company and its officers to their collective knees and offer many lasting governance lessons. As the Powers Report concluded with brutal clarity, a major portion of the company’s business plan—related-party transactions—was flawed. [6]

These transactions were replete with risky conflicts of interest involving management. There was a significant “forest for the trees” concern—an inability to recognize that conflicts of such magnitude that required so many board-approved internal controls and procedures should never have been authorized in the first place. All this, despite the fact that the individual Enron directors were people of accomplishment and capability who had been recognized by the media as a well-functioning board. [7]

Yet, they lacked the actual necessary independence to recognize the red flags waving before them. Their varied relationships with company leadership made them all-too-comfortable with what they were being told about the company. [8] This connection made it difficult for them to recognize the dangers associated with the warning signals that the conflicted transactions projected. Indeed it was the revelation of these conflicts that attracted media attention and ultimately “brought the house down”. [9]

4. It Can Still Happen . The 2020 scandal encompassing the German financial services company Wirecard offers one of the latest high profile (international) examples of how alleged aggressive business practices, lax internal and auditor oversight, accounting irregularities and limited regulatory supervision can combine into a spectacular corporate collapse that prompted numerous government fraud investigations. It is for no small reason that the Wirecard scandal is referred to as the “German Enron”. [10]

5. A Significant Legacy . Yet the Enron controversy remains fundamentally relevant as the spark behind the corporate responsibility environment that has reshaped attitudes about corporate governance for the last 20 years. It’s where it all began—the seismic recalibration of corporate direction from the executive suite back to the boardroom, where it belongs. It birthed the fiduciary guidelines, principles, and “best practices” that serve as the corridors of modern corporate governance, developed in direct response to the types of conduct so criticized in the Powers Report. [11]

And that’s important for today’s board members to know. [12] Because over the years, the message may have lost its sizzle. The once-key oversight themes incorporated within “plain old” corporate responsibility seem to be yielding the boardroom field to the more politically popular themes of corporate social responsibility. And, while still important, corporate compliance seems to have had its “fifteen years of fame” in the minds of some executives; the organizational initiative has turned elsewhere.

But the pendulum may be swinging back. There is a renewed recognition that compliance programs can atrophy from lack of support. The new regulatory administration in Washington may return to an emphasis on organizational accountability. As Delaware decisions suggest, shareholders may be growing increasingly intolerant of costly corporate compliance and accounting lapses. And there’s a renewed emphasis on the role of the whistleblower, and the board’s role in assuring the support and protection of that role.

So it may be useful on this auspicious anniversary to engage the board on the Enron experience, in a couple of different ways. First, include an overview as part of formal director “onboarding” efforts. Second, have a board level conversation about expectations of oversight, and spotting operational and ethical warning signs. And third, reconsider the Enron board’s critical and self-admitted failures, in the context of today’s boardroom culture. [13]

Such a conversation would be a powerful demonstration of a board’s good-faith commitment to effective governance, corporate responsibility and leadership ethics.

1 Bethany McLean, “Is Enron Overpriced?” Fortune, March 5. 2001. https://archive.fortune.com/magazines/fortune/fortune_archive/2001/03/05/297833/index.htm. (go back)

2 See , Michael W. Peregrine, Corporate BoardMember , Second Quarter 2016 (henceforth “Corporate BoardMember”). (go back)

3 See , e.g., Elson and Gyves, In Re Caremark : Good Intentions, Unintended Consequences, 39 Wake Forest Law Review, 691 (2004). (go back)

4 Report of the Special Investigation Committee of the Board of Directors of Enron Corporation, February 1, 2002. http://i.cnn.net/cnn/2002/LAW/02/02/enron.report/powers.report.pdf. (go back)

5 See , Michael W. Peregrine, “The Corporate Governance Legacy of the Powers Report” Corporate Counsel , January 23, 2012 Monday. (go back)

6 See , Michael W. Peregrine, “Enron Still Matters, 15 Years After Its Collapse”, The New York Times , December 1, 2016. (go back)

7 F.N. 5, supra . (go back)

8 See , Elson and Gyves, “The Enron Failure and Corporate Governance Reform”, 38 Wake Forest Law Review 855 (2003) and Elson, “Enron and the Necessity of the Objective Proximate Monitor”, 89 Cornell Law Review 496 (2004). (go back)

9 John Emshwiller and Rebecca Smith, “Enron Posts Surprise 3rd-Quarter Loss After Investment, Asset Write-Downs”, The Wall Street Journal , October 17, 2001. https://www.wsj.com/articles/SB1003237924744857040. (go back)

10 Dylan Tokar and Paul J. Davies, “Wirecard Red Flags Should Have Prompted Earlier Response, Former Executive Says” The Wall Street Journal , February 8, 2021. https://www.wsj.com/articles/wirecard-red-flags-should-have-prompted-earlier-response-former-execu tive-says-11612780200. (go back)

11 Corporate BoardMember , supra . (go back)

12 See Peregrine, “Why Enron Remains Relevant”, Harvard Law School Forum on Corporate Governance, December 2, 2016. (go back)

13 Corporate BoardMember , supra. (go back)

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Journal of Leadership Education

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  • 20th Anniversary Issue

Enron’s Ethical Collapse: Lessons for Leadership Educators

Craig Johnson 10.12806/V2/I1/C2

Craig Johnson Professor of Communication Arts Department of Communication

George Fox University 414 Meridian St.

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Top officials at Enron abused their power and privileges, manipulated information, engaged in inconsistent treatment of internal and external constituencies, put their own interests above those of their employees and the public, and failed to exercise proper oversight or shoulder responsibility for ethical failings. Followers were all too quick to follow their example. Therefore, implications for teaching leadership ethics include, educators must: (a) share some of the blame for what happened at Enron, (b) integrate ethics into the rest of the curriculum, (c) highlight the responsibilities of both leaders and followers, (d) address both individual and contextual variables that encourage corruption, (e) recognize the importance of trust and credibility in the leader-follower relationship, and (f) hold followers as well as leaders accountable for ethical misdeeds.

Introduction

Enron’s bankruptcy filing in November 2001 marked the beginning of an unprecedented wave of corporate scandals. Officials at Tyco, WorldCom, ImClone, Global Crossing, Adelphia, AOL Time Warner, Quest, and Charter Communications joined Enron executives as targets of SEC probes, congressional hearings, stockholder lawsuits, and criminal indictments. Enron’s troubles, which had been center stage, were soon pushed to the background by subsequent revelations of corporate wrongdoing.

More recent instances of corporate corruption should not diminish the importance of Enron as a case study in moral failure. Enron collapsed in large part because of the unethical practices of its executives. Examining the ethical shortcomings of Enron’s leaders, as well as the factors that contributed to their misbehaviors, can provide important insights into how to address the topic of ethics in the leadership classroom.

Moral Failure at the Top

Events leading up to Enron’s bankruptcy have been chronicled in a host of magazine articles as well as in such books as Anatomy of Greed (Cruver, 2002), Enron: The Rise and Fall (Fox, 2003), What Went Wrong at Enron (Fusaro & Miller, 2002), The Enron Collapse (Barresveld, 2002), and Pipe Dreams (Bryce, 2002). The company’s collapse was ultimately triggered by failed investments in overseas ventures and the unraveling of a series of dubious limited partnerships called Special Purpose Entities (SPEs). These SPEs , backed by Enron stock and illegally run by company insiders, were designed to keep debt off the firm’s balance sheets and helped prop up its share price. However, when the firm’s stock price began to slide, the company was unable to back its guarantees. In addition to charges related to shady partnerships, Enron stands accused of:

  • borrowing from subsidiaries with no intent to repay the loans (Wilke, 2002, August 5).
  • avoiding federal taxes even though some of its subsidiaries, like Portland General Electric, collected tax payments from customers (Manning & Hill, 2002).
  • contributing to the California energy crisis by manipulating electricity prices (Fusaro & Miller, 2002; Manning, 2002).
  • bribing foreign officials to secure contracts in India, Ghana and other countries (Wilke, 2002, August 7).
  • immediately claiming profits for long term projects that would eventually lose money (Hill, Chaffin, & Fidler, 2002).
  • switching account balances immediately before quarterly reports to boost apparent earnings (Cruver, 2002).
  • manipulating federal energy policy (Duffy, 2002; Duffy & Dickerson, 2002).

Much of the blame for what happened at Enron (nicknamed the “Crooked E” for its tilted Capital E logo) can be laid at the feet of company founder Kenneth Lay, his successor Jeffrey Skilling, chief financial officer Andrew Fastow, and Fastow’s top assistant Michael Kopper. Each failed to meet important ethical challenges or dilemmas of leadership (Johnson, 2001). Their failures included:

Abuse of Power

Both Lay and Skilling could wield power ruthlessly. The position of vice-chair was known as the “ejector seat” because so many occupants were removed from the position when they took issue with Lay or appeared to be a threat to his power. Skilling, for his part, eliminated corporate rivals and intimidated subordinates. Abdication of power was also a problem at Enron. At times, managers did not appear to understand what employees were doing or how the business (which was literally creating new markets) operated. Board members also failed to exercise proper oversight and rarely challenged management

decisions. Many were selected by CEO Kenneth Lay and did business with the firm or represented non-profits that received large contributions from Enron (Associated Press, 2002; Cruver, 2002).

Excess Privilege

Excess typified top management at Enron. Lay, who began life modestly as the son of a Baptist preacher turned chicken salesman, once told a friend, “I don’t want to be rich, I want to be world-class rich” (Cruver, 2002, p. 23). At another point he joked that he had given wife Linda a $2 million decorating budget for a new home in Houston which she promptly exceeded (Gruley & Smith, 2002). The couple borrowed $75 million from the firm that they repaid in stock. Linda Lay fanned the flames of resentment among employees when she broke into tears on the Today Show to claim that the family was broke. This was despite the fact that the Lays owned over 20 properties worth over $30 million (Eisenberg, 2002).

During Enron’s heyday, some of the perks filtered down to followers as well. Workers enjoyed such benefits as lavish Christmas parties, aerobic classes, free taxi rides, refreshments, and the services of a concierge ( Enron excess , 2002; How Enron let down its employees , 2002).

Enron officials manipulated information to protect their interests and to deceive the public, although the extent of their deception is still to be determined. Both executives and board members claim that they were unaware of the extent of the company’s off-the-books partnerships created and operated by Fastow and Kopper (Eisenberg, 2002). However, both Skilling and Lay were warned that the company’s accounting tactics were suspect (Duffy, 2002). The Senate Permanent Subcommittee on Investigations, which investigated the company’s downfall, concluded, “Much that was wrong with Enron was known to the board” (Associated Press, 2002). Board members specifically waived the conflict of interest clause in the company’s code of ethics that would have prevented the formation of the most troublesome special partnerships (Cruver, 2002).

Employees were quick to follow the lead of top company officials. They hid expenses, claimed nonexistent profits, deceived energy regulators and so on.

Inconsistent Treatment of Internal and External Constituencies

Enron’s relationships with both employees and outsiders were marked by gross inconsistencies. Average workers were forced to vest their retirement plans in Enron stock and then, during the crucial period when the stock was in free fall, were blocked from selling their shares. Top executives, on the other hand, were able to unload their shares as they wished. Five-hundred officials received “retention bonuses” totaling $55 million at the same time laid off workers received only a fraction of the severance pay they had been promised (Barreveld, 2002).

