Enron And Ethics and Accounting

Enron and Accounting Ethics
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Introduction
Mentioning the name Enron to scholars and practitioners in accounting will always shift their thoughts to ethical accounting practices. This owes to the fact that the failure of organizations like Enron, WorldCom and Adelphia, led to changes in the standards of practice in accounting. Consequently, several authors completed studies on the collapse and demise of Enron. For instance, Conroy and Emerson (2006), Cunningham and Harris (2006), and Dembiski et al., (2006) made publications on the topic in question. According to Conroy and Emerson (2006), Enron’s failure represents the biggest company failure in the history of America. This is highlighted by the fact that Enron had revenue of US $101 billion and an estimated size of 21000 employees by 2000. However, Dembiski et al., (2006) reveals that the organization collapsed in 2001 owing to unethical accounting practices within the organization. This paper discusses how Enron led to increased emphasis on corporate codes of conduct by analyzing the entire fiasco.
What Happened
It is notable that Enron was implementing aggressive business strategies that attracted clients and investors from the entire world. As an evidence of this, the organization lowered the cost of gas and electricity by 40 to 50 percent in the 1990s (Dembiski et al., 2006). This is because Enron was involved in diversified business operations owing to its involvement in energy supply chain. Specifically, Enron specialized in allowance trading, natural gas, and power marketing. Simply put, business operations in Enron could be divided into two different financial entities: a financial institution and an energy supply company. The energy section of the organization had information on the distribution problems and production costs while the financial institution section of Enron focused on wholesaling and the use of financial derivatives. Further Moncarz et al, (2006) Enron had information on the flow of gas products in the market.
It is notable that Conroy and Emerson (2006) argue that business strategies employed by Enron ensured rapid growth. This owes to the fact that the organization accumulated assets aggressively using debt financing. As a result, Enron produced a high debt-to-equity ratio that was partly concealed from investors using special purpose partnerships. It is critical that another element that resulted in the rapid growth of Enron was the profits sourced from derivatives trading. Additionally, Enron profited from an energy crisis that occurred during the summer of 2000 in California (Conroy and Emerson 2006). The same author further asserts that Enron acquired market power because the organization contributed as both a dealer and market participant to the gas industry. Further, the organization ensured that it bought products at a lower price and sold the same products at its asking price.
It is clear that Enron developed a business model that acquired investments from market and leveraging the same investment. This was possible because the organization created elastic pricing structures using financial derivatives to manage risks. As a result, the model used by Enron assumed continuous growth owing to its diversification from an energy firm to a hybrid business that focused on energy and financial derivatives. It follows this was the main source of success (managing risks using complex financial techniques). Nonetheless, the organization collapsed because of using unethical accounting practices in addition to using complex financial instruments. The failure of the Enron could also be attributed to its corporate culture. As Cunningham and Harris (2006) argue, Enron’s corporate culture also contributed to its failure because the organization embraced innovation and competitiveness. Thus, the organization encouraged experiments and discouraged failure.
Laws and Rules Applicable to Enron
According to Cunningham and Harris (2006), Enron was entitled to make disclosures about the traded federal securities. This is because an underlying philosophy of the federal security laws requires organizations to disclose all material information to the public for investors to make prudent decisions. It follows that two major statutes: The Securities Exchange Act of 1934 and The Securities Act of 1933 were relevant to the case study under discussion. According to the Securities Act of 1933, it is illegal for organizations to sell securities to American citizens unless the securities have been registered with the Securities and Exchange Commission. The Securities Exchange Act of 1934 requires organizations to disclose all relevant information to the public. As aforementioned, Enron used special purpose partnerships to conceal information of the organization’s financial performance from the public. The organization also sold unregistered securities to the public.
Enron also broke the federal pension law because the organization was unable to meet the requirements of the law. According to Dembiski et al., (2006), federal pension laws require organizations to provide retirement plans for their employees and manage those funds with an aim of benefiting the staff. Rules on federal pension laws are present in the Employee Retirement and Income Security Act. It is notable that Enron’s employees were required to contribute between 1 and 15 per cent of their basic pay for their retirement plan. Nonetheless, most employees lost their pensions after the demise of Enron. As an evidence of this, Dembiski et al., (2006) argue that employees who had invested hundred thousands of dollars to millions of dollars lost all their pensions upon the collapse of Enron. This reveals that Enron broke the federal pension law owing to its failure to administer employee pensions effectively.
Enron’s directors also ignored their fiduciary duties. Fiduciary duty is an obligation of the fiduciaries to partake their responsibilities to the principals. It requires the fiduciaries to exercise their decisions with utmost care and prudence. Enron directors breached their fiduciary duties because they failed to invest funds from employee pensions wisely. According to Dembiski et al., (2006), senior executives and Enron’s directors invested funds from employee pensions within Enron. This despises the reality that the organization’s leaders had an option of investing the funds in other sto...