Enron Accounting Ethics Essay Example

in financial reporting and capital formation. After receiving authorization from the US Bankruptcy Court, Enron Corp was renamed as Enron Creditors Recovery Corp (ECRC) by its newly appointed board of directors. The name was chosen to correspond with ECRC's objective of reorganizing and liquidating certain operations and assets for creditors' advantage before undergoing bankruptcy. The 2001 Enron collapse is renowned for being one of the most extensive and intricate cases in history.

Enron underwent restructuring and asset allocation among creditors after going bankrupt in 2001. The new board of Enron, which was appointed in November 2004, sought to maximize the value of the company's remaining resources and distribute profits to creditors. To this end, ECRC has taken legal action against financial institutions accused of participating in fraudulent practices by Enron prior to its bankruptcy. These actions have yielded cash settlements totaling almost $2 billion.

Furthermore, under these settlements, the defendants have promised to refrain from collecting distributions related to claims against Enron valued at around $1.38 billion. When ECRC resolves all pending litigation and converts all assets into cash, it will provide a final payment to creditors and then dissolve.

Enron's history dates back to 1932 when the Northern Natural Gas Company was established in Omaha, Nebraska. In 1979, it was restructured as the primary subsidiary of Inter North, a holding company. Enron acquired Houston Natural Gas in 1985 and adopted the name Enron. Although Inter North was technically the surviving entity, the combined business operated under the name "HNG/InterNorth Inc." initially.

After constructing a sizable headquarters in Omaha, the ex-CEO of Inter north, Samuel Segnar, departed six months following the merger. This allowed former HNG CEO Kenneth Lay

to step up as the newly merged company's CEO. Lay relocated Enron's headquarters to Houston and instigated a comprehensive rebranding of the business. Initially, Lay was in favor of the name "Enteron"; however, due to its similarity to a Greek word describing the intestine, it was swiftly abbreviated to "Enron."

Enron's final name was chosen after business cards and stationery with Enteron had already been printed, indicating the chaotic state of the company at that time. The "crooked E" logo was created by the late graphic designer Paul Rand. Enron initially focused on transmitting and distributing gas and electricity in the United States, constructing power plants and pipelines, and handling global infrastructure governance. The company owned a vast natural gas pipeline system, including Northern Natural Gas, Florida Gas Transmission, Tran western Pipeline Company, and a Canadian partnership in Northern Border Pipeline. These pipelines generated significant profits and enabled Enron to fund its other ventures and investments.

Enron entered the water industry in 1998 by creating Azurix Corporation, which partially went public on the New York Stock Exchange in June 1999. While struggling to establish itself in the water utility market and experiencing significant financial losses from a concession in Buenos Aires, Enron claimed success through its pioneering marketing of power and communication bandwidth commodities and their derivatives as tradable financial instruments. This included unconventional weather derivatives. Fortune magazine recognized Enron as "America's Most Innovative Company" for six consecutive years between 1996 and 2001, and it also made the "100 Best Companies to Work for in America" list in 2000. The lavish offices of Enron are now viewed with hindsight as remarkable.Once praised for its effective management and

benefits for workers, Enron's reputation changed when its corporate fraud was exposed. In August 2001, the first analyst to reveal Enron's financial flaws was Daniel Scotto with his report "All Stressed up and no place to go." He advised investors to sell their stocks and bonds at any cost. It later came out that many of Enron's reported profits were inflated or fraudulent, while debts and losses were concealed in offshore entities not included in financial statements. Furthermore, complex transactions between Enron and related firms were used to remove unprofitable entities from the company's books. While once a great asset for the company, Northern Natural Gas was eventually acquired by Warren Buffett's Mid-American Energy Holdings Corp after being pledged as collateral for a $2 loan.

Dynegy Corporation injected $5 billion to acquire Enron, but after conducting a thorough review of their financial records, they withdrew from the deal, fired their CEO, Chuck Watson, and appointed Daniel Dienstbier - who had worked for Enron previously and knew Warren Buffett - as their chairman and interim CEO. Despite this, NNG remains profitable. Nevertheless, the collapse of Enron took everyone by surprise, from workers and investors to analysts and creditors. How did the Fortune 500's seventh-largest firm fall into bankruptcy so abruptly? The Enron saga can be divided into three phases.

In Stage 1, The Company expanded its non-core Wholesale energy operations and service business by utilizing debt. Some of this expansion was reflected on the balance sheet while the rest was not. As long as the stock price remained stable, this did not cause any problems for The Company. However, in Stage 2, a decline in stock prices

resulted in off-balance-sheet liabilities creating pressure on debt agreements and causing credit downgrades. Consequently, Enron faced higher borrowing costs due to thin profit margins in their business and lower credit quality during Stage 3 which ultimately lead to the company becoming stuck in a liquidity trap.