Enron treated its friends royally. In particular, the company used political donations to gain preferential treatment from government agencies. Kenneth Lay was the top contributor to the Bush campaign and officials made significant donations to both Democratic and Republican members of the House and Senate. In return, the company was able to nominate friendly candidates for the Security Exchange Commission (SEC) and the Federal Energy Regulatory Commission (FERC). Federal officials intervened with foreign governments to promote Enron projects, and company representatives played a major role in setting federal energy policy that favored deregulation of additional energy markets (Fox, 2003). Anyone perceived as unfriendly to Enron’s interests could expect retribution, however. In one instance, Lay withdrew an underwriting deal to pressure Merrill Lynch into firing an analyst who had downgraded Enron stock (Smith & Raghaven, 2002). Skilling called one analyst an “asshole” when he questioned the company’s performance during a conference call (Cruver, 2002).

Misplaced and Broken Loyalties

Enron officials put their loyalty to themselves above those of everyone else with a stake in the company’s fate — stock holders, business partners, rate payers, local communities, foreign governments, and so on. They also betrayed the trust of those who worked for them. Employees apparently believed in the company and in Lay’s optimistic pronouncements. In August 2001, for example, he declared “I have never felt better about the prospects for the company” (Cruver, 2003, p. 91). In late September, just weeks before the company collapsed, he encouraged employees to “talk up the stock” because “the company is fundamentally sound” (Fox, 2003, p. 252). These exhortations came even as he was unloading his own shares. The sense of betrayal experienced by Enron employees only added to the pain of losing their jobs and retirement savings.

Irresponsible Behavior

Enron officials acted irresponsibly by failing to take needed action, failing to exercise proper oversight, and failing to shoulder responsibility for the ethical miscues of their organization. CEO Lay downplayed warnings of financial improprieties and some board members did not understand the numbers or the company’s operations. Too often company managers left employees to their own devices, encouraging them to make their numbers by any means possible. After the collapse, no one stepped forward to accept blame for what happened. Lay and Fastow claimed Fifth Amendment privileges against self-incrimination when called before congressional committees; Skilling testified but claimed he had no knowledge of illegal activity.

The unethical behavior of Enron’s leaders appears to be the product of both individual and situational factors. Greed was the primary motivator of both managers and their subordinates at Enron (Cruver, 2002). Optimistic earnings

reports, hidden losses and other tactics were all designed to keep the stock price artificially high. Lofty stock values justified generous salaries and perks, deflected unwanted scrutiny, and allowed insiders to profit from their stock options. Greed was not limited to top Enron executives, however. Meeting earnings targets triggered large bonuses for managers throughout the firm, bonuses that were sometimes larger than employees’ salaries. Rising stock prices and extravagant rewards made it easier for followers as well as leaders to overlook shortcomings in the company’s ethics and business model.

Hubris was also a major character flaw at the Crooked E, a fact reflected in the company banner that declared: FROM THE WORLD’S LEADING ENERGY COMPANY — TO THE WORLD’S LEADING COMPANY (Cruver, 2002, p.

3). Skilling, who lacked the social and communication skills of Ken Lay, best exemplifies the haughty spirit of many Enron officials. At the height of the California energy crisis he joked that the only difference between the Titanic and the state of California was that “when the Titanic went down, the lights were on” (Fusaro & Miller, 2002. p. 122).

Even the so-called “heroes” of the Enron debacle failed to demonstrate enough virtue to delay or to prevent the company’s collapse. Former company treasurer Clifford Baxter complained about Fastow’s financial wheeling and dealing, but then retired without going public with his complaints. Vice-president of corporate development Sherry Watkins outlined her concerns about the firm’s questionable financial practices in a letter and in a meeting with Lay ( A Hero , 2002). Later she discussed the same issues with an audit partner at Anderson. While these are commendable acts, in her letter she recommended quiet clean up of the problems rather than public disclosure. She stopped short of talking to the press, the SEC and other outside agencies when her attempts at internal reform failed (Zellner, 2002).

The destructive power of individual greed and pride was magnified by Enron’s corporate culture that encouraged creativity and risk taking. Employees invented a host of new commodity products which earned Enron top ranking six straight years on Fortune magazine’s list of most innovative companies (Fusaro & Miller, 2002). Ken Lay was fond of telling the story of how Enron employees in London started its on-line trading business (which later carried a quarter of the world’s energy trades) without the blessing or knowledge of corporate headquarters in Houston (Stewart, 2001). The cost of freedom, however, was pressure to produce that created a climate of fear. Enron’s atmosphere was similar to that of an elite law firm where talented young associates scramble to make partner (Fusaro & Miller, 2002).

Adding to the stress was the organization’s “rank and yank” evaluation system. Every six months 15% of all employees were ranked in the lowest category and then had a few weeks to find another position in the company or be let go (Cruver, 2002). Workers in the next two higher categories were put on notice that

they were in danger of falling into the lowest quadrant during the subsequent review. This system (a harsher variant of one used at many companies) encouraged cutthroat competition and silenced dissent. Followers were afraid to question unethical and or illegal practices for fear of losing their jobs. Instead, they were rewarded for their unthinking loyalty to their managers (who ranked their performance) and the company as a whole (Fusaro & Miller, 2002).

Lack of controls, combined with an intense, competitive, results-driven culture made it easier to ignore the company’s code of ethics which specifically prohibited conflicts of interest like those found in the SPEs and to seek results at any cost (Hill, Chaffin, & Fidler, 2002). Anderson auditors signed off on its questionable financial transactions for fear of losing lucrative auditing and consulting contracts with Enron.

Enron was also a victim of larger social and cultural factors. Publicly traded firms in the United States are judged by their quarterly earnings reports. Obsession with short-term results encourages executives to do whatever they can to meet these expectations. Enron’s explosive growth took place during the economic boom of the 90s. All the major stock indices soared and billions were wasted on Internet start-ups that never had a realistic chance to make a profit. During this period the Cult of the CEO emerged. Business leaders achieved rock star status, gracing the covers of national magazines and best selling biographies (Elliott & Schroth, 2002, p. 125). In this heady climate, government regulators and investors felt little need to study the operations or finances of apparently successful companies led by business superstars. The recent spate of corporate scandals and the accompanying market crash may be the penalty that society must pay for the excesses and inattention of the last decade.

Implications for Leadership Educators

The lessons of Enron extend beyond the accounting and market reforms instituted in the wake of the scandal. Leadership educators can gain important insights about how to treat the topic of ethics in the classroom from the moral shortcomings of Enron’s top executives. The pedagogical implications of Enron include:

Educators Must Share Some of the Blame

Academics find it easy to distance themselves from the sins of Enron. The college and university classroom seems a world away from the high flying, gun slinging mentality of the former energy giant. Few professors can begin to comprehend the level of privilege and influence enjoyed by the company’s C level executives.

Those who study and teach ethics believe that they would exhibit the virtues that Lay, Skilling, and Fastow seemed to lack.

Disassociating oneself from Enron may be comforting, but this maneuver conveniently overlooks the fact educators must shoulder at least some of the blame for the company’s moral failure (Kavanaugh, 2002). As college graduates, Enron managers undoubtedly enrolled in leadership and ethics courses. Many were also products of Harvard and other top MBA programs. Followers armed with bachelor and masters degrees served as willing soldiers in the army of public relations experts who helped the company maintain its veneer of profitability, lobby government official, and attack its critics. What Enron’s top leaders, lower level managers, and front line employees learned in university classrooms was not enough to prevent ethical tragedy.

Strive for Ethical Integration

Enron is a classic example of a company whose ethical pronouncements were “decoupled” from the rest of its operations (Weaver, Trevino, & Cochran 1999). The key values of the company were respect, integrity, communications, and excellence. Enron also had an extensive code of ethics. Unfortunately, these values and policies had little impact on how Lay, Skilling, and their underlings did business. By the time of its collapse in 2001, the company had been manipulating its books and misleading investors for several years.

Unfortunately, the teaching of ethics, like the practice of ethics at Enron, is typically decoupled from the rest of the curriculum. Discussions of ethics often stand alone, limited to a single unit or to one course in the entire leadership curriculum. Further, the placement of ethical material also diminishes its importance. Ethics units and text chapters sometimes appear to be an afterthought, introduced at the end of a course or book and therefore likely to be eliminated if the professor falls behind during the quarter or semester. To be effective, ethical considerations should be part of every unit, class, and set of readings.

Highlight Leadership and Followership Duties and Responsibilities

Many students study leadership in hopes of achieving the kind of heroic stature that, until recently, they saw reflected in press reports about famous business figures and other prominent leaders. Power, perks, financial security, and recognition all seem to come with an executive title. Instructors cater to this motivation when they act as cheerleaders for prominent business leaders like Jack Welch or Kenneth Lay. They overlook the fact that the same qualities and strategies so often praised in business and other leadership literature can lead to disaster. Enron is a case in point. The company’s leaders did many things right according to the leadership and management literature. Lay and his colleagues had a clear vision and values, pursued excellence, and fostered an extraordinary degree of creativity and innovation. Sadly, their vision was unrealistic, their stated values took back seat to unstated ones (e. g., make the deal at whatever the cost and generate constant profits and growth), and their drive for innovation led them into a host of unprofitable markets that even their management team did not

completely understand. Followers also lost sight of their personal values as well as their commitment to society.

Altruism is a universal value that is particularly important to leaders who, by virtue of their roles, are to exercise influence on behalf of others. Leaders cannot articulate the concerns of followers unless they first understand their needs (Kanungo & Mendoca, 1996). Leaders driven by altruism pursue organizational goals rather than personal achievement and are more likely to give power away. Leaders seeking self-benefit focus on personal achievements, and control followers through coercion and reward.

Communitarianism emphasizes the need for individual and corporate responsibility (Etzioni, 1993). Citizens and institutions have obligations to the larger community. When making decisions, leaders and followers must look beyond the immediate interests of themselves and their organizations to the needs of the local community and society as a whole.

Servant leadership is a model that puts the needs of followers first (Greenleaf, 1977; Spears, 1998). Servant leaders continually ask themselves what would be best for their constituents and measure their success by the progress of their followers. Driven by a concern for people, they seek to treat others fairly and recognize that they hold their positions in stewardship for others.

Address Both Individual and Contextual Variables

Training can help individuals develop sensitivity to moral issues and improve ethical reasoning skills (Rest, 1993). To prevent future Enrons, faculty must help current and future leaders and followers equip themselves with the values, principles, and skills they need to make reasoned moral choices. Nonetheless, an individual focus does not address organizational forces – group culture, high forced turnover, reward system – that played a significant role in Enron’s moral failures. In addition, society’s fixation on short term profits and daily market moves also increased the pressure to manipulate results and to hide financial bad news.

  • What organizational controls should be put on innovation?
  • How can employees be rewarded in a way that promotes ethical behavior?
  • What are the dysfunctional consequences of the rank and yank evaluation system?
  • What are reasonable limits on executive compensation?
  • What is a corporate board’s role in overseeing the operations of an organization?
  • What should be the composition of a board’s membership?
  • How should the performance of companies be judged?
  • How can society develop a long-term perspective on financial results?

