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    Assignment - Busiiness Ethics

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    Emad Belal
    Here are my responses to the questions: 1. The primary causes of the Enron scandal were unethical accounting practices and a lack of proper corporate governance and oversight. Specifically, Enron used off-balance sheet entities and mark-to-market accounting to hide debts and inflate profits. This allowed the company to misrepresent its true financial health. 2. Top management at Enron committed several unethical and illegal acts. They deliberately misled investors about the company's performance by manipulating accounting figures. Management also had conflicts of interest as they had personal stakes in some of the off-balance sheet entities. Additionally, they destroyed documents to cover up accounting irregularities once the scandal began unfolding. 3. If I

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    Assignment - Busiiness Ethics

    Uploaded by

    Emad Belal
    62 views6 pages
    Here are my responses to the questions: 1. The primary causes of the Enron scandal were unethical accounting practices and a lack of proper corporate governance and oversight. Specifically, Enron used off-balance sheet entities and mark-to-market accounting to hide debts and inflate profits. This allowed the company to misrepresent its true financial health. 2. Top management at Enron committed several unethical and illegal acts. They deliberately misled investors about the company's performance by manipulating accounting figures. Management also had conflicts of interest as they had personal stakes in some of the off-balance sheet entities. Additionally, they destroyed documents to cover up accounting irregularities once the scandal began unfolding. 3. If I

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    Here are my responses to the questions: 1. The primary causes of the Enron scandal were unethical accounting practices and a lack of proper corporate governance and oversight. Specifically, Enron used off-balance sheet entities and mark-to-market accounting to hide debts and inflate profits. This allowed the company to misrepresent its true financial health. 2. Top management at Enron committed several unethical and illegal acts. They deliberately misled investors about the company's performance by manipulating accounting figures. Management also had conflicts of interest as they had personal stakes in some of the off-balance sheet entities. Additionally, they destroyed documents to cover up accounting irregularities once the scandal began unfolding. 3. If I

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    62 views6 pages

    Assignment - Busiiness Ethics

    Uploaded by

    Emad Belal
    Here are my responses to the questions: 1. The primary causes of the Enron scandal were unethical accounting practices and a lack of proper corporate governance and oversight. Specifically, Enron used off-balance sheet entities and mark-to-market accounting to hide debts and inflate profits. This allowed the company to misrepresent its true financial health. 2. Top management at Enron committed several unethical and illegal acts. They deliberately misled investors about the company's performance by manipulating accounting figures. Management also had conflicts of interest as they had personal stakes in some of the off-balance sheet entities. Additionally, they destroyed documents to cover up accounting irregularities once the scandal began unfolding. 3. If I

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    Assignment: Business ethics

    Enron Scandal

    What is the Enron Scandal?

    The Enron Scandal involves Enron duping the regulators by resorting to


    off-the-books accounting practices and incorporating fake holding. The
    company utilized special purpose vehicles to hide its toxic assets and big
    amounts of debts from the investors and creditors.

    Explanation
    The Enron corporation was regarded as a corporate giant. But after a good
    run, it failed miserably and ended up as a bankrupt business. The failure
    and bankruptcy of the Enron Corporation jolted Wall Street as well as it
    put several employees on the verge of the financial crisis. The
    corporation had massive debts in its name. It tried to conceal these with
    the help of special economic entities as well as special purpose vehicles.
    Enron traded at the highest market price of $90.75 at the period of
    December 2, 2001. And when the accounting scandal emerged, stock
    prices went down to a record low of $0.26 per share.

    Rise of Enron Scandal


    The scandal began with the Enron misdeeds in the video rental chains.
    The business collaborated with a blockbuster to penetrate the VOD
    market. After entering the market, the business overstated the earnings
    basis for the growth of the VOD market.

    The business executed $350 billion in trades, but it did not last long as the
    dot com bubble came in. It spends a significant amount on broadband
    projects, but the business was unable to recover costs from the spending
    made. The company was exposed to massive exposures, and investors
    lost money as market capitalization deteriorated.

    In 2000, the business started to crumble. CEO Jeffrey Skilling concealed


    all financial losses resulting from the trading business and broadband
    projects by applying the accounting concept of mark-to-market
    accounting. The company kept building assets. It reported profits that
    were yet to be earned. If the actual profit earned were less than the
    reported earnings, the loss was never reported. Additionally, the business
    transferred the asset to the off-the-books corporation. Like this, the
    corporation concealed their losses.
    To add to the agony, the chief financial officer of the business Andrew
    Fastow deliberately resorted to the plan that displayed that the business
    is in good financial shape even though its subsidiaries lost a lot of
    investor’s money.

    Summary of Enron Scandal with Timeline of Downfall

    #1 – Business Background

     The year was 1985, and Enron was incorporated as the merger of
    Houston Natural Gas Company and Internorth Ince. In 1995, the
    business was recognized as the most innovative business by the
    Fortune, and it made it successful run for the next six years. In 1998,
    Andrew Fastow became the CFO of the business, and the CFO
    created SPVs (Special Purpose Vehicle Definition) to conceal the
    financial losses of the Enron. During the period of 2000, the shares
    of Enron traded at the price levels of $90.56.

