Balance Sheet and Enron Derivatives Trading Essay

How did the corporate culture of Enron contribute to its Bankruptcy? Once a sound company listed in fortune 500, Enron, lead to downfall because of deceptive accounting system incorporated within the organization. Enron’s dubicious finance finally collapsed in Dec 2, 2001 as it filed Bankruptcy in New York Bankruptcy court. The corporate culture of Enron focused on financial performance neglecting the stakeholder’s value .

The relentless emphasis on the importance of the shareholder’s value created the conditions for the disconnection of Enron from their essential moral underpinnings, encouraging them to concentrate exclusively on financial performance, and to neglect stakeholder’s common interest, but the essential interests of the economies and communities in which they operate.. The problem with established economic theories of corporate governance is that they misconceive the irreducible corporate governance, at the same time as underestimating the complexity of the phenomenon. Clarke, 2005) The ‘rank and yank’ system implanted by Skilling created the worst situation as the employee started the rivalry between each other in terms of making money at any cost violating the corporate culture. Fewer rewards were given to those who produced sustainable financial fortune and the bottom ranked employees were forced out The bad fortune of the company was destined by Enron’s management incentive system. Destructive business culture was implanted as Enron primarily focused on employees self worth rather than company’s worth.

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Extra rewards were provided to those candidates who contributed on promoting productivity. Those who contributed themselves on controlling the existing resources were not skewed with any incentives. The company’s profit was under a billion dollar but the average compensation of top 200 executives was over 1. 4 billion. Employees at the executive level were promoted quickly that left the lack of good executive skill at the vacant level. “The Bankruptcy of $63 billion company was significantly contributed by its business culture incorporated by Skilling and the value promoted among xecutive level and mid-level of management during his era from 1996 to 2001. The ethics among the upper level implanted by Skilling made the company inevitable from its death . Skilling himself described in the U. S Senate testimony that the reason of Enron’s debacle as a ‘Classic run on the bank ‘had for years focused on ‘taking profits now and worrying about the details later’. (Fowler,2002) The evil culture on Enron had features like high risk accounting, undisclosed off balance sheet statements, over compensation, unnecessary employee competition and lack of teamwork. With the introduction of off-balance sheet companies, it slid from creative to economic and social destruction. Enron’s losses on speculative and strategic moves reached such proportions that management desperately turned to a qualitatively new and more reckless gambit, improperly structured partnerships, hedge transactions, and deliberately falsified accounting. Unlike proper off-balance sheet transactions, these new counterparties were capitalized with Enron’s own stock and managed by insiders.

The financing of the partnership in effect meant that Enron was ensuring itself . An Enron derivatives trading increased and became more complex, it relied increasingly on financial strengths of hand that grew rather than contained the contagion. ”(Kobrak, 2009) Did Enron’s bankers, auditors, and attorneys contribute to Enron’s demise? If so, what was their contribution? Vinson and Elkins supported to figure out some of the special purpose partnership of Enron.

The law firm serving Enron for several years believed to support the legal deals which was illustrated as fraudulent by several law firms later Enron’s bankruptcy trustee is negotiating to settle claims with V for $30 million. As part of the deal, the law firm will also drop its claim for $3. 9 million in legal fees billed to Enron before the company went out of business, a small fraction of the $162 million the firm charged Enron from 1997 to 2001. The Securities & Exchange Commission is investigating the advice that V and other outside law firms gave the company. And in the ame class action in which they have targeted the banks, plaintiffs’ lawyers are preparing to unleash a new volley of evidence on June 13 to support allegations that V&E should be liable for some of the $40 billion in investor losses resulting from the energy giant’s collapse. (Business Week,2006) Merrill Lynch faced prosecution from Securities and Exchange Commission for aiding and abetting Enron’s securities fraud. SEC stated that Merrill Lynch and its former executives aided and abeited Enron’s earnings by disfiguring and manipulating the datas in the year ending 1999.

They assisted Enron to overstate their financial results. Those fraudulent transactions added about approximately $60 million to its fourth quarter of 1999 income. Merrill Lynch also assisted to increase the earning per share price from $1. 09 to $1. 17 in the same year. SEC prosecuted Enron stating the Nigerian Barge deal in which Merrill Lynch allegedly bought the barge for $28 million. Following the oral assurance of the CFO, Fastow, only $21 million has been financed and Fastow assured that Enron would buy Merrill Lynch’s investment out in six month with a 15% guaranteed rate of return.