Recognize the Importance of Credibility

Since Aristotle, scholars have examined the factors that make a source believable to an audience, an interest based on the strong correlation between credibility and influence (Hackman & Johnson, 2001, chap. 6). The Enron debacle and subsequent scandals demonstrate that credibility, specifically trustworthiness, is more important than ever. Stock values declined nearly 40% from market highs in July1998 due largely to investors’ loss of confidence in the integrity of publicly held corporations. Employees are increasingly skeptical as well. A 2002 survey by the Ethics Resource Center found that 43% of respondents believed that their bosses fail to model integrity and felt pressure to compromise their own ethical standards at work (Wee, 2002). Modern technology, which enables the rapid, worldwide dissemination of information, makes credibility more important now than in the time of Plato and Aristotle. Leadership faculty need to help students consider not only how credibility is built and maintained, but also how trust is destroyed and at what cost to individuals and organizations.

Followers are Also Accountable

Lay, Skilling, Fastow and other high level executives deserve most of the blame for what went wrong at Enron. It was they who created the company’s culture, approved dubious partnerships, attacked critics, and, in the end, abandoned employees while enriching themselves. Nevertheless, followers, ranging from second tier officials down to receptionists and mailroom clerks, share some of the blame. Many willingly bought into the get rich quick mentality of the Crooked E. During the company’s 15 years of rapid growth, few stopped to question the company’s tactics. They were “bought off” by the generous perks and the thrill of being part of one of the most sophisticated and innovative companies in the world. The constant threat of termination undoubtedly convinced others to keep their doubts to themselves and to support their bosses.

According to Chaleff (1995), courage – the willingness to accept a higher level of risk – is the most important virtue for organizational followers. Such courage was sorely lacking at Enron. Few had the courage to challenge authority. Few had the courage to leave when faced with ethical violations. Apparently no member of the firm had the courage to bring the misbehavior of Lay and his subordinates to the attention of the public before the crisis erupted (Cruver, 2002).

Unfortunately, cowardice is not limited to Enron. Nearly two-thirds of those who witness ethical violations in their companies refuse to report them, believing that reporting problems would not do any good ( Chief Executive , 2002). The final lesson of Enron, then, is that both instructors and students have the responsibility to confront moral failure whenever and wherever it appears, regardless of whether they function in a leadership or in a followership role.

In summary, top officials at Enron abused their power and privileges. They manipulated information while engaging in inconsistent treatment of internal and external constituencies. These leaders put their own interests above those of their employees and the public, and failed to exercise proper oversight or shoulder responsibility for ethical failings. Sadly, the followers were all too quick to follow their example.

Numerous implications for teaching leadership ethics can be gleaned from the Eron situation. Educators must share some of the blame for what happened at Enron. It is important to integrate ethics into the rest of the curriculum.

Leadership educators need to highlight the responsibilities of both leaders and followers along with addressing both individual and contextual variables that encourage corruption. The importance of trust and credibility in the leader- follower relationship must be recognized. And, finally, educators must hold followers as well as leaders accountable for ethical misdeeds.

Associated Press (2002, July 7). Report: Enron board aided collapse. Retrieved August 8, 2002 from http://www.msnbc.com/news/777112.asp.

Barreveld, D. J. (2002). The Enron collapse: Creative accounting, wrong economics or criminal acts? San Jose, CA: Writers Club Press.

Bryce, R., (2002). Pipe dreams: Greed, ego, and the death of Enron . New York: Public Affairs.

Chaleff, I. (1995). The courageous follower . San Francisco: Berett-Koehler.

Chief Executive of San Diego shuttle company assails corporate chicanery. (2002, July 14). San Diego Union-Tribune . Retrieved July 16, 2002 from Newspaper Source.

Cruver, B. (2002). Anatomy of greed: The unshredded truth from an Enron insider . New York: Carroll & Graf.

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Time , pp. 16-22.

Duffy, M., & Dickerson, J. F. (2002, February 4). Enron spoils the party. Time,

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Elliott, A. L, & Schroth, R. J. (2002). How companies lie: Why Enron is just the tip of the iceberg . New York: Crown Business.

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Ethical Lessons of the Enron Verdict from Wharton’s Thomas Dunfee

June 7, 2006 • 13 min read.

On May 25, a federal jury convicted former Enron CEO Kenneth Lay and former Enron president Jeffrey Skilling on conspiracy and fraud charges, with sentencing to be decided on September 11. As has been repeatedly noted in press coverage of this trial, Enron is the incredible story of a once powerful company done in by a group of top executives whose greed and fraud was breathtaking even by post dot-com standards. But it is by no means the only high-profile criminal trial in recent days, nor is it likely to be the last case brought by the government against CEOs who abuse their positions, their stockholders, their employees and the public trust. Thomas Dunfee, chairman of Wharton's legal studies and business ethics department, and an expert on social contracts and the social responsibility of business, talked to Knowledge at Wharton's Mukul Pandya and Robbie Shell about the Enron verdict.

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Lessons from the Enron Scandal

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Kirk Hanson, executive director of the Markkula Center for Applied Ethics, was interviewed about Enron by Atsushi Nakayama, a reporter for the Japanese newspaper Nikkei.

On March 5, 2002, Kirk Hanson, executive director of the Markkula Center for Applied Ethics, was interviewed about Enron by Atsushi Nakayama, a reporter for the Japanese newspaper Nikkei . Their Q & A appears below:

Nakayama: What do you think are the most important lessons to be learned from the Enron scandal?

Hanson: The Enron scandal is the most significant corporate collapse in the United States since the failure of many savings and loan banks during the 1980s. This scandal demonstrates the need for significant reforms in accounting and corporate governance in the United States, as well as for a close look at the ethical quality of the culture of business generally and of business corporations in the United States.

N: Why did this happen?

H: There are many causes of the Enron collapse. Among them are the conflict of interest between the two roles played by Arthur Andersen, as auditor but also as consultant to Enron; the lack of attention shown by members of the Enron board of directors to the off-books financial entities with which Enron did business; and the lack of truthfulness by management about the health of the company and its business operations. In some ways, the culture of Enron was the primary cause of the collapse. The senior executives believed Enron had to be the best at everything it did and that they had to protect their reputations and their compensation as the most successful executives in the U.S. When some of their business and trading ventures began to perform poorly, they tried to cover up their own failures.

N: Why didn't the company's directors protect the employees and investors?

H: The board of directors was not attentive to the nature of the off-books entities created by Enron, nor to their own obligations to monitor those entities once they were approved. The board did not pay attention to the employees because most directors in the United States do not consider this their responsibility. They consider themselves representatives of the shareholders only, and not of the employees. However, in this case they did not even represent the shareholders well-and particularly not the employees who were shareholders.

N: Why didn't anyone stop Skilling, Lay and Fastow?

H: Jeffrey Skilling and Andrew Fastow changed the business strategy and corporate culture of Enron. In the process, they appeared to make Enron very innovative and very profitable. When the stock is rising and the shareholders are getting rich, there is little incentive for the board of directors and the investment community to question the executives very closely. The board is at fault for permitting the suspension of Enron's own code of conduct to permit the conflicts of interest inherent in the off-books corporations controlled by Fastow. A few analysts recommended their clients stay out of Enron, but not many.

N: Could you tell me how the corporate governance should be changed?

H: I do not think the rules of corporate governance will be changed in significant ways. But boards of directors need to pay closer attention to the behavior of management and the way the company is making money. In too many American companies, board members are expected to approve what management proposes-or to resign. It must become acceptable and mandatory to question management closely. There is little chance the U.S. governance rules will be changed to make boards responsible to the employees as well as to the shareholders. However, board members would be foolish not to pay more attention to how employees and customers and business partners are treated. These greatly affect the long-term value of the shareholders' investment.

N: Don't you think this scandal damaged the new economy's fundamental system?

H: Enron is a prominent example of a "new economy" company. Kenneth Lay and Jeffrey Skilling claimed that Enron was the most innovative company in the United States and at times tried to intimidate reporters or analysts who questioned their strategy. In the new economy, new kinds of companies have been created. Enron's collapse will encourage investors, analysts, reporters, and employees to ask "old economy" questions about these new economy companies: How does this company make money? Can it sustain this strategy over the long term? How do those who work in and with this company feel about it? The new economy has lost some of its appeal after the collapse of many dot.com companies and of Enron.

N: Can we believe analysts' strong "buy" recommendations from now on?

H: Many have questioned the overly optimistic "buy" recommendations analysts have issued in recent years, fearing they had conflicts of interest because of the underwriting business their firms did for dot.coms or because of the investment industry culture which rewarded analysts who were bullish on the new economy. I think there will be much closer scrutiny of analysts' recommendations in the months and years ahead, and a close look at the conflicts of interest of individual analysts. Analysts who are always bullish will be less likely to be believed.

N: What reforms should Congress, the SEC, and others institute post-Enron?

H: I believe accounting regulations should be altered to prohibit ownership of both auditing and consulting services by the same accounting firm. Accounting firms are already moving to sever their consulting businesses. The SEC should probably adopt additional disclosure requirements. Various regulators should tighten requirements for directors to be vigilant and provide protections for whistleblowers who bring improper behavior to public attention. But, in the final analysis, the solution to an Enron-type scandal lies in the attentiveness of directors and in the truthfulness and integrity of executives. Clever individuals will always find ways to conceal information or to engage in fraud.

N: How can credibility be recovered with investors?

H: U.S. firms and foreign firms listed on U.S. stock exchanges will need to demonstrate that they have eliminated all off-books accounts which distort the public's understanding of the financial health of the organization. They may need to pledge that they will not suspend the company's code of conduct, or at least report to the public when they do. Finally, every company will need to demonstrate that its board of directors is vigorous, vigilant, and that its procedures will enable it to uncover any questionable behavior. Companies may need to adopt a set of "governance best practices" to regain the trust of the market.

N: Some say Enron's collapse was caused by its stock options system. Do you think the executive compensation system should be reformed, and if so, how?

H: The stock option system is not itself the problem. Excessive stock options and excessive corporate compensation give corporate executives too many incentives to manipulate the financial accounts and the stock price of the company. When huge cash or options bonuses are dependent upon achievement of one or a few narrowly defined profit or growth goals, the temptation to manipulate the numbers to get the rewards will be too great. The problem is not the stock option system but the excessive compensation given to executives in the United States, particularly compared to the salaries of regular employees of the company. U.S. companies should look more like Japanese companies in the ratio of the salaries of top executives to those of regular employees.

N: Will stock prices continue to be down because the investors' faith has been shaken? The other day the blue chips like GE and IBM had to reassure investors about the strength of their financial controls.

H: I believe the stock prices of new economy companies will continue to show an "Enron effect" for many months to come. Until an individual company convinces the market that it has rid itself of any questionable practices and has improved its governance systems, it will not be evaluated fully.

N: Don't you think this kind of scandal will be a bad influence on the U.S. economy, which is recovering from recession?

H: Enron has clearly done some damage to the U.S. economy, but it will not hold up recovery from the current recession. The fundamental health of the U.S. economy is strong and now getting stronger. Some individual new economy companies will have depressed stock prices for some time, but they, too, will recover as they demonstrate that they are prepared to prevent Enron-like behavior.

N: You mentioned in Newsweek magazine that Enron will become the morality play of the new economy. Could you give me a more concrete idea what you mean by this?

