The Importance of Ethical Practices in Business - Research Proposal Example

Business Research Proposal Table of Contents 3 Introduction 4 1. Relevance of the Research Proposal 4 2. Context of the Study 4 3.Rationale of the Study 4 1.4. Problem Statement 5 1.5. Research Question 5 1.6. Research Objective 5 2. Literature Review 6 3. Research Methodology 8 3.1. Research Design 9 3.2. Justification of the Research Design 9 3.3. Data Collection 10 3.4. Ethical and Reliability Issues Involved 11 3.5. Time Plan 11 Reference List 13 Abstract The Enron’s scandal was one of the most discussed financial frauds of all time. Enron’s managers and the auditors were involved in unethical practices and fraudulent activities. The objectives of this research study is to identify the unethical practices of Enron, implications of the unethical practices and also to find out the necessary recommendations to the organizations involved in unethical practices. The critical review of several scholarly studies revealed How Enron rose to the leading position and eventually ended up being bankrupt. The research will be conducted based on both primary and secondary data. The primary data will be collected from the employees of several organizations, whereas the secondary data will be collected from past journal articles. This research work will help the reader to understand the importance of ethical practices and how breaching the ethical codes can lead to catastrophic damage to an organization and also to its stakeholders. 1. Introduction 1.1. Relevance of the Research Proposal Enron, established in 1985, is an energy company based in Houston. The company was doing well till 2001, when a major loss of $618 million was reported. Further investigations showed that a network of unethical partnership was responsible to hide the company’s debts. The company’s share prices dropped drastically and the investors lost billions of dollars. Enron eventually filed for protection against bankruptcy in 2nd December, 2001 (CBC, 2006). This research proposal is an attempt to find out the ethical issues which led to the down fall of Enron. Conducting a thorough business research of the unethical practices of the organization will give a clear idea on how they are relevant to explain the downfall of Enron. With the rise in competitiveness in the industry, several companies have deliberately taken unethical steps to get around audits and also deceive the stakeholders by manipulating financial figures in order to make easy money (Zeiger, 2014). The in-depth research of the Enron’s financial scandal will reveal what a firm can learn from their mistakes and how the management can prevent such activities. This research proposal will focus on the importance and assessment of ethical practices of business houses in real life scenarios by relating them with the case of Enron. 1.2. Context of the Study The purpose of this study is to analyze the unethical activities of Enron and how it eventually led the company to its bankruptcy. It will also focus on several unethical practices, which have been adopted by several firms over the years and how they have been affected by it. This study is an attempt to find out how Enron adopted such unethical practices and how the company’s downfall could have been averted. 1.3. Rationale of the Study The ethical codes were designed to protect the interests of the common man, to ensure fairness and justification in social activities. Code of ethical practices has also been incorporated in the business activities to protect the interests of the stakeholders (Malloy, 2005). This study will help researchers to have an in-depth analysis of Enron’s unethical activities. It will also help other companies to learn from Enron’s mistakes and follow this research work as a background for study of ethical values. This study will also guide the new startup companies to follow ethical practices and how it is important for the long-term success of the company. It will pose the example of Enron as a warning to other companies with unethical practices as it highlights the severe impact on the company which has led to its bankruptcy and loss of jobs of several employees. As a result, it will ensure a healthy competition in the industry without any unethical practices. 1.4. Problem Statement Unethical practices in the business environment are not a new phenomenon. Business houses have started to adopt unethical practices, like financial frauds, mistreating of employees, misrepresentation of official statements and manipulation of stakeholder’s data. Enron’s financial fraud was related to hiding company’s debts which in turn led to severe losses. This study attempts to focus the ongoing unethical practices in the industry so that they can be reduced. The outcome of unethical and fraudulent activities has never been fruitful in the long run. It puts severe impact on the investors who loses substantial amount of their funds and at the same time the employees also loses their jobs due to bankruptcy. This paper aims to address this issues in the light of how a company should operate its business in an ethical manner, so as to ensure its sustainability and growth in the long run. 1.5. Research Question What are the unethical practices did Enron adopt? How did their unethical practices get exposed? What were the implications of the scandal? How this incident could be avoided? 1.6. Research Objective To identify the unethical practices of Enron. To find out how Enron’s practices got caught. To find out the implications of the unethical practices. To find out relevant recommendations that will highlight the ways in which fraudulent activities could be avoided. 