Enron's Problem

Topics: Enron, Balance sheet, Board of directors Pages: 2 (637 words) Published: April 21, 2013
The unethical and illegal activities in Enron
The unethical and illegal activity is the management team of Enron manipulated the accounting rules. Firstly, it is related about the long-term contracts. Because when a long-term contract was signed, the inflows of the future contract and the expected cost of the contract were recognized in Enron’s Balance Sheet. The problem is because of the fix rates of price of the contract, Enron could easily estimate their inflows, but for the costs of contract fulfillment, they underestimated. Therefore, in the Balance sheet, it would show overvalued earnings. Because of the information asymmetry, Investors and shareholders would invest in Enron depends on this financial statement. The second issue is SPEs. By following the accounting rules, if a company consolidate SPE, it should put the assets and liabilities into its own balance sheet, and if unconsolidated SPE, the balance sheets should be reported separately. In Enron’s case, the management team use SPE crafty. Enron sold their asset and shares to SPE. What Enron did is they reported the SPE’s gains, for example the gain from their own stock’s increase, in Balance Sheet, but they did not record the debts of SPE in their Balance Sheet. So Enron created a good performed financial statement by manipulated accounting rules. All the unethical activities in Enron are based on information asymmetry. Managers of Enron hide the information inside and created false good performance to outsiders to gain investment. The unethical behavior is they did not care about the interest of shareholders; the managers focused on expand their own interest. And also lots of employees of Enron lost their jobs after the SPEs scandal because of the managers’ unethical behavior.

Factors cause the unethical issue
Enron’s managers wanted to lead Enron to an incomparable peak. They expand their business to other energy market and trading market. To provide and keep providing a good financial...
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