H: I do believe Enron will be the morality play of the new economy. It will teach executives and the American public the most important ethics lessons of this decade. Among these lessons are:

You make money in the new economy in the same ways you make money in the old economy - by providing goods or services that have real value.

Financial cleverness is no substitute for a good corporate strategy.

The arrogance of corporate executives who claim they are the best and the brightest, "the most innovative," and who present themselves as superstars should be a "red flag" for investors, directors and the public.

Executives who are paid too much can think they are above the rules and can be tempted to cut ethical corners to retain their wealth and perquisites.

Government regulations and rules need to be updated for the new economy, not relaxed and eliminated.

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Enron and World Finance

A Case Study in Ethics

  • Paul H. Dembinski (Professor) 0 ,
  • Carole Lager (PhD in Political Science) 1 ,
  • Andrew Cornford (Research Fellow) 2 ,
  • Jean-Michel Bonvin (PhD in Sociology, Professor) 3

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Table of contents (16 chapters)

Front matter, overview of the book.

Andrew Cornford

Enron: Origins, Character and Failure

Enron and internationally agreed principles for corporate governance and the financial sector, a revisionist view of enron and the sudden death of ‘may’.

  • Frank Partnoy

Who Is Who in the World of Financial ‘Swaps’ and Special Purpose Entities

  • François-Marie Monnet

Ethics in Thought and Action

An ethical diagnosis of the enron affair.

  • Etienne Perrot

Anonymity: Is a Norm as Good as a Name?

  • Edward Dommen

Spaces for Business Ethics

  • Domingo Sugranyes Bickel

Corporate Governance and Auditing

The demise of andersen: a consequence of corporate governance failure in the context of major changes in the accounting profession and the audit market.

  • Catherine Sauviat

Enron et al. and Implications for the Auditing Profession

  • Anthony Travis

Enron Revisited: What Is a Board Member to Do?

  • Beth Krasna

How to Restore Trust in Financial Markets?

  • Hans J. Blommestein

Corporate Culture and Ethics

Enron: the collapse of corporate culture.

  • John Dobson

Ethics, Courage and Discipline: The Lessons of Enron

  • Robert C. Kennedy

Developing Leadership and Responsibility: No Alternative for Business Schools

  • Henri-Claude de Bettignies

Ethics for a Post-Enron America

  • John R. Boatright

'The essays in this book greatly enhance our understanding of the causes of one of the most important events in financial history. The authors examine in notable depth the ethical and governance dimensions of the Enron saga, while providing a fascinating commentary on the nature of modern finance capitalism.' - John Plender, Financial Times and author of Going off the Rail - Global Capital and the Crisis of Legitimacy

'Enron and World Finance addresses the most important issue of our time...This brilliant collection of essays with its remarkably insightful introduction and conclusion require us to consider what might be called the tyranny of economics...Enron is important not only in itself but also as a warning signal of the predictable destructive consequences of the failure of language.' - Robert A. G. Monks, Lens Governance Advisors, USA

'Enron offers an 'ideal' example of using or perhaps misusing financial innovations within modern corporations. The book Enron and World Finance provides a very insightful overview of this memorable case where the ethical dimension of an organization is nonexistent. As professors of Finance, we welcome such a book that illustrates the pitfalls of financial creativity when it ignores or abuses the boundaries of an honest corporate culture and of its management.' - Marc Chesney and Rajna Gibson, Professors of Finance, Swiss Banking Institute, University of Zürich, Switzerland

'The book provides, at once, a fresh understanding of the place of ethical thought in financial markets, and a focus on leadership and responsibility for the implementation of ethical duties. I commend this fascinating book to a wide readership in financial and academic institutions.' - Professor Dr. Hans Tietmeyer, Bundesbankprasident i.R., Germany

Paul H. Dembinski

Carole Lager

University Paris IV-Sorbonne, Switzerland

Jean-Michel Bonvin

Department of Sociology, University of Geneva, Switzerland

Book Title : Enron and World Finance

Book Subtitle : A Case Study in Ethics

Editors : Paul H. Dembinski, Carole Lager, Andrew Cornford, Jean-Michel Bonvin

DOI : https://doi.org/10.1057/9780230518865

Publisher : Palgrave Macmillan London

eBook Packages : Palgrave Economics & Finance Collection , Economics and Finance (R0)

Copyright Information : Palgrave Macmillan, a division of Macmillan Publishers Limited 2006

Hardcover ISBN : 978-1-4039-4763-5 Published: 16 December 2005

eBook ISBN : 978-0-230-51886-5 Published: 16 December 2005

Edition Number : 1

Number of Pages : XVI, 257

Topics : Accounting/Auditing , Business Strategy/Leadership , Business Ethics , Finance, general

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New Innovations in Economics, Business and Management Vol. 1

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A Case Analysis on Enron; Ethics, Social Responsibility, and Ethical Accounting

  • Muhammad M. Rashid

New Innovations in Economics, Business and Management Vol. 1 , 26 October 2021 , Page 62-69 https://doi.org/10.9734/bpi/niebm/v1/1923C Published: 2021-10-26

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In 2001, just after the Asian crises of 1997-1998, the DotcomBubble, and 9/11, the Enron scandal sparked a Wall Street fraud crisis that shook the market to its core. Since then, scandals like Lehman Brothers and WorldCom in 2007-2008, as well as the Great Recession, have eclipsed it, although Enron remains one of the most significant incidents of accounting fraud. Despite the fact that the financial industry had become highly regulated by the early 2000s, deregulation of the energy industry permitted companies to speculate on future prices. Enron was hailed as a star inventor at the peak of dotcom bubble, but as the bubble burst, Enron's plan to construct high-speed internet failed, and investors began to lose money. Furthermore, the operations' financial losses were hidden by employing market to market accounting instead of book value, as well as special purpose organisations to hide debt. The main cause was determined to be a company with a toxic corporate culture that prioritised officer compensation rather than social responsibility, resulting in poor leadership.  Is it possible then that; ethical accounting practices, social responsibility and ethics all become inferior goods as income rises in an ‘irrationally exuberant’era? This paper also further hypothesizes about the possibility of ethics, social responsibility and ethical accounting being inferior goods and points towards peaks in business cycles and financial crises as evidence.

  • Enron (ENE, ENRN)
  • dotcom bubble
  • accounting fraud
  • deregulation
  • speculation
  • corporate culture
  • social responsibility
  • government intervention
  • risk management
  • consumer behavior
  • energy markets

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Case analysis: Enron; Ethics, social responsibility, and ethical accounting as inferior goods?

Abstract. In 2001 soon after the Asian Crises of 1997-1998, the DotcomBubble, 9/11, the Enron crises triggered a fraud crisis in Wall Street that impacted the market to the core. Since then scandals such as the Lehman Brothers and WorldCom in 2007-2008 and the Great Recession have surpassed it, Enron still remains one of the most important cases of fraudulent accounting. In 2000’s even though the financial industry had become highly regulated, deregulation of the energy industry allowed companies to place bets on future prices. At the peak of the dotcom bubble Enron was named as a star innovator but when the dotcom bubble burst, Enron’s plan to build high speed internet did not flourish and investors started to realize losses. Furthermore, the financial losses of the operations were hid using the market to market accounting technique instead of book value and using special purpose entities to hide debt. The root cause that was identified as a company with a toxic corporate culture focused on officer compensation rather than social responsibility and hence faulty leadership. Is it possible then that; ethical accounting practices, social responsibility and ethics all become inferior goods as income rises in an ‘irrationally exuberant’era?

Keywords. Enron (ENE, ENRN), Dotcom bubble, Accounting fraud, Deregulation, Speculation, Corporate culture, Social responsibility, Government intervention, Risk management, Consumer behavior, Energy markets.

Banerjee, N., & Barboza, D. (2002). Enron’s many strands: Corporate culture; At Enron, lavish excess often came before success. The New York Times, Feb. 26. [ Retrieved from ].

Chinn, M., & Frieden, J.A. (2011). Lost Decades: The Making of America's Debt Crisis and the Long Recovery . New York: W.W. Norton.

Econ Crises, (2016). Enron Coporattion 2001, [ Retrieved from ].

Ferrell, O.C., Fraedrich, J., & Linda, F. (2017). Business Ethics; Ethical Decision Making and Cases , Cengage Learning.

Jacobe, D. (2002). Public confidence in the Wake of Enron. Gallup , Feb 19. [ Retrieved from ].

Greenspan, A. (2007). The Age of Turbulence: Adventures in a New World . New York: Penguin.

Rashid, M.M. (2019). A Survey of US and International Financial Regulation Architecture, MPRA Papers, No.93447. [ Retrieved from ].

Rashid, M.M. (2019). International Financial Credit Crises; Lessons from Canada. MPRA Paper , No.94657. [ Retrieved from ].

Rashid, M.M. (2020). King, Fuller and Dworkin on Natural Law and Hard Cases. Journal of Economic and Social Thought , 7(2), 75-85.

Rashid, M.M. (2020). St. Thomas Aquinas and the development of natural law in economic thought. Journal of Economic and Social Thought , 7(1), 14-24.

Rashid, M.M. (2018). Analysis of political economy, international political economy, globalization and its importance to public finance. Journal of Economics and Political Economy, 5(4), 480-487

Rashid, M.M. (2019). Successes and drawbacks of the federal reserve and the impact on financial markets. Journal of Advanced Studies in Finance , 9(2), 56-59. doi. 10.14505//jasf.v9.2(18).02

Rashid, M.M. (2019). Repercussions of international trade on the Market Power of Firms in Different Market. Journal of Advanced Research in Management , 10(1), 30-34. doi. 10.14505//jarm.v10.1(19).03

Shiller, R.J. (2005). Irrational Exuberance . Princeton, N.J: Princeton University Press.

SF Gate, New Evidence of Enron Schemes Documents Tapes. [ Retrieved from ]

U.S. Treasure, (2020). [ Retrieved from ].

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What Was Enron?

Understanding enron, the enron scandal.

  • Mark-to-Market Accounting

What Happened to Enron

  • The Role of Enron's CEO

The Legacy of Enron

The bottom line.

  • Company Profiles
  • Energy Sector

What Was Enron? What Happened and Who Was Responsible

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

enron case ethical analysis

Investopedia / Daniel Fishel

Enron was an energy-trading and utility company based in Houston, Texas, that perpetrated one of the biggest accounting frauds in history. Enron's executives employed accounting practices that falsely inflated the company's revenues and, for a time, making it the seventh-largest corporation in the United States. Once the fraud came to light, the company quickly unraveled, and it filed for Chapter 11 bankruptcy in December 2001.

Key Takeaways

  • Enron was an energy company that began to trade extensively in energy derivatives markets.
  • The company hid massive trading losses, ultimately leading to one of the largest accounting scandals and bankruptcy in recent history.
  • Enron executives used fraudulent accounting practices to inflate the company's revenues and hide debt in its subsidiaries.
  • The SEC, credit rating agencies, and investment banks were also accused of negligence—and, in some cases, outright deception—that enabled the fraud.
  • As a result of Enron, Congress passed the Sarbanes-Oxley Act to hold corporate executives more accountable for their company's financial statements.

