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Enron Company’s Whistleblowing Scandal

Introduction

Whistleblowing is conducted in accordance with Frankena’s four basic requirements for ethics that include avoiding evil, preventing evil, eliminating evil, and doing good (Grace & Cohen, 2010). In that regard, whistleblowing is more about an individual’s moral judgment than it is about clear requirements that obligate individuals to reveal tricky organizational transactions that pose great risks to the public. There are two types of whistleblowing, namely internal and external. In many cases, only external whistleblowing is recognized because reporting that exists within an organization comprises the normal feedback channels that solve internal problems. Moreover, many feedback channels work within the organization and internal issues are not taken outside. In this paper, I will argue that Sherron Watkins actions were not morally justifiable because even though she uncovered the fraud at Enron, her decision not to share the information she had gathered with the public led to losses of billions of dollars, widespread unemployment, and the collapse of the company.

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The Enron Case

As mentioned earlier, whistleblowing can be either internal or external. In the Enron scandal of 2001, the main whistleblower (Sherron Watkins) informed the company’s top management that Enron was at risk of collapse because of the innumerable financial inconsistencies she had discovered in the firm’s financial statements (Fox, 2004). Watkins wrote an anonymous letter to the company’s founder, Kenneth Lay after discovering that Enron was engaging in unethical accounting practices. Prior to the eruption of the scandal, Watkins had launched investigations into the transactions conducted between Enron and LJM. LMJ’s main role was to manipulate financial statements by excluding Enron’s high-risk assets that were performing poorly from its balance sheet (Sterling, 2002). The manipulation of financial books conducted by LMJ amounted to unethical accounting practices. Therefore, Watkins took it upon herself to inform the top management about the possible consequences of the actions. She realized that the company was in deep financial troubles after former CEO Jeffrey Skilling resigned (Fox, 2004). Based on the foregoing definition of whistleblowing, Watkins’s actions can be described as internal whistleblowing because she never took the information to any external agency for assistance.

Internal Whistleblowing

Instead of revealing her discovery of financial fraud at Enron to the public, Watkins chose to give the information to the company’s top management (Sterling, 2002). Her decision had severe consequences. There are four conditions that a whistleblowing case should fulfill in order for it to be morally justifiable. First, it should be serious and involve information that supports gross misconduct within an organization (Grace & Cohen, 2010). The threat posed by the misconduct should be specific and about to happen. Otherwise, the information will be malicious gossip. Second, the information must be reliable and have some benefits to the public (Grace & Cohen, 2010). Moreover, the public has a right to know about the misconduct in order to avoid the impending threat. Third, the whistleblower should not have access to mitigation means that could rectify the fraud within the organization (Grace & Cohen, 2010). Fourth, alternative means of addressing the issue should have been tried prior to seeking assistance from external agencies. Fifth, blowing the whistle should have the potential to end the problem (Grace & Cohen, 2010). These five conditions are based on the assumptions that specific organizational actions are a threat to public interests and internal procedures to rectify problems have been tried by employees and failed.

In the case of Enron, Watkins chose to pursue internal whistleblowing. Based on the aforementioned conditions used to evaluate the moral justification of a case, Watkins’s actions fulfilled most of the conditions. The fraud in the organization was a threat to public interest, was specific and imminent, and the information available was reliable. For example, the fraud led to losses of more than $45 billion (Fox, 2004). Shareholders and employees were subjected to losses that wiped their investments. After the resignation of Skilling, Watkins sent an anonymous memo to Kenneth Lay (chairman and CEO) outlining the inconsistencies she had discovered in Enron’s financial accounts (Weiss, 2008). In the memo, she warned Lay that the accounting practices that LJM was applying would lead to severe financial consequences and predicted that Enron would be rocked by a wave of accounting scandals originating from unethical accounting practices (Sterling, 2002). Watkins’s claims were supported by documents containing information that she had gathered various business divisions with proof of shady financial practices. Lay failed to act even though he was warned that Enron would be liable for millions of dollars in losses because of the actions of LJM (Sterling, 2002).

Lay did not take Watkins’s claims with the seriousness they deserved because he failed to conduct proper investigations into the matter. Instead of hiring a new accounting firm to conduct investigations, Lay continued to rely on the company’s lawyers and accounting firm that had approved the transactions described as fraudulent (Weiss, 2008). Watkins’s actions had good intentions because she wanted to find an internal solution to the fraud case. In the memo, she offered Lay several alternatives that she thought would save the company from losses (Sterling, 2002). Instead of responding swiftly to the suggestions, Lay resorted to finding a way to fire her.