    #2 – Initial Ripples
     On February 12, 2001, Jeffrey Skilling came in place of Kenneth as
    a chief executing officer. On August 14, 2001, Skilling abruptly
    resigned, and Kenneth took over the role once again. Same period,
    the broadband division of the business reported a massive loss of
    $137 million, and the market prices of stock fell to $39.05 per share.
    In the period of October, the CFO‘s legal counsel instructed auditors
    to destroy the files of the Enron and asked to maintain only the utility
    or necessary information.
     The business reported a further loss of $618 million and a write off
    of
     $1.2 billion. The price of the stock deteriorates to $33.84.

    #3 – fall of Giant
     On October 22, the business got into a probe from securities and
    exchange commission. With this news, the stock of Enron further
    deteriorated and was reported at $20.75. In November 2001, the
    business for the first time admitted and made the revelation that it
    inflated its income levels by $586 million. In addition, that it has been
    doing so since 1997. On 2nd December 2001, the business files for
    bankruptcy and the stock prices end up flat at $0.26 per share

    #4 – Criminal Probe

     On January 9, 2002, the justice department ordered a criminal


    proceeding against the business. On January 15, 2002, the NYSE
    suspended Enron, and the accounting firm, along with Arthur
    Andersen was convicted on the grounds of obstruction of justice.

    Enron Hiding their Debt

     The Enron corporation and its management resorted to an unethical


    scheme and malpractice of off-balance-sheet mechanism. It
    created a special economic vehicle to hide the massive debt from its
    external stakeholders, namely creditors and investors. The special
    purpose vehicle was utilized for concealing realities of accounting
    rather than focusing on the operating results.
     The corporation transferred some portion of assets that had rising
    marketable value to the special economic vehicle, and in return, it
    took cash or note. The special purpose vehicle then utilized to such
    stock to hedge an asset present on the balance sheet of Enron. It
    ensured that a special purpose vehicle reduced the counterparty
    risk.
     The formation of the special purpose vehicles cannot be termed as
    illegal, but in comparison with the securitization techniques relating
    to debt, it could be termed as bad. Enron disclosed the existence of
    special purpose vehicles to the investors and the public, but few
    people understood the complexity of transactions done using the
    special purpose vehicles.
     Enron assumed that the prices of the stock would continue to
    appreciate and that it would not deteriorate or fail as hedge funds.
    The primary threat was that the special economic entities were
    capitalized with only the stock of the corporation. If the corporation
    was compromised, then the special economic entities will not be able
    to hedge the deteriorating market price of such stocks. Additionally,
    the Enron Corporation had held significant conflicts of interest with
    respect to the special purpose vehicles.

    MTM in Enron Scandal

     The CEO of Enron Corporation Jeffrey Skilling transitioned the


    accounting practice of the Enron Corporation from a historical cost
    accounting method to mark to market accounting method. The
    transition of the accounting practice received approval from the
    securities and exchange commission during 1992. Mark to market
    accounting is a practice that reports the fair market value of the
    liabilities and assets for a given duration or financial period.
     The mark to market gives insights to an institution and is regarded
    as the legitimate practice. The method, however, is also exposed to
    some form of manipulation. The Mark to market is based on fair
    value rather than taking up the actual value. It caused the business
    to fail miserably as they were reported the expected profits as the
    actual profits.
    Why is the Enron Scandal Important?

     The Enron scandal is significant in terms of learning perspectives for


    both new financial professionals and experienced professionals. The
    scandal tells us why strong corporate governance is the key to
    success for any business to sustain and drive profitable business.
    Additionally, it draws insights as to how accounting policies should
    not be used and applied. Any misuse can have drastic results or
    impacts on the health of the business.
     Due to the bankruptcy of the business, employees lost several perks
    and pension benefits. Many came on the verge of the financial crisis.
    The crisis was so deep that the shareholders of the business lost an
    estimated value of $74 billion. Such corporate fraud should be taken
    as learning, and an understanding should be drawn as to why
    regulations and compliance are necessary.

    Conclusion

     The Enron Corporation was formed as the merger of Houston’s


    natural gas company and inter-north incorporation. After the merger,
    it grew rapidly and was regarded as the most innovative company.
    However, it resorted to bad accounting practices. It was involved in
    the creation of special purpose vehicles, utilized to hide the rising
    debt of the Enron incorporation, and this led to the failure and
    downfall of the business.

    Answer the following questions:

    1. Based on your understanding of the case identify the causes of


    Enron Scandal?
    2. Identify the types of unethical conducts and illegal behaviors that top
    management committed in Enron and justify your answer?
    3. If you are a top decision maker in Enron during the crisis, suggest at
    least three solutions in order to avoid the collapse of the firm?
    4. Enron reputation and image were damaged badly because of the
    scandal, you were selected to be a member of committee that is
    responsible to rebuild the company image and reputation suggest
    five decisions needs to be taken urgently in order to achieve the task
    and justify your answer?

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