Enron was an energy company formed in 1986 following a merger between Houston Natural Gas Company and Omaha-based InterNorth Incorporated. After the merger, Kenneth Lay, who had been the  chief executive officer  (CEO) of Houston Natural Gas, became Enron's CEO and chair.

Lay quickly rebranded Enron into an energy trader and supplier. Deregulation of the energy markets allowed companies to place bets on future prices. In 1990, Lay created the Enron Finance Corporation and appointed Jeffrey Skilling, whose work as a McKinsey & Company consultant had impressed Lay, to head the new corporation. Skilling was then one of the youngest partners at McKinsey.

Enron provided a variety of energy and utility services around the world. Its company divided operations in several major departments including:

  • Enron Online: In late 1999, Enron build out its web-based system to enhance customer functionality market reach.
  • Wholesale Services: Enron offered a variety of energy delivery solutions, with its most robust industry being natural gas. In North America, Enron claimed to deliver almost double the amount of electricity compared to their second tier of competition.
  • Energy Services: Enron's retail unit provided energy around the world, including to Europe in which it expanded retail operations to in 2001.
  • Broadband Services: Enron provided logistical service solutions between content providers and last-mile energy distributors.
  • Transportation Services: Enron developed an innovative, efficient pipeline operation to network capabilities and operate pooling points to connect to third-parties.

However, by leveraging special purpose vehicles, special purpose entities, mark to market accounting, and financial reporting loopholes, Enron became one of the most successful companies in the world. Upon discover of the fraud, the company subsequently collapsed. Enron shares traded as high as $90.75 before the fraud was discovered, but plummeted to around $0.26 in the sell-off after it was revealed.

The former Wall Street darling quickly became a symbol of modern corporate crime. Enron was one of the first big-name accounting scandals, but it was soon followed by the uncovering of frauds at other companies such as WorldCom and Tyco International.

Prior to coming to light, Enron was internally fabricating financial records and falsifying the success of its company. Though the entity did achieve operational success during the 1990s, the company's misdeeds were finally exposed in 2001.

Pre-Scandal

Leading up to the turn of the millennium, Enron's business appeared to be thriving. The company became the largest natural gas provider in North American in 1992, and the company launched EnronOnline, its trading website allowing for better contract management just months before 2000. The company also had rapidly been expanding into international markets, led by the 1998 merger with Wessex Water.

Enron's stock price mostly followed the S&P 500 for most of the 1990's. However, expectations for the company began to soar. In 1999, the company's stock increased 56%. In 2000, it increased an additional 87%. Both returns widely beat broad market returns, and the company was soon trading at a 70x price-earnings ratio.

Early Signs of Trouble

In February 2001, Kenneth Lay stepped down as Chief Executive Officer and was replaced by Jeffrey Skilling. A little more than six months later, Skilling stepped down as CEO in August 2001 with Lay taking over the role again.

Around this time, Enron Broadband reported massive losses. In the company's Q2 2001 earnings report, Lay revealed "in contrast to our extremely strong energy results, this was a difficult quarter in our broadband businesses." In this quarter, the Broadband Services department reported a financial loss of $102 million.

Also around this time, Lay sold 93,000 shares of Enron stock for roughly $2 million while still telling employees via e-mail to continuing buying the stock and predicting significantly higher stock prices. In total, Lay was eventually found to have sold over 350,000 Enron shares for total proceeds greater than $20 million.

During this time, Sherron Watkins had expressed concerns regarding Enron's accounting practices. A Vice President for Enron, she wrong an anonymous letter to Lay expressing her concerns. Watkins and Lay eventually met to discuss the matters in which Watkins delivered a six-page report detailing her concerns. The concerns were presented to an outside law firm in addition to Enron's accounting firm; both agreed there were no issues to be found.

By October 2001, Enron had reported a third quarter loss of $618 million. Enron announced it would need to restate its financial statements from 1997 to 2000 to correct accounting violations.

$63.4 billion

Enron's $63.4 billion bankruptcy was the biggest on record at the time.

On Nov. 28, 2001, credit rating agencies reduced Enron's credit rating to junk status, effectively solidifying the company's path to bankruptcy. On the same day, Dynegy, a fellow energy company Enron was attempting to merge with, decided to nix all future conversations and opted against any merger agreement. By the end of the day, Enron's stock price had dropped to $0.61.

Enron Europe was the first domino, filing for bankruptcy after close of business on Nov. 30th. The rest of Enron followed suit on Dec. 2. Early the following year, Enron dismissed Arthur Andersen as its auditor , citing that the auditor had yielded advice to shred evidence and destroy documents.

In 2006, the company sold its last business, Prisma Energy. The next year, the company changed its name to Enron Creditors Recovery Corporation with the intention of repaying back the remaining creditors and open liabilities as part of the bankruptcy process.

Post Bankruptcy/Criminal Charges

After emerging from bankruptcy in 2004, the new board of directors sued 11 financial institutions involved in helping conceal the fraudulent business practices of Enron executives. Enron collected nearly $7.2 billion from these financial institutions as part of legal settlements. The banks included the Royal Bank of Scotland, Deutsche Bank, and Citigroup.

Kenneth Lay pleaded not guilty to eleven criminal charges. He was convicted of six counts of securities and wire fraud and was subject to a maximum of 45 years in prison. However, Lay died on July 5, 2006, before sentencing was to occur.

Jeff Skilling was convicted on 19 of the 28 counts of securities fraud he was charged with in addition to other charges on insider trading. He was sentenced to 24 years and four months in prison, though the U.S. Department of Justice reached a deal with Skilling in 2013 which resulted in ten years being cut off of his sentence.

Andy Fastow and his wife Lea both pleaded guilty to charges against them including money laundering, insider trading, fraud, and conspiracy. Fastow was sentenced to 10 years in prison with no parole in order to testify against other Enron executives. Fastow has since been released from prison.

Causes of the Enron Scandal

Enron went to great lengths to enhance its financial statements, hide its fraudulent activity, and report complex organizational structures to both confuse investors and conceal facts. The causes of the Enron scandal include but are not limited to the factors below.

Special Purpose Vehicles

Enron devised a complex organizational structure leveraging special purpose vehicles (or special purpose entities). These entities would "transact" with Enron, allowing Enron to borrow money without disclosing the funds as debt on their balance sheet.

SPVs do provide a legitimate strategy does allow for companies to temporarily shield a primary company by having a sponsoring company possess assets. Then, the sponsor company can theoretically secure cheaper debt than the primary company (assuming the primary company may have credit issues). There are also legal protection and taxation benefits to this structure.

The primary issue with Enron was the lack of transparency surrounding the use of SPVs. The company would transfer its own stock to the SPV in exchange for cash or a note receivable. The SPV would then use the stock to hedge an asset against Enron's balance sheet. Once the company's stock started losing its value, it no longer provided sufficient collateral that could be exploited by being carried by an SPV.

Inaccurate Financial Reporting Practices

Enron inaccurately depicted many contracts or relationships with customers. By collaborating with external parties such its auditing firm, it was able to record transactions incorrectly, not only not in accordance with GAAP but also not in accord with agreed to contracts.

For example, Enron recorded one-time sales as recurring revenue. In addition, the company would intentionally maintain an expired deal or contract through a specific time period to avoid having to record a write-off during a given period.

Poorly Constructed Compensation Agreements

Many of Enron's financial incentive agreements with employees were driven on short-term sales and quantities of deals closed (without consideration for the long-term validity of the deal). In addition, many incentives did not factor in the actual cash flow from the sale. Employees also receive compensation tied to the success of the company's stock price, while upper management often received large bonuses tied to success in financial markets.

Part of this issue was the very rapid rise of Enron's equity success. On Dec. 31, 1999, the stock closed at $44.38. Just three months later, it closed on March 31, 2000 at $74.88. With the stock hitting $90 by the end of 2000, the massive profits some employees received only fueled further interest in obtaining equity positions in the company.

Lack of Independent Oversight

Many external parties learned to know Enron's fraudulent practices, but their financial involvement with the company likely caused them to not intervene. Arthur Andersen, Enron's accounting firm, received many jobs and financial compensation in return for their service. Investment bankers collected fees from Enron's financial deals. Buy-side analysts were often compensated to promote specific ratings in exchange for stronger relationships between Enron and those institutions.

Unrealistic Market Expectations

Both Enron Energy Services and Enron Broadband were poised to be successful due to the emergence of the Internet and heightened retail demand. However, Enron's over-optimism resulted in the company over-promising on services and timelines that were simply not realistic.

Poor Corporate Governance

The ultimate downfall of Enron was the result of overall poor corporate leadership and corporate governance . Former Vice President of Corporate Development Sherron Watkins is noted for speaking out about various financial treatments as they were occurring. However, top management and executives intentionally disregarded and ignored concerns. This tone from the top set the precedent across accounting, finance, sales, and operations.

In the early 1990's, Enron was the largest seller of natural gas in North America. Ten years later, the company no longer existed due to its accounting scandal.

The Role of Mark-to-Market Accounting

One additional cause of the Enron collapse was mark-to-market accounting. Mark to market accounting is a method of valuating a long-term contract using fair market value. At any point, the long-term contract or asset could fluctuate in value; in this case, the reporting company would simply "mark" their financial records up or down to reflect the prevailing market value .

There are two conceptual issues with mark-to-market accounting, both of which Enron took advantage of. First, mark-to-market accounting relies very heavily on management estimation. Consider a long-term, complex contracts requiring the international distribution of several forms of energy. Because these contracts were not standardized to common contracts, it was easy for Enron to artificially inflate the value of the contract because it was difficult to appropriate determine the market value.

Second, mark-to-market accounting requires companies to periodically evaluate the value and likelihood that revenue will be collected. Should companies fail to continually evaluate the value of the contract, it may easily overstate the expected revenue to be collected.

For Enron, mark-to-market accounting allowed the firm to recognize its multi-year contracts upfront and report 100% of income in the year the agreement was signed, not when the service would be provided or cash collected. This form of accounting allowed Enron to report unrealized gains that inflated its income statement, allowing the company to appear much more profitable than its cash flow truly was.

The Enron bankruptcy, at $63.4 billion in assets, was the largest on record at the time. The company's collapse shook the financial markets and nearly crippled the energy industry. While high-level executives at the company concocted the fraudulent accounting schemes, financial and legal experts maintained that they would never have gotten away with it without outside assistance. The Securities and Exchange Commission (SEC), credit rating agencies and investment banks were all accused of having a role in enabling Enron's fraud.

Initially, much of the finger-pointing was directed at the SEC, which the U.S. Senate found complicit for its systemic and catastrophic failure of oversight. The Senate's investigation determined that had the SEC reviewed any of Enron’s post-1997 annual reports, it would have seen the red flags and possibly prevented the enormous losses suffered by employees and investors.

The credit rating agencies were found to be equally complicit in their failure to conduct proper due diligence before issuing an investment-grade rating on Enron’s bonds just before its bankruptcy filing. Meanwhile, the investment banks—through manipulation or outright deception—had helped Enron receive positive reports from stock analysts, which promoted its shares and brought billions of dollars of investment into the company. It was a quid pro quo in which Enron paid the investment banks millions of dollars for their services in return for their backing.