Enron’s share price in USD was affected by the company’s background and business strategy. Enron emerged from the merger between Houston Natural Gas and Inter-North in July 1985. Kenneth Lay, an energy economist, became the company’s chairman and chief executive. Enron's business grew as a result of the deregulation of the energy markets, especially the electrical power markets, leading to its expansion into brokering and trading electricity and other energy commodities. Enron invested time and money in lobbying Congress and state legislatures for access to public utility markets, which had traditionally been publicly provided.

Enron was a company that had to gain government approval for the sale of energy and other goods. As such, its top executives were known supporters of the Republican Party. The Center for Responsive Politics states that between 1989 and 2001, Enron donated almost $6 million to federal parties and candidates. Enron attracted many customers through a free internet trading service which resulted in online trades worth $880 billion over two years; however, no information was disclosed regarding their profitability. During this time, it is believed that Enron employed advanced accounting methods to maintain high share prices while raising investments against assets and stock to project an image of success. In their 2000 annual report, Enron reported global revenues totaling $100 billion.

Income grew by 40% in three years, starting with a Fortune magazine article on February

20, 2001 that exposed Enron's debt and deception towards Wall Street. On August 14, 2001, Jeff Skilling stepped down as CEO for personal reasons and Kenneth Lay resumed the role of CEO. Subsequently, on October 2, 2001, Arthur Anderson's legal team instructed employees responsible for auditing Enron to discard all documentation except essential records.

On October 16th, 2001, Enron declared a loss of $618 million for the third quarter. On October 24th, 2001, CFO Andrew Fastow, who managed some of the controversial SPE's, was replaced. On November 8th, 2001, the company made an unprecedented decision to restate profits for the past four years and acknowledged accounting mistakes. Enron inflated its income by $586 million since 1997 by hiding debts through intricate partnership arrangements.

On December 2, 2001, Enron sought Chapter 11 bankruptcy protection and simultaneously sued Dynegy Corp. for breaching contract in the amount of $10 billion. On December 12, 2001, the CEO of Anderson, Jo Berardino, stated under oath that possible illegal actions by Enron had been uncovered. Then on January 9, 2002, the United States...

Within three months of the Justice department launching a criminal investigation, Enron went from a company claiming assets worth almost ? 62bn to bankruptcy, and its share price plummeted from about $95 to below $1. The role of Arthur Andersen, one of the world's five leading accounting firms, was as the auditor for Enron.

Following the scandal, Andersen's chief auditor for Enron, David Duncan, initiated the destruction of numerous potentially incriminating documents. This led to Mr. Duncan's dismissal. Additionally, Jo Berardino, who was Andersen's CEO during the Enron collapse, resigned in March 2002. Andersen faces accusations of obstructing justice and improperly authorizing

Enron's "special purpose entities", which were used to fraudulently conceal losses from investors.

Enron's downfall was caused by the creation of partnerships with shell companies, known as Special Purpose Entities (SPE's). These entities, managed by Enron executives who profited greatly from them, enabled Enron to keep hundreds of millions of dollars in debt off its financial records. However, when investors and financial journalists learned of these arrangements, the company's finances were called into question resulting in a loss of investor confidence, a drop in stock value, credit rating reductions, and ultimately insolvency. Enron employed SPE's to conduct off balance sheet financing, and a flow chart demonstrates how this was achieved. One example was LJM2 Co-Investment, which was marketed by Merrill Lynch.

During Delaware court hearings, it was alleged that Enron's bankruptcy involved major financial institutions including Citigroup, JP Morgan Chase, CIBC, Deutsche Bank and Dresdner Bank. These entities were allegedly directly or indirectly involved in Enron's partnerships when it fell. At first, Enron used SPEs correctly by separating non-energy related businesses into separate entities. However, they later tried to boost earnings by manipulating capital structure and hiding losses. They also lacked independent outside partners for full disclosure and did not disclose financial statement risks.

To avoid conflicts of interest in such cases, interlocking management between off-balance sheet entities and parent companies should be avoided. Additionally, off-balance sheet entities should have an ownership percentage greater than 3% with outside investors who are neither controlled nor affiliated with the parent company. Unfortunately, this was not the case with Enron as they used their own management-controlled partnerships to funnel money through and avoid external ownership regulations.

Although investors did not widely acknowledge

the scale and importance of Enron's off-balance sheet vehicles, several Wall Street companies were aware of them. Enron approximated that $27 billion of its assets had been relocated off balance by the conclusion of 1999, accounting for a total of $60 billion.