2. Literature Review This section includes the several scholarly articles on the case of Enron’s financial scandal. Pavel and Encontro (2012) described in their article how Enron moved to the leading position and how they got involved in the financial fraudulent activities. The deregulation of the energy industry was overseen by Kenneth Lay as he had a close connection with the Bush family. The approval of the deregulated sale of energy products allowed Enron to put higher price tags on their energy products, as a result the company’s revenue increased drastically. The company eventually shifted to financial trading sector, in order to find new ways to earn money. Enron started to expand its business by making several investments all over the world, which made them the world’s most innovative company according to Fortune (Forbes, 2012). This recognition drove the company to take big leaps. Schwarcz (2002) pointed out that the company’s fate started to take a U-turn when Jeffrey Skilling, appointed as the CEO, decided to change the accounting system. The traditional straight forward accounting system was changed to “mark-to-market” type. This new method asks for future estimation of the company’s income in case of signing of a long term contract. The estimation was to predict the future value of the present cash flow. This system allowed the accountants to mention all the future predicted incomes in the books, even though the amount was not received. Any further changes like addition of profit or loss were supposed to be show up in the next financial statement (Forbes, 2009). As the costs of most of the contracts were hard to estimate, the investors were given manipulated and misleading information, because the estimation was deviated. The company used “Special purpose entities” to avoid following the traditional accounting system and it also allowed them to cover their debts from the stake holders. Using the special purpose entity, the company was able to hide the debts and overestimate the equities. Pavel and Encontro (2012) further added that the diversification strategies taken by the company to move to different sectors, gained investor’s trust and soon became popular among them. As a result, its stock prices increased by more than three times by the end of the year 1998. The prices further increased till year 2000 when the company was evaluated at $60 billion. This rapid increase of the company’s revenue and its growth in the energy sector made Enron a political target (Dembinski et al, 2006). Oppel Jr, and Sorkin (2001) pointed out that adoption of the “mark-to-market” accounting type backfired on Enron. The company became overconfident in estimating its future profits and all the revenues it has earned were on the paper only. In 2001, Enron realized that it had extremely low liquidity and was running out of cash. Pavel and Encontro (2012) also pointed out that the work culture of Enron was equally responsible for its downfall. The employees were awarded in cash and stocks, only if they can prove themselves to be worthy of the rewards. This created a highly competitive environment in the organization and the employees started to close of deals as many as they can without any proper assessment. This as a result added a lot of projects in Enron’s books, which had no further follow ups. McCullough (2002) further mentioned that Andrew Fastow, the CFO of Enron, decided to hide the losses and manipulate the financial figures by creating several “Special purpose entities”. When the debt stated piling up to unmanageable amounts, the news stared to surface to the stakeholders. As a result, the stock prices stared declining and a lot of “Special purpose entities” began to shut down. Bryce (2002) pointed out that Enron’s unethical debt hiding got caught as the financial regulations of the special purpose entities were not met by the company. The financial law suggests that a special purpose entity must follow the following regulations; a) a minimum of 3 percent of the equities should belong to outside investors, b) the company cannot control the entity, c) the company is not liable for taking any loans. The investigation showed that the entities were run by the company’s employees only, which was a clear violation of the regulations. As a result the disturbingly high levels of debts were disclosed. Enron’s stock prices started falling severely and the company eventually filed for bankruptcy protection just after few weeks of the disclosure (Bryce, 2002). According to Healy and Palepu (2003) the primary reason for Enron’s collapse was the use of “Mark to Market” method of accounting and the use of “Special Purpose Entities”. Furthermore, the transactions were recorded mechanically which created room for divergence between the financial figures and the actual economic reality. Losses were amounted to more than $ 60 millions, whereas job cuts were estimated to be more than 4500. Fox (2002) pointed out that Enron’s decline was almost as fast as it took the leading position. The company eventually shifted from energy sector and moved to financial sector. Enron further diversified its business portfolio by entering into the business of metals and paper industry. As a result, Enron became a favorable choice of the investors. According to Walter (2004) the bankruptcy of Enron had shaken the entire financial market, as no one expected that a company as big as Enron would go bankrupt just in few days. As a result, this incident caused write-off of several million