Enron reported total company revenue of:

  • $13.2 billion in 1996
  • $20.3 billion in 1997
  • $31.2 billion in 1998
  • $40.1 billion in 1999
  • $100.8 billion in 2000

The Role of Enron's CEO

By the time Enron started to collapse, Jeffrey Skilling was the firm's CEO. One of Skilling's key contributions to the scandal was to transition Enron's accounting from a traditional historical cost accounting method mark-to-market accounting for which the company received official SEC approval in 1992.

Skilling advised the firm's accountants to transfer debt off of Enron's balance sheet to create an artificial distance between the debt and the company that incurred it. Enron continued to use these accounting tricks to keep its debt hidden by transferring it to its  subsidiaries  on paper. Despite this, the company continued to recognize  revenue  earned by these subsidiaries. As such, the general public and, most importantly, shareholders were led to believe that Enron was doing better than it actually was, despite the severe violation of GAAP rules.

Skilling abruptly quit in August 2001 after less than a year as chief executive—and four months before the Enron scandal unraveled. According to reports, his resignation stunned Wall Street analysts and raised suspicions, despite his assurances at the time that his departure had “nothing to do with Enron.”

Both Skilling and Kenneth Lay were tried and found guilty of fraud and conspiracy in 2006. Other executives plead guilty. Lay died in prison shortly after sentencing and Skilling served twelve years, by far the longest sentence of any of the Enron defendants.

In the wake of the Enron scandal, the term " Enronomics " came to describe creative and often fraudulent accounting techniques that involve a parent company making artificial, paper-only transactions with its subsidiaries to hide losses the parent company has suffered through other business activities.

Parent company Enron had hidden its debt by transferring it (on paper) to wholly-owned subsidiaries —many of which were named after Star Wars characters—but it still recognized revenue from the subsidiaries, giving the impression that Enron was performing much better than it was.

Another term inspired by Enron's demise was "Enroned," slang for having been negatively affected by senior management's inappropriate actions or decisions. Being "Enroned" can happen to any stakeholder, such as employees, shareholders, or suppliers. For example, if someone has lost their job because their employer was shut down due to illegal activities that they had nothing to do with, they have been "Enroned."

As a result of Enron, lawmakers put several new protective measures in place. One was the Sarbanes-Oxley Act of 2002, which serves to enhance corporate transparency and criminalize financial manipulation. The rules of the Financial Accounting Standards Board (FASB) were also strengthened to curtail the use of questionable accounting practices, and corporate boards were required to take on more responsibility as management watchdogs.

What Did Enron Do That Was So Unethical?

Enron used special purpose entities to hide debt off of its balance sheet and mark-to-market accounting to overstate revenue. In addition, it ignored internal advisement against these practices knowing that its publicly disclosed financial position was incorrect.

How Big was Enron?

With shares trading for around $90/each, Enron was once worth about $70 billion. Lead up to its bankruptcy, the company employed over 20,000 employees. The company also reported over $100 billion of company-wide net revenue (though this figure has since been determined to be incorrect).

Who Was Responsible for the Collapse of Enron?

Several key members of the executive team are often noted as being responsible for the fall of Enron. The executives includes Kenneth Lay (founder and former Chief Executive Officer), Jeffrey Skilling (former Chief Executive Office replacing Lay), and Andrew Fastow (former Chief Financial Officer).

Does Enron Exist Today?

As a result of its financial scandal, Enron ended its bankruptcy in 2004. The name of the entity officially changed to Enron Creditors Recovery Corp., and the company's assets were liquidated and reorganized as part of the bankruptcy plan. Its last business, Prisma Energy, was sold in 2006.

At the time, Enron's collapse was the biggest  corporate bankruptcy  to ever hit the financial world (since then, the failures of WorldCom, Lehman Brothers, and Washington Mutual have surpassed it). The Enron scandal drew attention to accounting and corporate fraud as its shareholders lost tens of billions of dollars in the years leading up to its bankruptcy, and its employees lost billions more in pension benefits. Increased regulation and oversight have been enacted to help prevent corporate scandals of Enron's magnitude. However, some companies are still reeling from the damage caused by Enron.

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Page 56.

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Pages 59-63.

University of Chicago. " Enron Annual Report 2000 ."

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Pages 77 and 84.

Wall Street Journal. " Enron Announces Acquisition of Wessex Water for $2.2 Billion ."

University of Missouri, Kansas City. " Enron Historical Stock Price ."

The New York Times. " Enron Chairman Kenneth Lay Resigns, Company Says ."

University of Chicago. " Enron Reports Second Quarter Earnings ."

U.S. Securities and Exchange Commission. " SEC Charges Kenneth L. Lay, Enron's Former Chairman and Chief Executive Officer, with Fraud and Insider Trading ."

U.S. Securities and Exchange Commission. " Form 10-Q, 9/30/2001, Enron Corp. "

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Page 85.

GovInfo. " Enron and the Credit Rating Agencies ."

United States Bankruptcy Court. " Enron Corp. Bankruptcy Information ."

Blackstone. " Enron Announces Proposed Sale of Prisma Energy International Inc. "

GovInfo. " Enron Creditors Recovery Corp ."

JournalNow. " Judge OKs Billions to Enron Shareholders ."

United States Department of Justice. "Federal Jury Convicts Former Enron Chief Executives Ken Lay, Jeff Skilling on Fraud, Conspiracy and Related Charges ."

Federal Bureau of Investigation. " Former Enron Chief Financial Officer Andrew Fastow Pleads Guilty to Commit Securities and Wire Fraud, Agrees to Cooperate with Enron Investigation ."

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Page 62.

University of North Carolina. " Enron Whistleblower Shares Lessons on Corporate Integrity ."

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Pages 5-6 and 79.

George Benston. " The Quality of Corporate Financial Statements and Their Auditors Before and After Enron ."

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Pages 2, 44, and 70-75.

The New York Times. " Jeffrey Skilling, Former Enron Chief, Released After 12 Years in Prison ."

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Page 72.

enron case ethical analysis

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Enron Ethics Case Study

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Table of contents

Enron's unethical practices, analysis of the ethical issues, consequences and impact of enron's actions, lessons learned from the enron case, recommendations for preventing similar scandals.

  • McLean, B., & Elkind, P. (2003). The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. Portfolio.
  • Houston, F., & Ryngaert, M. (2011). The Enron Scandal: A Decade Later. European Financial Management, 17(3), 483-511.
  • Bowen, R. M. (2002). After Enron: Lessons for Public Policy. Organization, 9(2), 196-198.

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enron case ethical analysis

Applied Behavior Analysis (PSYCH 581)

Module 7: ethics content.

Behavior Analyst Certification Board Registered Behavior Technician™ (RBT®) Task List 2nd ed.

E-1 Effectively communicate with a supervisor in an ongoing manner. E-2 Actively seek clinical direction from supervisor in a timely manner. E-3 Report other variables that might affect the client in a timely manner. E-5 Comply with applicable legal, regulatory, and workplace data collection, storage, transportation, and documentation requirements. F-1 Describe the BACB’s RBT supervision requirements and the role of RBTs in the service-delivery system. F-2 Respond appropriately to feedback and maintain or improve performance accordingly. F-4 Maintain professional boundaries (e.g., avoid dual relationships, conflicts of interest, social media contacts).

Module 7: Ethics  

            Maintaining ethical standards is the responsibility of professionals in most fields. Business owners, attorneys, and medical professionals all have their own ethical codes of conduct. Consumers have an expectation of ethical behavior when engaging in a relationship with professionals. However, despite this expectation and these standards, ethical violations still occur. For instance, in 2001, corporate giant, Enron was investigated by the Securities and Exchange Commission for various accounting frauds. The company was accused of deceptively reporting profits and false reporting of debts to increase their value in a competitive business field. As a result of the investigation, Enron had no choice but to file for bankruptcy. Upon notice of the investigation and subsequent bankruptcy, Enron’s stock plummeted to $1 per share, nearly eliminating their employee’s 401K pensions. Ultimately, the United States Department of Justice charged Chief Executive Officer, Kenneth Lay, Chief Financial Officer, Andrew Fastaw, and chief auditor, David Duncan and others with multiple counts of fraud and accounting charges that resulted in their imprisonment. Employee monies lost as a result of this scandal were never recouped (Bodarenko, 2016). In 1998, Dr. Andrew Wakefield published an article in the Lancet linking the measles, mumps, rubella (MMR) vaccine to a potential predisposition for developmental disorders. This article was widely publicized within the autism community resulting in a decreased number of MMR vaccinations for fear of contracting this disorder (Rao & Andrade, 2011). Continued studies debunked Dr. Wakefield’s original study and further examination found that aside from his questionable experimental design and small sample size (n=12), Dr. Wakefield selected participants without consent and was paid by lawyers who were involved in litigation with vaccine-producing companies. As a result of this unethical behavior, children went without previously recommended vaccinations and research efforts for the true cause of developmental disorders was deterred. Following the investigation, Dr. Wakefield was removed of his medical license and his original article was fully retracted in 2010 (Rao & Andrade, 2011). Each of these examples outline clear ethical violations and in some cases they also present as legal violations. Our histories and experiences tell us that fraud and theft all violate the trust of consumers. If our histories and experiences guide our ethical decision making, why do ethical violations continue to occur? Over the course of this chapter, you will identify what ethics is and access references to guide your ethical decision making.

The Ethical code

 Ethics refers to behaviors, practices, and decisions that address three basic and fundamental questions (Reich, 1988; Smith, 1987; Smith, 1993):

  • What is the right thing to do?
  • What is worth doing?
  • What does it mean to be a good professional?

While these questions may appear simple to answer, many situations that paraprofessionals will encounter may not be simply answered by these three questions. Many ethical dilemmas fall into a “grey area.” The application of ethical codes as a “compass” in professional situations will guide practitioners to appropriately identify right and wrong (Cooper, Heron, & Heward, 2007, p. 662).

The RBT® Ethics Code (2018) was established by the Behavior Analyst Certification Board® (BACB) to assist in navigating ethical situations that may arise while engaging with special populations. These codes encompass the ethical obligation of Registered Behavior Technicians™ (RBT®) and RBT applicants. Adherence to these codes is critical to maintain the dignity and humane treatment of consumers of Applied Behavior Analysis.

Responsible Conduct

RBT’s have a responsibility, not only to their clients, but to the field of behavior analysis. This code protects consumers by ensuring those who call themselves Registered Behavior Technicians are qualified to represent themselves as such and to provide treatments rooted in science. RBT’s are required to seek out professional development opportunities to maintain their competence and to promote additional learning opportunities. These professional development opportunities, along with required supervision can support a practitioner’s competence in their areas of practice. RBT’s have a commitment to provide these behavior analytic services truthfully, legally, and without bias. This includes personal biases associated with gender, age, race, religion, or socioeconomic status and those biases due to dual relationships. All attempts to prevent conflicts of interests should be avoided.

Responsibility to the BACB . From the outset of their relationship with the BACB, RBT’s are required to provide accurate and current information when applying and re-applying for their certification. Any minor changes to their statuses (address change, etc.) should be updated with the BACB immediately. Any major changes to their statuses (legal or ethical charges) should also be updated with the BACB immediately. Any content provided by the BACB is considered property of the entity and upholding its integrity and the integrity of its certificants is of utmost priority to those certified by this Board.

  1.01 RBTs uphold and promote the values and core principles of behavior analysis.

 1.02 RBTs have an obligation to remain familiar with this code. Lack of knowledge or understanding of this code does not excuse unethical conduct.

