1- Ethics at Enron
Watch the movie Enron: The Smartest Guys in the Room (Magnolia Home Entertainment, 2005, Los Angeles, California).
- Do you think such behavior is common at other companies, or do you think this was a fairly isolated event?
- How important is the “tone at the top” (the tone set by company leadership)?
- Do you think you could be tempted to follow along if the leadership at your company had the same mentality as the leadership at Enron, or do you think you would have the courage to “just say no” or even be a “whistle-blower”?
- Why do you think some people can so easily justify (at least to themselves) their unethical behavior?
- In general, do you think people stop to think about how their actions will affect other people (e.g., the elderly in California who suffered due to electricity blackouts) or do they just “do their job”?
- What was your reaction to the psychology experiment shown in the DVD? Studies have shown that unlike the traders at Enron (who received large bonuses), most employees really have very little to gain from following a superior’s directive to act unethically. Why then do some people do it?
- Do you think people weigh the potential costs of acting unethically with the potential benefits?
- You are a business student and will someday work for a company or own a business. How will watching this movie impact the way you intend to conduct yourself as an employee or owner?
- The reporter from Fortune magazine asked the question, “How does Enron make its money?” Why should every employee and manager (at every company) know the answer to this question?
- In light of the “mark-to-market” accounting that enabled Enron to basically record any profit it wished to record, can you understand why some of the cornerstones of financial accounting are “conservatism” and “recording transactions at historical cost”?
- How did employees of Enron (and employees of the utilities company in Oregon) end up losing billions in retirement funds?
2- Ethics involved with assigning costs to inventory (Learning Objectives 4 & 5)
Brandon is the production manager of a large manufacturing firm. He is worried about the prospect of bonuses for the upcoming year. The company has paid out bonuses for the past ten years, so Brandon has been counting on the bonus to help pay some debts he has accumulated over the year. In addition, Brandon and his wife are expecting their first baby in two months. Due to the unexpected downturn in sales, bonuses appear to be unlikely this year.
Ryan is the accounting manager for the company. He and Brandon are good friends. Over lunch one day, Brandon confides in Ryan about his financial difficulties. He is stressed out over the bills and the baby on the way. He really needs that bonus.
Ryan wants to help Brandon. Ryan has been with the company for many years and knows that fundamentally the company is strong. This year is just an unusual year. He thinks about ways that he can help Brandon. Brandon is a good employee, and the company does not want to lose him if he were to go to work for a competitor.
Ryan thinks about how he can best help Brandon. He thinks about a few different options, including the following:
- Option #1: Ryan could increase income for the year by adding sales commission costs and advertising costs to the products. If he does this, the product cost will be higher. However, there is still a large inventory of units on hand. The units that are still in ending inventory will shield these costs from decreasing net income until the units are sold in a future year.
- Option #2: Ryan could quietly make Brandon a loan from the company to help him get back on his feet. The company does not have a policy prohibiting loans to employees, but neither does it have a policy of allowing such loans to employees.
Ryan does not know what to do.
Using the IMA Statement of Ethical Professional Practice as an ethical framework, answer the following questions:
- If Ryan were to increase income by adding sales commission costs and advertising costs to product costs as described in Option #1, what ethical principles would be violated?
- If Ryan were to make a company loan to Brandon (Option #2), what, if any, ethical principles would be violated?
- What do you think Ryan should do in this situation?