Although Merrill lynch agreed the oral assurance of Fastow but the internal document of Merrill Lynch stated that the transactions was not lawful and appropriate. According to the SEC, Merrill Lynch violated its fiduciary responsibility to investors who entrusted it as an asset management company to use their money prudently, in a manner consistent with their financial goals. Instead, the company helped Enron create a false “sale” of three barges. Designed to look like a sale, in reality the transaction was an “asset parking” arrangement — i. e. ust a loan designed to help Enron meet its profit target in the last quarter of 1999. (Merrill bought an interest in a number of Nigerian barges from Enron with the understanding that it would be paid back with interest within six months. ) In late 1999, Merrill Lynch also extracted an $8. 5 million structuring fee for another deceptive deal designed to inflate Enron’s income by about $50 million, through two complex energy options trades (Lenazun, 2010) Arthur Anderson was Enron’s auditor who used to measure Enron’s books of accounts and financial statements.

Anderson was found guilty of obstruction of justice in March 2002 for destroying Enron-related auditing documents during the SEC investigation of Enron. (Ferrell, 2009) It was the responsibility of the auditor to as for the explanation of the fishy accounts found in Enron’s books of accounts. It appears that the heavy amount of consultation fees might have shut the mouth of the auditor. With the SEC, the Justice Department and various congressional committees now scrutinizing Andersen’s audit work on Enron, there is little doubt efforts will be made to rein in the industry. The profession has always done just enough to get out of a hole,” says industry analyst Arthur Bowman. The SEC and Congress are looking into Andersen’s interpretation of accounting rules that allowed Enron to exclude losses at several partnerships from its balance sheets. But the larger issue will be the objectivity of the entire industry. Enron paid Andersen $25 million for its audit last year and $27 million for “consulting” and other services. “How can any auditor be independent when his client is paying this kind of money? ” (Kadlec, 2002)

What role did the CFO play in creating the problems that led to Enron’s financial problems? Andrew Fastow was indicted by the Justice Department for his alleged contribution for incorporating fraudulent accounting practices that finally demised the energy giant of Texas in late 2002. According to Ferrell, “The charges included fraud ,money laundering,conspiracy,and one count of obstruction of justice”(Ferrell,2009) The mastermind behind Enron debacle created so called “Special Purpose Entities” that produced the off balance sheet statements in order to hide debt and enrich assets.

This helped Enron to be more powerful than it actually was. Fastow responded the prosecutor’s questions stating that the he with Lay and Skilling juice the earning so that they can report the numbers they wanted to report. According to Feeley and Weildlich,” Prosecutors told jurors in opening arguments that Lay and Skilling manipulated earnings through deals with Fastow’s partnerships and deceived investors about the finances of Enron, once the seventh-largest U. S. Company by sales. In January 2004, Fastow admitted engaging in securities fraud and agreed to forfeit $29 million in cash and assets.

Lay and Skilling have said they weren’t involved with the partnership transactions, which they claimed were overseen by Fastow. Prosecutors said the former CFO reaped at least $25 million in illegal profits from Enron-related deals with the partnerships” (Feeley, J, Weildich, T, 2006) Fastow tried to hide the ill gotten money using his wife who worked as the assistant treasurer of Enron until 1997. Federal prosecutors argued that the debacle of Enron was because of fraud and theft rather than bad accounting practices.

They stated that around 1 billion of the property has been concealed in Enron’s debt that leaded to bankruptcy which was particularly masterminded and paved the path by Fastow. The charge against Fastow, is that he and others, mainly Kopper, “devised a scheme to defraud Enron and its shareholders” through a series of transactions using so-called special purpose entities (SPEs) “that allowed Enron to make itself appear more attractive to Wall Street investment analysts and credit rating agencies. ” Fastow used the SPEs both to manipulate Enron’s financial results and to enrich himself, the complaint alleges.

The complaint details a variety of SPE transactions, including those involving several partnerships all known as LJM that allowed Enron to move money-losing assets off its balance sheet. Other transactions detailed in the complaint include several involving an SPE called Chewco, which was created to buy out the interest in the LJM partnerships once owned by the California Public Employees Retirement System (CALPERS) and make it appear that there was outside money invested in the SPE, which was a legal requirement for keeping the SPE’s debts and assets off Enron’s books. (Ackman, 2002) References:

Ackman,D,The Journal of Andrew Fastow,Fall guy,10-03-2002,8:55,A. M,E. T. Clarke,T. 2005,’Corporate Governanace’, The Journal of An International Review,Oxford,Vol . 13,Iss. 5,p. 598. Feeley, J, Weildich, T, Mar 7, 2006, 16:48. EST Ferrel. et. al, 2009,’Business Ethics’, The Journal of The Fall of Enron: A Stakeholder Failure, 7th edition. Kadlec, D, 2002, The Journal of Enron: Who’s Accountable? Jan13, 2002 Kobrak, K. 2009, The Journal of Business History Review, Boston, Vol. 83, Iss. 1, p. 73. Lenazun, Jan. 19, 2010,-3:18 P. M Orey, M. 2006,’Business Week’, The Journal of Enron’s Last Mystery, Newyork, p. 28 :

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