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Enron: What Caused the Ethical Collapse

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Case 1

ENRON: WHAT CAUSED THE ETHICAL COLLAPSE?

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Kenneth Lay, former chairman and chief executive officer (CEO) of Enron Corp., claimed to be a moral and ethical leader and exhorted Enron’s officers and employees to be highly ethical in their decisions and actions. In addition, the Enron Code of Ethics specified that “An employee shall not conduct himself or herself in a manner which directly or indirectly would be detrimental to the best interests of the Company or in a manner which would bring to the employee financial gain separately derived as a direct consequence of his or her employment with the Company.” Enron’s ethics code was based on the values of respect, integrity, communication, and excellence. Given this code of conduct and Ken Lay’s professed commitment to business ethics, one wonders how Enron could have collapsed so dramatically? The answer to this question seems to be rooted in a combination of the failure of top leadership, a corporate culture that supported unethical behavior, and the complicity of the investment banking community.

The failure of Enron’s top leadership was evident in the activities of Andrew Fastow, Jeff Skilling, and Ken Lay, all of whom faced multiple counts of criminal activity with respect to their decisions and actions at Enron. Included among these criminal charges were money laundering, wire fraud, securities fraud, conspiracy, making false statements on financial reports, and insider trading. Some of the activities that led to these criminal charges were: (a) concealing how extensively Enron was involved in trading in order to support a high market valuation of Enron’s stock; (b) setting up and operating related party transactions, called LJM partnerships, to do business with Enron; (c) exempting Fastow from the company’s ethics code regarding the private partnerships he set up; and (d) covering…...

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