dollars from the company’s exposure. Pavel and Encontro (2012) further added that almost $ 45 billion dollars were later traced back to fraudulent activities. The employees of the company won an $85 million lawsuit as a compensation for their pension funds. This financial scandal led to development of several new financial laws and regulations. One of them is The Sarbanes-Oxley Act (Soxlaw, 2002). This act consists of certain regulations for the company boards and the financial firms. The regulations primarily stated that most of the directors of the board and the audit committee must be independent. Li (2010) described that the Enron’s case can be discussed by the “prisoner’s dilemma”. The company was engaged in several business activities before it went bankrupt, which included energy related derivatives and other financial commodities. Its financial activities were overseen by the CFTC (Commodities and Futures Trading Commission) and FERC (Federal Energy Regulatory Commission). The CFTC oversaw the commodities operations and ensured that the business operation is transparent. On the other hand, the FERC oversaw the energy business. The “Zero Sum” theory suggests that each party will secure the maximum profit while trying to maintain mutual cooperation (Princeton, 2014). Li (2010) mentioned that the chief auditor, Arthur Andersen was supposed to be responsible for the interests of the managers as well as the shareholders. However, Arthur Anderson and the managers in pursuit of fulfilling self-interest betrayed the shareholders, who lost millions of their investments. Walter (2004) further added that the stakeholders were blinded by the superficially high stock prices and did not bother to question the management, which further allowed them to mould the financial numbers. He also believed that if the share holders and board of directors have paid more attention to the decision of the CFO and the CEO, then the bankruptcy could have been avoided. 3. Research Methodology The research methodology gives the overview of how the research will proceed and what are the processes involved in the research work, like types of data collection methods, type of data used and the types of analytical tools used. It will give the reader a general idea of how the research questions will be answered and how the objectives will be fulfilled (Saunders, Lewis and Thornhill, 2009). 3.1. Research Design The research design particularly focuses on the different ways in which the research questions will be approached and answered. It also mentions the source of the data that will be used in the research. For this particular research, the data will be collected from both primary and secondary sources. The data will be collected keeping in mind that they are sufficient to fulfill the research objectives. The Secondary data will be collected from several case studies, which covers the topic of business ethics and responsibilities, several cases on bankruptcy caused by unethical practices. The primary data will include personal opinions on ethical issues and practices in the respondent’s organization. The data will be collected on the grounds of the existing unethical practices in several business firms. The data collected from these sources will be sufficient to point out the unethical practices of Enron and it will also point out the responsible authorities and what they could have done to avert this situation. It will also highlight the auditing process which uncovered the fraudulent activities of the company. The loopholes present in the previous auditing system will also be discussed, which allowed the management to get involved in the financial scandal. This will be followed by the discussion of the implications of the fraudulent activities. Historical data will be collected from the company’s previous balance sheets to show how much the company was affected by the disclosure of the fraudulent activities. Finally, the data will give sufficient insight to provide recommendation which could have avoided this scandal. It will also point out all the relevant measures that an organization and its stakeholders can follow to prevent fraudulent activities. 3.2. Justification of the Research Design The above mentioned research design will help the research work to progress in a deductive approach to find out the answers of the research questions. The secondary data collected from the case studies will provide relevant examples and historical data which will help to find out all the related unethical practices in other organizations. Relating the unethical practices of several other organizations will help to point out the loop holes that were previously present in Enron, which allowed the fraudulent activities. It will also highlight how several business firms have been affected by these practices and how they are same or different from the Enron’s scandal. In short, it will help to compare the Enron’s case with other firms and simultaneously will point out the related factors in them. The primary data will provide a firm ground based on which the researcher can assess individual opinion. The data will give a clear idea on the current level of unethical practices on different organizations and also it will point out how the firms have taken steps to curb the existing fraudulent activities. The recommendation can be created based on how different firms practice control mechanisms to avoid fraudulent activities. 