1.03 RBTs are truthful and honest and create an environment that promotes truthful and honest behavior in others. They promote an ethical culture in their work environments and make others aware of this code.

1.04 RBTs act in a way that conforms to the legal and ethical codes of the professional and social communities where they are members. They do not lead others to engage in fraudulent, illegal, or unethical conduct.

 1.05 If RBTs’ ethical responsibilities conflict with employer policies, RBTs must bring the conflict to their supervisor’s attention, document that they did so, and document the resolution.

1.06 RBTs avoid multiple relationships with clients and supervisors. If they find that a multiple relationship has developed due to unforeseen circumstances, they inform their supervisor and work to resolve it. If the multiple relationship involves their supervisor, the RBT should report it to the person to whom their supervisor reports.

1.07 RBTs do not engage in sexual relationships with clients or supervisors. RBTs refrain from sexual relationships with former clients or supervisors for at least two (2) years following the date the working relationship ended.

1.08 RBTs recognize that their personal problems and conflicts with others may impact their ability to perform their duties and refrain from providing services when this is the case. 1.09 RBTs follow through on obligations and contractual commitments with high-quality work and they do not make commitments they cannot keep.

 1.10 RBTs do not make false, deceptive, misleading, exaggerated, or fraudulent public statements about their work or qualifications.

1.11 RBTs provide a current and accurate set of credentials (e.g., degrees, certifications) to clients, employers, and supervisors upon request. Changes to certification status must be immediately reported to employers and supervisors.

1.12 RBTs obtain permission to use trademarked or copyrighted materials as required by law. RBTs provide citations that recognize the intellectual property of others, including trademark and copyright symbols.

  1.13 RBTs attempt to resolve issues informally when possible, without violating confidentiality, by first bringing the issue to the attention of their supervisor and then the individual involved. RBTs document their efforts to address any of these issues. If the matter cannot be resolved informally, they report it to the appropriate authority (e.g., employer, director, regulatory authority). If the matter meets the reporting requirements of the BACB, RBTs must submit a formal complaint to the BACB.

Responsibility to Clients

At the beginning of this chapter, we reviewed the case of Enron. Their consumers and employees’ legal rights were affected by the company’s fraudulent accounting. The following section covers an RBT’s legal and ethical responsibility to clients by maintaining their legal and ethical rights. This code details those rights and the provision of those rights to clients. Clients have a right to privacy. RBT’s have a responsibility to maintain a client’s confidentiality by securing all written, electronic, and verbal documentation of services. There is an expectation that this information will be protected and disclosed only under specific circumstances. Any documentation pertaining to the client will be maintained and disposed of only as permitted.

2.01 RBTs support the legal rights and preferences of clients.

2.02 If RBTs become aware that a client’s legal rights are being violated, or if there is risk of harm, RBTs must take the necessary action to protect the client. This includes but is not limited to: (1) contacting relevant authorities; (2) following organizational policies; (3) consulting with their supervisor; and (4) documenting their efforts to address the matter.

2.03 When providing services, RBTs do not discriminate against, demean, or harass individuals or groups on the basis of age, gender, race, culture, ethnicity, national origin, religion, sexual orientation, disability, language, socioeconomic status, or any other basis forbidden by law. RBTs recognize their own limitations and obtain the proper training, consultation, or supervision when providing behavior technician services to protected individuals or groups.

2.04 RBTs do not accept gifts from or give gifts to clients.

2.05 RBTs may not share identifying information about clients on social media. They must avoid creating situations where such information could be shared by others, including, but not limited to, written information, photos, or videos.

2.06 RBTs always obtain permission from clients and staff to record interviews and service delivery sessions. Consent must be specifically and separately obtained from each individual.

2.07 RBTs protect the confidentiality and privacy of their clients. RBTs only use relevant identifying information in their job-related communications (e.g., consultation, emails, reports). Confidentiality and privacy requirements may be established by law or by an organization’s policies.

2.08 RBTs only discuss confidential information with those who need to know that information. They share information for job-related purposes only. Confidential information includes, but is not limited to: (1) information about anyone with whom the RBT works; or (2) information about anyone to whom the RBT provides services. RBTs maintain confidentiality when handling records under their control. This includes records that are written, electronic, or in any other format. Handling a record may include creation, storage, access, transfer, or disposal.

2.09 RBTs never disclose confidential information without consent from the client. Exceptions are made as required by law, or where allowed by law for a valid reason. This includes but is not limited to: (1) providing needed services; (2) obtaining appropriate consultations; and (3) protecting the client or others from harm.

2.10 RBTs create, maintain, distribute, store, retain, and dispose of records and data relating to their services (1) in accordance with applicable laws, regulations, and policies; (2) in a way that complies with the requirements of this code; and (3) in a manner that allows for appropriate transition of service at any given time.

Competence and Service Delivery

  3.01 RBTs only practice under the close, ongoing supervision of a qualified supervisor.

3.02 RBTs follow the direction of their supervisors and inform them when they are asked to do something that goes beyond the scope of their certification.

3.03 RBTs must be competent in the areas in which they provide behavior technician services.

3.04 RBTs may not practice with new client populations without proper training and oversight.

3.05 RBTs provide behavior technician services only within defined roles.

3.06 When RBTs provide services, they communicate with clients in a simple and easy-to-understand way.

3.07 RBTs collect and display data in a way that allows for decisions and recommendations to be made for program development.

3.08 If RBTs are involved in the delivery of non-behavior-analytic interventions, they do not make reference to, display, or otherwise use their RBT in that practice.

______________________________________________________________________________

Standards for Clients Receiving Behavior Analytic Services

While the BACB codes clearly outline ethical expectations, there are several additional resources to support ABA professionals in implementation and practice of ethical and professional standards. One such resource, The Right to Effective Treatment (Van Houten, Axelrod, Bailey, Favell, Fox, Iwata, & Lovaas, 1988) outlines six guidelines and standards for individuals receiving behavior analytic services: 1. The individual has a right to a therapeutic environment

Client’s have a right to a supportive physical and social environment. A therapeutic physical environment is achieved when basic human needs are met (e.g., food, water, shelter) client dignity is respected, and there are minimal external stressors. A therapeutic social environment is achieved when surrounded by supportive and knowledgeable persons (i.e. staff, teachers, parents), and access to preferable and enjoyable choices.

  • An individual has a right to services whose overriding goals is personal welfare

Any potential risk to a client’s welfare should be considered and evaluated before implementing any procedures that could be considered a risk. Risks can include inappropriate use of physical force, use of harmful reinforcers, or use of non-evidenced based treatment models. Behavior analytic principles should be implemented to promote appropriate skills and independence. Any potential threat to this right should first be evaluated by a Peer Review or Human Rights Committee.

  • An individual has a right to treatment by a competent behavior analyst

ABA professionals practicing under any BACB credential (RBT, BCaBA, BCBA, BCBA-D) are required to conduct the necessary academic and practicum training experience before practicing as that credential. The BACB requires BACB Verified Course Sequences for BCBA-D, BCBA, and BCaBA credentials. All BACB certifications require supervised training experiences and the passing of an exam. If, when practicing under that credential, BACB credentialed professionals are presented with situations outside of their scope of current knowledge, they are obligated to seek assistance from those more experienced. This consultation takes place at all professional levels. For example, if a BCBA has minimal experience developing functional analysis conditions, they may seek out assistance from a BCBA-D whom has more experience with functional analyses.

  • An individual has a right to programs that teach functional skills

Clients have the right to the selection of goals that target socially significant behaviors, promote the client’s independence and foster socially valid behavior change. For example, non-vocal clients require augmentative communication supports to access their environment. Communication is a socially significant, functional, and necessary skill for all clients.

  • An individual has a right to behavioral assessment and ongoing evaluation

As stated in Code 3.01, assessment is a necessary component at the outset of any behavior analytic service. That assessment should include an evaluation of the client’s current skills and deficits and the contributing variables affecting their current performance level. Consistent data collection assists with progress evaluation.

  • An individual has a right to the most effective treatment procedures available.

Applied Behavior Analysis is scientifically validated. The evidenced based treatments associated with behavior analysis should be conducted with the least restrictiveness possible. Only appropriate evidence-based procedures that will result in the most effective and efficient behavior change should be implemented.

Implementing the Ethics Code

Behavior Analysts have long examined the importance of adherence to ethical standards and its impact on the field. Ethical standards and expectations regarding the ethical code are clearly defined by the BACB. RBT’s have an obligation to their clients, credential, and to the field to adhere to ethical practice at all times. Therefore, an RBT should reference and review The RBT® Ethics Code (2018) often. Keeping in close contact with this code will assist in learning to identify ethical dilemmas fluently. In addition, once an ethical issue has been identified, it is imperative that RBT’s acknowledge that there are varying complexities of ethical issues and complex cases require support from their supervising BCBA and often senior level clinicians such as a BCBA-D (Bailey & Burch, 2016). Some cases may require immediate action due to concerns of immediate harm, while others will not need to be dealt with immediately. Bailey & Burch suggest “buying time” as an excellent strategy when an issue falls into a gray area and/or requires more support. When using this strategy Bailey and Burch suggest making statements such as “Let me get back to you on that. I will have an answer to you by our next meeting.” During this time, it is recommended that the code is reviewed, and a supervisor or colleague is consulted. In most cases, ethical dilemmas should not be dealt with alone. It is important for practitioners at all professional levels consult with their supervisors, colleagues and/or mentors before making a final decision on a plan of action. For instance, ethical issues often require difficult conversations with clients, families, supervisees, other professionals and sometimes even your direct supervisor. Therefore, seeking support on how to address ethical issues with those involved is recommended. In turn, these supervised experiences will allow professionals at all levels to learn how to better navigate ethical issues.

Please  review the chart  regarding the BACB Ethics Department’s processes for receiving and processing Notices of Alleged Violation. 

Case Examples 

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Case Study :  Bryan is a practicing RBT.  When providing ABA services to a client with autism, the parent requests that he no longer implement DTT, but instead use and intervention that has very little scientific support.  Bryan decides to try the intervention that is not currently scientifically supported and implements this procedure per the parent request.

Is this an ethical violation?

 Yes.  Despite his research, Bryan has been unable to identify this model as evidenced based for treatment of children with autism.  Bryan, along with his supervisor, could have discussed the difference between ABA and this model and the ethical obligation they have to their client to implement evidenced based treatments. 

Case Study:   Jenny is a practicing RBT working with a 3-year-old client who has minimal food preferences.  As a result, the client is exhibiting health issues.  Jenny has no experience with clients with this profile, so she reads one article on food desensitization and implements a program to increase food intake. 

Is this an ethical violation?   Yes.  Jenny does not have the proper education, training, and supervised experience to implement this type of programming.  Had Jenny contacted a colleague who is competent in food desensitization, and through their training and supervision implemented this program then she would have fulfilled her ethical obligation to the client. 

____________________________________________________________________________

Case Study:   Meagan is a practicing RBT.  She actively attends professional conferences and has recently enrolled in master’s program to receive her BCBA certification.  She continues to maintain her RBT certification while enrolled in this program.

Is this an ethical violation?  

No.  Meagan can maintain her RBT certification while enrolled and conducting coursework towards a BCBA certification.  She cannot represent herself as a BCBA until she meets the criteria to do so by the BACB.

