Unethical Practices that Caused the Downfall of Enron
We will write a custom essay sample
on Unethical Practices that Caused the Downfall of Enron or any similar
topic specifically for you
Enron, once the seventh largest company in the United States of America according to the Fortune 500, is one of the best examples today as how greed and desire for success in business can transform one into unethical behaviorism. In its early days Enron did the right things and were completely ethical when it came to business. Later on their successful operations were replaced with the illusion of their operations being successful. In the last phases of Enron, they sustained their operation throughout loans from banks and investors.
However when their loan funds dried up, the company imploded. Enron’s collapse was the result of countless unethical practices. Enron began with their CEO Kenneth Lay. The name Enron in North America is now a synonym with green and excessive profit by whichever means possible to do so. Enron started out as a natural gas company put together by Kenneth Lay. The enterprise was put together to profit from the deregulation of the natural gas industry around the North American area.
Enron was one of the largest energy company in the United States, and in the world. They marketed electricity and natural gas. They delivered energy, physical commodities and provided financial and risk management service to countless customers around the world. Enron was formed in July 1985 which was merged with Houston Natural Gas, and InterNorth of Omaha, Nebraska. Initially being just a natural gas pipeline company, Enron began to enter European market in 1995. They also launched a plan to buy and sell access to very high speeds of internet bandwidth.
It began with the trouble in Vahalla. The enterprise acquired a team of financial market speculators. Their original job and function was to evade the risk of the company in their field of operations. Soon the speculators
got involved and by luck and also accounting tricks, they made a lot of money. Enron’s staff though of this as dependable profits and decided to keep the team of speculators however offer them a different function however without anyoneelse knowing and disguising themselves and just speculators. They were now called traders of Enron.
Page 2 Unethical Practices that Caused the Downfall of Enron Essay
The problem for Enron started after the traders were longer successful and began to have financial failures. This is when Enron was no longer making a profit. The traders, which were just high stakegamblers were no longer making any profits if not high source of losses. Thus Enron started to cover up their losses in a number of ways and by borrowing form Wall Street.
One famous source of cover up was the Mark-to-the-Market accounting method which was inspired by Jeff Skilling once he reached the top and the highest level of management. Mark-to-the-Market accounting is a legitimate form of accounting and appropriate for any enterprise which is involved in buying and selling securities. This accounting method is a very dangerous form of accounting when a firm concentrated or is engaged into building projects or plants. Mark-to-the-Mark accounting, “when a power plant is completed the entire present and the future discounted stream of net cash flows are entered into the accounts as a credit.”
“For example, suppose a firm decides to build an electrical power plant which is going to last 50 years and is expected to bring in a net cash flow of $1 million per year. The present value of those fifty years of a million dollars a year, when the market interest rate is 10 percent, is $9.9 million. If the plant cost $4 million to construct that is a net gain of $5.9 million. Under the Mark-to-the-Market accounting system Enron was using the completion of that power plant which would show up as an entry of $5.9 million even though the company had not yet received a penny of revenue.” This was a good way for them temporarily to cover up their losses.
Another way Enron disguised their losses was borrowing money to finance the deficits off their books. The head of this was Chief Financial Officer, Andrew Fastow. According to the accounting rules, borrowing was allowed to be kept off the book as long as a portion of the borrowing was from investors or lenders which were not involved in the company. Fastow found an easy way to put together lent money to the company to hide major losses of Enron.
Enron had many foreign assets such as pipelines and power plants spread around the world, which were not holding up financially as they hoped it would. In 1997, Enron set up, or opened a subsidiary company called Whitewing. It was created to purchase Enron’s assets which were not doing so well financially. The plan was then Whitewing would sell these underperforming assets. Whitewing would buy these underperforming assets at a slightly higher price that they would actually sell for in the market. As they would take a loss in buying above market price, their losses would compensate Whitewing into Enron stock.
Here is how Whitewing would successfully hide Enrons debts and bad investments. If Enron built a power plant for eight million dollars and expecting the project to be worth over eight million and to be worth at ten million, they would enter the difference which would be two million into the books. After a while when the power plant does not perform up to their expectations, the market value would decrease to seven million.
Enron should of cancelled the two million dollar profit down to a nasty one million dollar loss. To avoid a loss in the books, they would instead sell the plant to their other company Whitewing for ten million and validation their books for a two million dollar profit. Whitewing then sell the power plant for seven million and the other three million would count as Enron stock as according to their agreement. So this three million stock issued by their other company would not show up as a loss for Enron, instead it would become a two million dollar profit right away.
In the year 2000-2001, Enron played a big role in the power crisis in the state of California. Enron deliberately manipulated the energy and power market in California with strategies made up by their traders. Traders drove up prices during the crisis through techniques and strategies using code names such as Fat Boy, Load Shift, Ricochet, and Death Star to increase Enron’s profit from trading power within the state, which added electricity costs and congestion between transmission lines. There were countless blackouts throughout the state, and Enron just kept profiting over these unethical practices done by the traders and supported by other Enron members. Later on after the deregulation stopped, Enron had no choice but to declare bankruptcy.
There are many unethical practices that cause the downfall of Enron. However with their schemes and unethical strategies they managed to trick people into believing they were still one of the best to invest in. They managed to hide losses throughout years without the public finding out. It’s kind of like the cartoon of wily coyote that runs off a cliff and for a period of time he is suspended in air and tries to stay suspended longer by wind milling his body before he plummets to the ground. In this case with the Enron Corporation, the period of suspension after the cliff, lasted for years.
Works Cited Alex Gibney, Enron: The Smartest Guys in the Room (2005), 2005, Bovee, C., Thill, J, The Unethical Behavior of Enron, October 2008, Brad McCormick, Enron: Endless Possibilities and the 2000-01 California Energy Crisis, 23 March 2006, Donna Fezler, The Enron Scandal, November 30, 2001
Jerry Isaacs, Enron defrauded California out of billions during energy crisis, 10 May 2002, Naureen S. Malik, California Power Facing Biggest Test Since Enron: Energy Markets, Apr 19, 2013, Richard A. Oppel Jr, Enron Forced Up California Prices, Documents Show, May 07, 2002, San José State University, The Rise and Fall of Enron,See More on Business