5. (Answer both (a) and (b) below). The Enron scandal was an accounting scandal of Enron Corporation, an energy company based in Houston, that led to Enrons bankruptcy in 2001 the largest corporate bankruptcy in US history at the time. While the company was performing well and growing throughout the 1990s, it began to incur losses by 2000. Trying to keep share price high to meet Wall Street expectations, Enrons executives Kenneth Lay, Jeffrey Skilling, Andrew Fastow and others inflated the companys revenue and hid its losses and debt from investors using a number of questionable accounting practices. These included mark-to-market accounting, i.e. reporting of estimated rather than actual profits, which can easily be manipulated to mislead investors and regulators; creative accounting that overestimated Enrons revenue; and use of affiliated shell companies to hide Enrons debt. Enron began to crumble in mid-2001; its share price fell drastically, and the company filed for bankruptcy; authorities opened an investigation into its accounting practices. One consequence was that many employees savings plans that relied on Enron stock became practically worthless.

a. Using at least one of the three approaches to ethical reasoning we discussed in class (principles-based, consequences-based, and/or virtue-based), explain why Enrons executives acted unethically.

b. What theories about the world, other people, or themselves might have led Enrons executives to engage in deceptive accounting practices? Explain.