Case Study:   Amanda is an RBT who works for an organization that provides ABA services to children with autism.  She currently works 40 hours per week.  Her supervisor asked her to take on another case that would require her to work an additional 5 hours per week.  She accepts the additional responsibility.

Is this an ethical violation ?

No. Not necessarily. If Amanda can keep her professional commitment to the additional hours per week, then she is maintaining her ethical obligation.  If Amanda was aware that she may be unable to maintain this additional professional commitment at the outset of services and still continued with those services, she would be neglecting her ethical responsibility.

Case Study:   Kelly is an English speaking RBT.  Her client also speaks English, but the client’s parent/guardian speaks primarily Spanish.  Kelly needs to provide assessment results to the parents so she enlists the help of her organization’s Spanish language interpreter to assist.

No.  Kelly fulfilled her ethical obligation to her client by ensuring that her assessment results could be fully understood by the client’s parent/guardian. 

Case Study:   Jeff, a BCBA, has a friend whose child requires ABA services.  Jeff’s friend inquired about him providing services to his child because he is currently on a waitlist for services at multiple companies.  After identifying that he had sufficient time in his schedule to provide these services, he accepted the offer, wrote a contract and was paid by the family for his services at the same rates of reimbursement that the insurance company offers.  Jeff informed the family that this situation would be temporary and would only be providing these services until they were able to receive services from another organization.

Yes.  Given the relationship between Jeff and his friend, it would be inappropriate for him to provide services even if a contract was established at the outset of services. 

Case Study:   Susie, a BCBA, supervises an RBT who has expressed a romantic interest in her.  She has removed herself from her supervisory responsibilities to pursue a romantic relationship with this RBT. 

 Yes.  Susie should not engage in a romantic relationship for at least two years after the conclusion of her supervisory responsibilities. 

Case study:   Scott serves a client with significant gross motor delays resulting in frequent falls.  The client’s parent requests that Scott and his staff create a program to teach the client how to kayak.  The family has been unable to spend time at their lake house because this client is unable to kayak.  Despite Scott explaining potential safety concerns for the client, the parent is insistent that he develop a program for the client to learn how to kayak. The parents are insistent so he created the program.

Yes. If Scott created a program for his client, this would be an ethical violation.   Scott’s primary client is the child, not the parents and he must explain to the parents that he cannot ethically develop a plan of this nature, at this time, due to the present safety concerns. 

Case Study:   Sheri works in a public school setting as an RBT.  A parent has requested her RBT credentials.  Her principal informs her that she doesn’t need to provide that information because she is an employee of the school and she wouldn’t have been hired without proper credentials.

Yes.  Regardless of the conditions under which she was hired, if a parent requests that information, Sheri is still required to provide that information to the parent. 

Case Study:   Daria an RBT, attends a conference also attended by a former RBT colleague.  Knowing that she works with her former client, Daria asks for a progress update on the client.  The colleague does not provide any updated progress information for her client.

No. Daria did not engage in any ethical violations by inquiring on the progress of her former client.  Furthermore, by not providing any information regarding the client, her colleague maintained her ethical obligation to her client’s confidentiality. 

Case Study :  John is an RBT who no longer provides services to a client.  Under the direction of his supervising BCBA, he boxed up all client records and locked them in his organization’s file room.

No. John fulfilled all state, organizational, and BACB policies to adequately maintain the client’s records. 

Case Study:   Britney is an RBT for a client who just recently began receiving speech and language therapy.  The Speech Language Pathologist emailed Britney requesting information about her client’s programming so that they can better align programming to reflect the client’s ABA and speech and language needs.  Britney responded to the email attaching a copy of the client’s insurance treatment plan and a request to meet to discuss more formally in person.

 Yes.  Without signed consent from the parent or guardian, Britney is unable to provide this information to the Speech Language Pathologist. 

Case Study:  Jackie documents her clinical rationale for all of her client’s programmatic changes and saves them on her organization’s secured server.

No.  Jackie has documented appropriate information in regards to her client’s programming in a secure location. 

Case Study :  Madeline no longer works for an organization.  All of her client records were saved on the organization’s secured server.  The organization disposed of the client records 5 years after Madeline left the organization.

No.  Madeline maintained her ethical obligation to her client by retaining all client records on her organization’s secured server before concluding employment.  The organization may have engaged in al violation by disposing of records before the 7-year requirement.

Case Study : Lauren has a new client who engages in aggression towards his sibling.  On the first day of services she implemented a behavior reduction plan with the parent’s consent and runs this plan for the next year.

Yes. Without having first conducted a functional assessment, Lauren has not maintained her ethical obligation to her client.  Even though the parent consented to Lauren’s plan, she has not conducted the necessary assessments to implement the behavior reduction plan.

Case Study :  Upon RBT certification, Joey volunteered to be on a committee for his state ABA chapter. 

 No.  Joey can volunteer for this committee.

Case Study :  Annabelle posted an article from the Journal of Applied Behavior Analysis to her social media page and states “I am so excited about this article! It is going to help me develop better toilet training plans for my clients!”

 No.  Annabelle is promoting behavior analysis through a respected publication and she does not indicate who these clients are, so confidentiality is maintained.

Case Study:   Bobby and his colleagues often discuss their client’s in inappropriate or negative terms and often in public places such as a restaurant or bar after work.   Lyla an RBT listens to the conversations but does not participate.

Yes. Lyla should inform his colleagues that it can be unethical to discuss their client’s in this manner.

Case Study:   Stephanie thinks that her supervisor may be engaging in an ethical violation that has included her.  She referenced the Professional and Ethical Compliance Code and reached out to a senior colleague who agreed that this is, in fact, an ethical violation.  Stephanie fears that approaching her supervisor could have negative consequences for her employment, so she has removed herself from the case, but has chosen to wait and see if the issue is resolved by her supervisor.

Yes.  Stephanie fulfilled her ethical obligation at first by contacting another colleague for clarification about the ethical dilemma.  Removing herself from the case may be an appropriate resolution, but it is not the full resolution.  By not speaking to her supervisor about the ethical violation and seeing the issue through to its resolution, she is not fulfilling her ethical obligation.

Case Study:   A parent has asked Lyla to assist with occupational therapy skills to practice for a youth baseball league. The occupational therapist is unable to attend session that day so the parent would like Lyla to offer the client suggestions on how to baseball and offer suggestions on body mechanics. This is not part of the client’s ABA treatment plan and Lyla is unfamiliar with how to play baseball or occupational therapy practices.

Yes. Teaching the mechanics of baseball is not in the client’s treatment plan and Lyla has no experience as an occupational therapist.

Case Study:   Ali is presenting a lecture to her colleagues.  She makes reference to a presentation she attended the previous month and cites it at the end of her presentation.

Is this an ethical violation? No.  By citing the presentation, Ali has satisfied her ethical obligation for the use of this information in her presentation.

Case Study :  Bridget is an RBT. It was brought to her attention by another paraprofessional  that the intake director at her company (who is not certified by the board) informed the parent of a potential client that Bridget is a miracle worker for children with disabilities and she will have the client undistinguishable from his/her typically developing peers in at least 3 months. Bridget seeks out the support of her supervising BCBA and together they meet with him to clarify that her work is based on the principles of ABA. They also inform him that the BCBA would have to assess the child and develop a treatment plan with feasible and individualized timelines because every case is different. The BCBA also offers a model of how she would describe Bridget’s role and asked that the intake coordinator clarify this with the parent.  

No. Bridget did not make the comments, she then reported it to her supervising BCBA and assured follow-up in an effort to correct the statements made.

Case Study : Mark has a client whose parent posted to her personal social media post about the great progress her son has made as a result of Mark’s services.  Mark was made aware of this post by another parent.

No. Mark cannot control what his client’s parent writes on her personal social media page.  He did not solicit or use this testimonial for any purpose, so it would not be considered an ethical violation.

Case Study: Jason needed clients and thought to himself, “Well, there is a center that diagnoses right down the street, I could stand outside of their center and talk tot parents that just received a diagnosis to tell them directly about my services.”

If acted on, is this an ethical violation?

Yes. Directly going up to potential clients who are vulnerable and may have just received news of a new diagnosis would possibly present undue influence on them. Instead, Jason may advertise to the owners of the center by providing a brochure that describes the kinds and types of evidence-based services they provide in accordance with applicable laws. The center could then choose whether or not they share that information with their clients.

Case Study:   Steve suspects that his client is being abused.  He contacts his supervisor first before contacting the state agency, but his supervisor has not contacted him back.  His state requires a time limit to file any suspicions of abuse as a mandated reporter.  Steve reports his suspicions to the state authority without permission from his supervisor first to avoid expiration of the time limit.

No. Steve is a mandated reporter, and although it may have been beneficial to have support from his supervisor, he does not need supervisor approval to file with the state agency, so he has done his due diligence.

Case Study: Jesse was collecting data and noticed that the last 5 sessions data points were not following the same pattern as the first 10 points. He found it difficult to explain the last 5 data points. Therefore he cut those points off of the graph and published only the first 10 data points.

  Is this an ethical violation?

Yes. Omitting the last sessions of data might alter interpretations of Jesse’s work/research findings.

Case study:   After reviewing her submitted application to the BACB, Katie omitted a previous address required for her background check.  Her application was approved and her test date has already been scheduled.

Yes. Katie has an ethical obligation to report this omission to the BACB as soon as she noticed the omission.  The non-reporting of this would be considered an ethical violation. 

Case Study:   Jesse received a parking ticket.  He did not report it to the BACB.

No. Jesse is not required to notify the BACB about a parking ticket as that is not a public health or safety related ticket. 

Case Study:   After taking the RBT exam, Sheila revealed some questions from the exam to a colleague to help her study. 

 Yes.  Sheila is ethically bound to withhold the disclosure of specific exam questions. 

Case Study :  Alex just took his RBT exam.  A colleague of his is taking the exam next week and asks Alex for some hints on potential exam questions.  Alex remembers some of the questions and reviews those questions with his colleague during a study session.

Yes.  Alex can participate in a study session with BACB approved study guides, but providing his colleague with actual questions from the exam would be unethical according to this code.   

Quiz 1 Quiz 2 Quiz 3

Bodarenko, P. (2016) Enron Scandal.  Encyclopedia Britannica.  Retrieved from

        https://www.britannica.com/event/Enron-scandal

Cooper, J. O., Heron, T. E., & Heward, W. L. (2007). Applied Behavior Analysis (2nd ed.). Columbus, OH:

        Merrill Prentice Hall.

Rao, T.S., & Andrade, C. (2011). The MMR Vaccine and Autism:  Sensation, Refutation, Retraction, and

        Fraud.  Indian Journal of Psychiatry, 53(2), 95-96 .  Retrieved from    

        https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3136032/

Reich, W.T. (1988).  Experimental Ethics as a Foundation for Dialogue Between Health Communications.

      and Health-Care Ethics.  Journal of Applied Communication Research, 16 , 16-28 

Smith, D.H. (1987).  Telling Stories as a Way of Doing Ethics.  Journal of the Florida Medical Association,

     74 , 581-588. 

Smith, D.H. (1993).  Stories, Values, and Patient Care Decisions.  In C. Conrad (Ed.) Ethical

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