"The Ethics and Legality of Financial Regulation: What Enron Revealed"

by Paige Lenssen | Xchanges 10.2/11.1

📋 Contents

Introduction
An Aristotelian Approach
Enron and Ethical Egoism
Balancing Regulation
Conclusion
Works Cited
About the Author

Abstract: The Enron scandal of the early 2000s is perhaps the most publicized occurrence of corporate fraud in recent decades, and it had impactful consequences: not only did the company’s scandal and resulting prosecution lead to the dissolution of Enron Corporation and the sentencing of several C-level executives, it also sparked a major reform in financial regulation by way of the Sarbanes-Oxley Act of 2002. The Enron collapse and its legislative fallout raise questions about how effectively financial regulation addresses ethical concerns in the marketplace. This analysis will explore these questions through the application of Aristotelian virtue ethics, deontological ethics, and the contractarianism approach to ethical egoism. While no single methodology provides a clear solution to addressing corporate fraud, these theories help shed light on the design and success of current regulatory responses. Analysis will center on one particular piece of legal legislature that received significant press attention during Enron’s criminal investigation. 18 U. S. Code Section 1346 states that it is a felony to “deprive another of honest services,” and it was according to this definition that former Enron CEO Jeffry Skilling was found guilty of fraud (Casey, 2010, p. 1). Analysis of this “honest services clause,” ethical systems in corporate environments, and post-Enron legal regulation reveals that while increasing punishments for noncomplying entities may seem like an appropriate way to deter corporate fraud, it cannot fully address the concerns of market shareholders and stakeholders.

Introduction

Enron Corporation, an energy firm based in Houston, Texas, was one of the world’s largest corporations at the turn of the 21st century (Benston and Hartgraves, 2002, p. 105). In early 2001, Enron enjoyed a market capitalization of over $60 billion dollars, a stock price of over $80 a share, and the title of America’s most innovative large corporation on Fortune magazine’s list of Most Admired Companies (Healy & Palepu, 2003, p. 3). This façade of soaring revenues and profitable innovation, however, soon dissolved. On November 8, 2001, the firm released a restatement of several years’ financial statements that reduced shareholder wealth by $508 million (Benston & Hartgraves, p. 106). The price of Enron stock plummeted, and about a month later, Enron Corporation filed for what became the largest corporate bankruptcy in U.S. history (p. 106). Investigation into Enron’s accounting revealed that firm management had been illegally manipulating the company’s financial statements “to hide losses and debt from investors,” thereby inflating the firm’s earnings and stock price (p. 108). Following the bankruptcy, Enron was subjected to a full criminal investigation, and former CEO Jeffrey Skilling was convicted of fraud for his stock price manipulation (Casey, p. 57). 18 U.S. Code Section 1346 states that fraud includes “scheme[s] or artifice[s] to deprive another of the intangible right of honest services,” and it was this definition of fraud that led the courts to convict Skilling (p. 57).

Section 1346 seems focused more on the ethical rights of all market stakeholders than it does on the protection of just firm shareholders, primarily because it does not address the consequences of a firm’s actions. The law states that it is a felony to engage in a “scheme or artifice” to cheat anyone out of honest services, and this wording implies that it is not the result of the scheme that is unethical — the intent alone of an agent to “deprive anyone of honest services” is enough for that agent to be found guilty. This focus on the intent of the agent, rather than the nature of the action or its consequences for recipients, draws a direct parallel to Aristotelian virtue ethics.

This analysis will explore the ethical implications of the Enron case and the legal responses that followed through three ethical frameworks: Aristotelian virtue ethics, deontological ethics, and ethical egoism (specifically as it relates to contractarianism). While no single methodology provides a clear solution to addressing corporate fraud, these theories help shed light on the design and success of current regulatory responses, and point toward the conclusion that increased education in corporate ethics and legal regulation should be customary in corporations.

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