The Utility Test Application To The Enron Case Study

The Utility Test

  1. Introduction of the Utility Test

The central idea of utilitarianism is that the wrongness or rightness of a given action is dependent on its consequences. Particularly, the only consequences of the action that are pertinent to it are the bad, as well as good, outcomes that it generates. Act utilitarianism relates to the consequences of the actions of individuals, but rule utilitarianism relates to the consequences of specific forms of actions like fleecing organizations (Urmson, 1953). The utilitarian principle, which is widely christened the utility test, is hinged on the thinking that the wrongness or rightness of a given action is dependent on its consequences. According to the utility test, the outcomes, or consequences, of given actions or happenings determine whether or not they are right. The test views the ends attained via given means as justifying the means. The test establishes given actions as being right if it can be demonstrated that they give rise to the best by and large outcomes.

The outcomes that are deemed as being good in line with the test are measured by pain and pleasure, and unhappiness and happiness. In some cases, they are measured by individuals’ preferences. In other cases, they are measured in monetary value, where money indicates the preferences. Clearly, the utility test has varied strengths. First, it is only the outcomes of an action that matter when determining its wrongness or rightness. Notably, one cannot be contented with merely following own ethical standards where unwelcome outcomes result. Second, factual data is critical in determining the wrongness or rightness. Third, other entities’ welfare ought to be considered in moral decisions where they are impacted on by the attendant outcomes. Third, the test necessitates that one strives for the greatest, or best, results and not merely good results.

  1. The Validity of Utility Ethics in Determining Wrong and Right

There are varied reasons why the utility test ought to be considered as being a valid means of establishing the wrongness and rightness of given actions. First, the utility test ought to be considered as being a valid means of establishing the wrongness and rightness of given actions since every relevant entity is considered similar to the others. Second, the utility test ought to be considered as being a valid means of establishing the wrongness and rightness of given actions as everyone is keen on being happy and keen on keeping away from unhappiness.

Third, the utility test ought to be considered as being a valid means of establishing the wrongness and rightness of given actions as good is that which generates the greatest happiness or most minimum unhappiness those affected notwithstanding. These three reasons mean that individuals cannot merely look at given actions’ effects on themselves or their groups to determine what is moral, or ethical. That is because all those who are affected by the actions have the same standing on the actions’ effects.

  1. Applying the Utility Test to the Accounting Fraud that Happened at Enron

    • Identification Of The Probable Alternative Actions and The Relevant Groups or Stakeholders

Commonly, individuals are keen on judging that is which is excellent for themselves, others as well for particular groups. The groups may include religious teams, shareholders in given organizations, families, friends or entities. Given that most utilitarians were keen on public policies along with political groupings, they commonly zeroed in on discovering the actions, as well as policies, that would make the most of particular groups’ wellbeing. The group considered in this paper with respect to the effects of the accounting fraud that happened at Enron is that of the company’s shareholders. The shareholders come off as having suffered the most of the gravest of the consequences of the accounting fraud.

To avoid the collapse of Enron owing to the fraud, it appears that two specific actions would have been effectual. First, a law could have been enacted by the Congress to bar all auditing firms, including Arthur Andersen, from offering consultancy services to their clients whom they are auditing. Second, the board of directors of Enron would have monitored the auditing functions of the company continually to eliminate the possibility of having it served by the same entity as its consultant and auditor, which gave rise to the accounting fraud.

Notably, big firms and their external auditors commonly develop close linkages, or relationships, which should not become cozy preferably. Even then, the relationship between Arthur Andersen and Enron become too cozy that it hampered the former from scrutinizing the latter’s books sufficiently independently and thoroughly. The directors did not pay attention to the relationship.

  • Costs and Benefits of the Alternatives to the Shareholders

Had a law been enacted by the Congress to bar all auditing firms, including Arthur Andersen, from offering consultancy services to their clients whom they are auditing, it would save Enron’s shareholders the shareholder value that they lost (Madsen & Vance, 2009). The value was $63,101,519,000 according to USA Today (2002). Thus, the benefit that would have accrued from the enactment of the law can be considered as the saving of $63,101,519,000 worth of shareholder value.

Had the board of directors of Enron monitored the auditing functions of the company continually to eliminate the possibility of having it served by the same entity as its consultant and auditor, the accounting fraud could have been stopped beforehand. The monitoring by the board would have saved Enron’s shareholders the shareholder value that they lost. The value was $63,101,519,000 according to USA Today (2002). Thus, the benefit that would have accrued from the monitoring can be considered as the saving of $63,101,519,000 worth of shareholder value.

The law would have been a substantive one. In total, the Congress passed 1653 substantive laws between the beginning of 1995 and the close of 2014. That means that on average, the Congress passed 166 substantive laws per annum between the beginning of 1995 and the close of 2014 according to DeSilver (2014, table 1). According to Jimmie (2012), the public spends about $5,250,000, 000 annually on the running of the Congress.

If one uses the estimates are given by DeSilver (2014) and Jimmie (2012) as credible and computer the average amount of money the public finances the Congress with to pass one substantive law, the amount is found to be about $31,626,506. That means that the cost that would have been incurred with respect to the enactment of the law by the Congress to bar all auditing firms, including Arthur Andersen, from offering consultancy services to their clients whom they are auditing, would have been about $31,626,506 and the related benefit would have been $63,101,519,000 worth of saved shareholder value according to USA Today (2002).

According to Green and Suzuki (2013), the average pay given to the board of directors for a Standard & Poor’s 500 Index Company for a year is about $251,000. Possibly, the Enron’s board of directors would have required holding various meetings in a year to monitor the auditing functions of the company continually to eliminate the possibility of having it served by the same entity as its consultant and auditor. Possibly, the total cost incurred by the company owing to the meetings would possibly have amounted to about $251,000 as suggested by Green and Suzuki (2013) and the related benefit would have been $63,101,519,000 worth of saved shareholder value according to USA Today (2002).

  • Action with Least Costs Compared to Benefits for the Shareholders

The monitoring of the auditing functions of the company continually to eliminate the possibility of having it served by the same entity as its consultant and the auditor would have been the action producing the most benefits compared to costs for the shareholders. As earlier noted, that would have cost those involved $251,000 but helped save $63,101,519,000 worth of shareholder value according to USA Today (2002). On the other hand, the enactment of the law would have cost the taxpayer about $31,626,506 with the related benefit being $63,101,519,000 worth of saved shareholder value according to USA Today (2002).

  • What Would Have Happened Had Monitoring Would Have Been A Policy Applicable In All Comparable Situations

As noted previously, had the board of directors been required by policy to monitored the auditing functions of the company continually to eliminate the possibility of having it served by the same entity as its consultant and auditor, the accounting fraud could have been stopped beforehand. Possibly, Arthur Andersen would either have been Enron’s auditor or consultant (Harsanyi, 1977). It would not have developed such a close relationship between it and Enron as to hamper its capacity to audit it sufficiently independently and thoroughly.

  1. Conclusion

The monitoring of the auditing functions of the company continually by the board to eliminate the possibility of having it served by the same entity as its consultant and the auditor would have been ethical. The monitoring of the functions would have produced a net benefit of $63,101,268,000. The enactment of the law would have produced a net benefit of $63,069,892,494.

 

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