Utility Ethics and Enron
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Let's begin with an overview of utility ethics. In utility ethics, it is the outcome, or the consequences, of an act that determines whether that act is a good or bad one.
Utility ethics are also referred to as "teleological" ethics, a word that is rooted in the Greek wordtelos, and which may be translated as an "end" or "purpose." Therefore, utility ethics are concerned with the ends or purposes (the outcome) of an act, and not with the act itself.
The following reading from the Seven Oaks School is a good overview of utility ethics. Read the section entitled "Utilitarianism":
Virtue ethics. (2011). Seven Oaks Philosophy. Retrieved from http://www.sevenoaksphilosophy.org/ethics/virtue.html
Next, read the following article from the Markkula Center of Applied Ethics:
Velasquez, M., Andre, C., Shanks, T., & Meyer, M. J. (2008). Ethics and virtue. Markkula Center for Applied Ethics. Retrieved from http://www.scu.edu/ethics/practicing/decision/ethicsandvirtue.html
For purposes of the Case assignment, we will focus on the Utility Test:
Hamilton, B. (2012, June 7). Utility test. Ethics Ops. Retrieved fromhttp://ethicsops.com/UtilityTest.php
The Utility Test may be best understood with a review of the following examples - also from Ethics Ops. Be sure that you review both examples thoroughly, as we will be using the Utility Test in the Case assignment:
http://ethicsops.com/LessSugarMarketing.php
http://ethicsops.com/PhantomExpenses.php
Require Reading: Madsen, S., & Vance, C. (2009). Unlearned lessons from the past: An insider's view of Enron's downfall. Corporate Governance, 9(2), 216-227.
1. Choose an ethical issue raised by the Enron case study - e.g., Enron's accounting fraud, the company's reward systems, its use of "special purpose entities," or Enron's "deal making" culture.
2. Apply the Utility Test: http://ethicsops.com/UtilityTest.php
3. Be sure that you follow each step of the Utility Test (use a separate section heading for discussion of each step of the test):
A. Introduce the test.
B. Briefly discuss why utility ethics is a valid way of deciding right and wrong.
C. Apply the test
Step 1: Identify the alternative actions that are possible and the persons and groups (the stakeholders) who will be affected by these actions.
Step 2: For each of the most promising alternatives, determine the benefits and costs to each person or group affected.
Step 3: Select the action in the current situation that produces the greatest benefits over costs for all affected.
Step 4: Discuss what would happen if the action were a policy for all similar situations.
D. Draw a conclusion. If the same action is selected in Steps 3 & 4, then the action is an ethical one. If different actions are selected, decide whether the individual action will produce the greatest good and the least harm, for all affected, over the long term.
4. Be sure to use at least two sources from the library to support your discussion and analysis.
5. Be sure to cite references
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Solution Summary
Utility ethics and Enron are examined. The outcome and consequences are analyzed.
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ETHICAL ISSUE
An ethical issue that Enron raised was in its use of mark-to-market accounting combined with special purpose entities. In this accounting method, the company would build an asset, such as a power plant, and before the power plant had generated any real revenue, would record the forecasted revenue in its income statement. After the power plant started receiving actual revenue, Enron would determine if the actual revenue generated was higher or lower than the forecasted revenue that had been recorded on the income statement. If the actual revenue was lower than the forecasted revenue, the company would prevaricate the loss from stockholders by shuffling the loss to a special purpose entity. Note that using a special purpose entity to hide losses was not a generally accepted accounting procedure. The generally accepted accounting procedure would be to record the loss. As a result of these hidden losses, Enron appeared to be doing very well financially in the public's eye; however, in reality, the company was losing money (1).
INTRODUCTION OF THE TEST
To alert the executives to the ethical issues in their use of special purpose entities, the executives could ask stockholders and employees: Would we be comfortable reading a Wall Street Journal story that our company had special purpose entities to hide losses instead of the procedures dictated by generally accepted accounting principles? Would such a practice maximize the good and minimize the harm to others? (2).
UTILITY ETHICS IS A VALID WAY OF DECIDING RIGHT AND WRONG
The utility test forces us to question if the action will produce the best outcomes for all stakeholders, and if we are maximizing the good done while minimizing the harm done for everyone involved. Hence, the utility test is a way to determine right from wrong. ...
Education
- MSc, California State Polytechnic University, Pomona
- MBA, University of California, Riverside
- BSc, California State Polytechnic University, Pomona
- BSc, California State Polytechnic University, Pomona
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