3.3. Data Collection Collection of data is the most important part of any business research. It is the pillar on which the entire research work is structured. Data collection can be done by employing several techniques. It can be either collected directly from the respondents of a sample (primary data) or it can be collected from previously published data in relevant journals (secondary data). Primary data can be collected by observation, conversation or by a questionnaire (Saunders, Lewis and Thornhill, 2009). For this research work, the secondary data will be gathered from several journals and academic books collected from library and online databases. The data will mostly focus on the historical activities of Enron and how those activities led to the downfall of the company. Financial reports will also be collected from the company’s website s well as from published journals. These reports will help to assess Enron’s rise and fall in a measurable and synchronized manner. The primary data will be collected via online questionnaire. The questionnaire will be distributed to the employees of several organizations that will ask for data regarding the existing ethical code of conduct. It will also gather data regarding the ongoing unethical practices that the respondent is aware of, and their personal opinion on how unethical activities can be reduced. The collected data will be analyzed in Statistical Package for the Social Sciences (SPSS). The respondent will be chosen in such a way that the sample contains a homogenous mixture of respondents from different types of organizations. This will broaden the perspective of the research study as the researcher can consider different types of industries and the associated ethical codes and practices. In the light of descriptive statistics it can be stated that the data collected will allow the researcher to analyze the collected sample data and describe the evident pattern of the ethical and unethical activities in the industry. From the point of view of inferential statistics, the collected data will give an overall view of the entire business industry. 3.4. Ethical and Reliability Issues Involved The study will be conducted based on the regulations set by the university and the collected data will be used for study purposes only. The name of the respondents will not be disclosed to protect their identity. Every data collection process has some short comings and ethical issues involved (Saunders, Lewis and Thornhill, 2009). The secondary data can be questioned for its validity in the present scenario. Data which may be more than twenty or twenty five years old may be considered invalid. The researcher should be careful about the age and validity of a particular article. The primary data collection also has several shortcomings. In this case the respondents will be asked about the unethical practices about their organizations, which may be considered to be a sensitive topic of discussion for some people. Some organizations may have policy against sharing of internal data, which will stop the employees from participating in the data collection process. Some ethical issues can also arise, when an employee is disclosing the fraudulent activities of his organization. Thus the researcher will take care of all the associated ethical issues while collecting data. 3.5. Time Plan Activities 1st week 2nd week 3rd week 4th week 5th week 6th week Selection of Topic * Secondary data collection * * Developing research plan and selecting research methods * * Primary data collection * * Analysis and Findings * * Conclusion * Draft submission * Final submission * Reference List Bryce, R., 2002. Pipe Dreams: Greed, Ego, and the death of Enron. PublicAffairs. Oxford CBC, 2006. The rise and fall of Enron: a brief history. [online] Available at: [01 December 2014] Dembinski, P.H., Lager, C., Cornford, A. and Bonvin, J.M., 2006. Enron and World Finance a Case Study in Ethics. New York: Palgrave Macmillan. Forbes, 2009. Why Mark-To-Market Accounting Rules Must Die. [online] Available at: [01 December 2014] Forbes, 2012. Enron 10 Years After -- From Bad to Worse. [online] Available at: [1 December 2014] Fox, L., 2003. Enron the Rise and Fall. New Jersey: John Wiley & Sons. Healy, P.M. and Palepu, K. G., 2003. The Fall of Enron. Journal of Economic Perspectives. 17(2), pp.3-26 Li, Y. 2010. The Case Analysis of the Scandal of Enron. International Journal of Business and Management. 5(10). 37-40. Malloy, D.C., 2005. Understanding the Nature of Ethics, Values, and Purposes of Business, Health Care and Law: Implications and Applications for Community Sport. [online] Available at: < http://www.cces.ca/files/pdfs/CCES-PAPER-Malloy-E.pdf > [01 December 2014] McCullough, R., 2002. Memorandum. McCullough Research. February. Oppel Jr, R.A. and Sorkin, A. R., 2001. Enrons Collapse: The Overview; Enron Collapses As Suitor Cancels Plans for Merger. [online] Available at: [01 December 2014] Pavel, T. and Encontro, M., 2012. The Enron scandal. Chalmers University of Technology. Göteborg Princeton, 2014. Zero Sum. [online] Available at: [01 December 2014] Saunders, M., Lewis, P. and Thornhill, A. 2009. Research methods for business students. 5/e. London: Pearson Professional Limited Schwarcz, S.L., 2002. Enron and the use and abuse of Special purpose entities in corporate structures. Corporate Law Symposium. 70, pp. 1310-1318. Soxlaw, 2002. The Sarbanes-Oxley Act. [online] Available at:< http://www.soxlaw.com/ > [1 December 2014] Walter, I., 2004. Conflicts of interest and market discipline among financial service firms. European management Journal, 22(4), pp.361-376 Zeiger, S., 2014. Effects of a Lack of Ethics on a Business Environment. [online] Available at: [01 December 2014] Read More