Ethical and legal considerations significantly impact decision-making in business and other contexts. Failure to consider ethical considerations can result in negative consequences, such as a loss of trust, reputation damage, and legal liability. Failure to comply with legal requirements can lead to legal sanctions, such as fines, penalties, or imprisonment.
Enron and Arthur Andersen:
Although the Enron case is large and complex and has many financial deviations that led to its bankruptcy, all these deviations would not have continued from the beginning if an honest financial auditing firm had been behind it, and this is the opposite of what Arthur Andersen's firm did, which covered up all Enron's deviations to show that Enron achieves fantastic profits and growth rates, on the other hand, Enron was achieving significant losses. It did not show it to investors who trusted "Enron's management and Arthur Andersen's firm" (Khan, Jamali & Jamshed, 2022).
Some ethical and legal implications are that Arthur Andersen worked as Enron's financial controller and auditor. At the same time, the firm was working for the company as a financial advisor with millions of contracts, so Arthur Andersen was auditing himself! Arthur Anderson also accepted direct gifts from Enron and indirect donations to its charities, such as the MD Anderson Cancer Center (Rashid, 2021).
Ethical and legal implications:
The Enron and Arthur Andersen scandals were business decision errors with ethical and legal implications. The scandal involved a failure to act independently, a disregard for stakeholders' interests, and an intentional effort to deceive investors and regulators. The legal consequences of the scandal included charges of obstruction of justice and a significant fine. In contrast, the ethical implications included a loss of trust, reputation damage, and a substantial reduction in Arthur Andersen's workforce.
Strategies to eliminate the risk of fraud:
Auditors should be required to maintain a high level of independence from their clients and to report any potential conflicts of interest to the appropriate authorities. Auditors should be necessary to thoroughly review a company's financial statements and identify any possible errors or inconsistencies. Companies should be required to disclose more information about their economic activities to investors and regulators. The legal system should have more penalties for fraud and other financial crimes. Senator (Paul Sarbanes) and Representative (Michael Oxley) made a new law, which is (Sarbanes-Oxley), and its primary goal is to eliminate these types of Loopholes—finally, educating and training employees to follow the Code of Business Conduct and strengthen corporate governance rules (Kabeyi, 2020).
Conclusion
Ethics can be a robust fraud prevention strategy in business. A company's ethical culture can set the tone for employees' behavior and help prevent fraudulent activities. By promoting a strong ethical culture, companies can create an environment where fraud is less likely to occur, and employees are more likely to report suspicious activities they observe. Ethics can be used as a fraud prevention strategy in business by establishing a Code of Ethics, leading by example, training and education on ethical behavior, and encouraging Whistleblowing (Nwanyanwu, 2018).
References
Rashid, M. M. (2021). A Case Analysis on Enron; Ethics, Social Responsibility, and Ethical Accounting. New Innovations in Economics, Business and Management, 62.
Kabeyi, M. J. B. (2020). Corporate governance in manufacturing and management with analysis of governance failures at Enron and Volkswagen Corporations. Am J Oper Manage Inform Syst, 4(4), 109-123.
Khan, M. A., Khan, U. N., Jamali, A. K., & Jamshed, J. (2022). The Factors Contributing to a Corporation's Demise: An Analysis of Enron. Journal of Management Practices, Humanities and Social Sciences, 6(2), 15-21.
Nwanyanwu, L. A. (2018). Accountants' ethics and fraud control in Nigeria: The emergence of a fraud control model. Journal of Accounting, Finance and Auditing Studies, 4(1), 130-150. Retrieved from ProQuest