The Fall of Enron
- Submitted by: tuavelar
- Views: 292
- Category: Other
- Date Submitted: 04/29/2013 08:02 PM
- Pages: 3
- Report this Essay
1. What activities and practices of Enron’s management team do you believe were a) unethical and/ or illegal?
The Fall of Enron is a real world business case which shows the management team has heavily violated the code of ethics and illegal violated the accounting principles.
On the 64 page code of ethics, it is said that any investment made by the senior managers with potential conflicts of interest with the company must be approved by the chairman of the board and CEO of the company. However, Enron’s board of management oversight the SPEs creation to acquire Enron’s asset, especially in the case of forming LJM1 that Fastow proposed. The board finally indicated that Fastow’s participation in this new venture would not affect the interests of the company and voted for Fastow to be the general partner and investor in LJM1. As a result, Fastow has gained huge profit from transactions between Enron and SPEs without the supervision from the board and CEO of the company.
Furthermore, the management team of Enron did not follow the accounting standard where they had to reflect all related business activities into the balance sheets. This can be considered as illegal issue of the company. The company business is complex with a lot of products, physical assets, trading operations and cross national boundaries. There are two issues in the financial report system of Enron. First of all, they eliminated the cost of contract fulfillment. Their trading business involved long term contract and they have successfully lobbied to use present value in accounting rules and contract. As a result, the present value of the future contract will be recognized as revenue and the present value of the expected cost of fulfilling the contract will be considered as expense, which caused the unrealized gain and loss in the market value of long-term contract. Secondly, management did not reflect the business of SPEs into the company’s consolidated balance sheet. Chewco is an...
The Fall of Enron is a real world business case which shows the management team has heavily violated the code of ethics and illegal violated the accounting principles.
On the 64 page code of ethics, it is said that any investment made by the senior managers with potential conflicts of interest with the company must be approved by the chairman of the board and CEO of the company. However, Enron’s board of management oversight the SPEs creation to acquire Enron’s asset, especially in the case of forming LJM1 that Fastow proposed. The board finally indicated that Fastow’s participation in this new venture would not affect the interests of the company and voted for Fastow to be the general partner and investor in LJM1. As a result, Fastow has gained huge profit from transactions between Enron and SPEs without the supervision from the board and CEO of the company.
Furthermore, the management team of Enron did not follow the accounting standard where they had to reflect all related business activities into the balance sheets. This can be considered as illegal issue of the company. The company business is complex with a lot of products, physical assets, trading operations and cross national boundaries. There are two issues in the financial report system of Enron. First of all, they eliminated the cost of contract fulfillment. Their trading business involved long term contract and they have successfully lobbied to use present value in accounting rules and contract. As a result, the present value of the future contract will be recognized as revenue and the present value of the expected cost of fulfilling the contract will be considered as expense, which caused the unrealized gain and loss in the market value of long-term contract. Secondly, management did not reflect the business of SPEs into the company’s consolidated balance sheet. Chewco is an...