The Morality of Watkins’s Actions

According to Grace and Cohen (2010), a revelation can be described as whistleblowing if it is conducted externally. Watkins chose to blow the whistle internally and exclude the public from accessing the information implicating Enron in fraudulent activities. Her actions had severe financial implications because they led to losses that affected shareholders in a great way (Weiss, 2008). Watkins was responding to a specific and imminent threat, and her information was reliable (Weiss, 2008). However, she did not share the information with the public. As a result, the company filed for bankruptcy and shareholders lost billions of dollars. She did not take any action that could have saved the company and the shareholder’s money. Had Watkins blown the whistle externally, the outcomes of the case would have been different for both Enron and the public.

According to utilitarianism, right and wrong is determined by the value of the effects of actions taken by individuals (Timmons, 2012). If Watkins had gone to the public, the company would have been saved and shareholders’ investments salvaged. However, her decision to hide the information from the public led to losses that affected the company, employees, and investors. Her actions had little value because even though the fraud was uncovered, the company’s bankruptcy affected many people in a negative way (Weiss, 2008). The alternative (external whistleblowing) would have greater value because it would have prevented the losses. Utilitarianism states that a person’s interests do not carry a greater weight than other people’s interests (Timmons, 2012). Watkins chose internal whistleblowing because she was afraid of the consequences of external whistleblowing. She put her interests before the interests of her colleagues and shareholders. In that regard, she did not do the right thing because her actions affected the interests of other people in a negative way. She knew that the company was at risk of collapsing because of the fraudulent accounting practices that had been going on in the organization. Despite this knowledge, she decided not to share the information with the public.

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Internal reporting is a critical part of an organization’s channels for providing feedback. External reporting is not necessary if internal reporting works. Watkins’s internal whistleblowing did not work because top management failed to respond to her clams appropriately. Lay declined to hire a new accountant to investigate the accusation. Instead, he devised a plan to fire Watkins. It was Watkins’s moral responsibility to blow the whistle externally by sharing the information she had gathered with the public. According to egoism theory, acting in accordance with one’s self-interest is the best way for an individual to be morally good (Bloomfield, 2007). Proponents of this moral theory believe that individuals are only required to consider their own well-being and desist from taking other people’s needs into consideration. This theory justifies Watkins’s actions because she made a decision that protected her well-being even though many other people suffered. One of the main tenets of the theory is that acting in accordance with self-interests increases overall happiness by resolving common moral dilemmas (Bloomfield, 2007). The consequences of Watkins’ internal whistleblowing contradict the theory’s tenets because it decreased the overall happiness of shareholders and employees.

According to deontological ethics, the morality of an action should be determined based on an individual’s adherence to certain rules (Bloomfield, 2007). These rules are binding and as a result obligate people to act in certain ways. Emmanuel Kant was a philosopher whose theory was a formulation of deontological ethics. He believed that moral actions are based on a sense of duty or obligation (Bloomfield, 2007). It can be argued that Watkins did not fulfill her duty of blowing the whistle externally because she put her interest first before the interests of other employees and shareholders. It was her duty to ensure that the financial inconsistencies she had discovered in Enron’s financial statements did not cause harm to anybody. Personal responsibility is commensurate with an individual’s capacity to assist and the availability of other people who can offer assistance (Grace & Cohen, 2010). Watkins should have sought help from external sources because internal efforts to stop the company’s collapse had failed. However, she did not. She only gave a testimony at a hearing after the company had declared bankruptcy. As an employee of Enron, Watkins was part of a company that engaged in unethical accounting practices that led to great losses. So, she was partly to blame for the losses.

Conclusion

Watkins’s decision to blow the whistle internally led to the collapse of Enron and financial losses that affected shareholders negatively. After discovering illegal transactions carried out by Enron’s accounting firm, she chose to share the information with top management and not the public. Had she shared the information with the public, the case would have a different outcome because the government and investors would have acted swiftly. She had reliable information, her concerns were specific and based on imminent threats, and the information was beneficial to the public. However, she decided to put self-interest first and send an anonymous memo to the CEO outlining the imminent threats Enron was facing. Watkins did not do the right thing because she refused to share information that was beneficial to shareholders and that could have avoided the collapse of Enron and massive financial losses.

References

Bloomfield, P. (2007). Morality and self-interest. New York, NY: Oxford University Press.

Fox, L. (2004). Enron: the rise and fall. New York, NY: John Wiley & Sons.

Grace, D., & Cohen, S. (2010). Business ethics. New York, NY: Oxford University Press.

Sterling, T. F. (2002). The Enron scandal. New York, NY: Nova Publishers.

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Timmons, M. (2012). Moral theory: an Introduction. New York, NY: Rowman & Littlefield Publishers.

Weiss, J. (2008). Business ethics: a stakeholders and issues management approach. New York, NY: Cengage Learning.

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StudyCorgi. (2021, March 3). Enron Company's Whistleblowing Scandal. Retrieved from https://studycorgi.com/enron-companys-whistleblowing-scandal/

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StudyCorgi. 2021. "Enron Company's Whistleblowing Scandal." March 3, 2021. https://studycorgi.com/enron-companys-whistleblowing-scandal/.

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