Enron Case Study

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Enron case

1. What activities and practices of Enron’s management team do you believe were unethical and/ or illegal? Concealing debt
By using SPEs, Enron’s balance sheet understated its liabilities and overstated its equity and earnings. Enron disclosed to its shareholders that it had hedged downside risk in its illiquid investments using special purpose entities which were lies.

Enormous spending
Extravagant expenses were rampant in the company which included enormous salary expenses. In 2000, the top 200 highest-paid employees received $1.4 billion based on inflated operating results.

Insider trading
Fastow(CFO) earned $30 million from compensation arrangements when managing the LJM limited partnerships. This was not known to Enron’s BOD even until the bubble popped up.

2. What factors caused the concerned managers to engage in these activities? Compensation
Management was compensated extensively using stock options. This stock option awards caused management to make up a look that the company is aggressively growing and it actually kept the stock price going up and up. Enron’s statement of 2010 stated that, within three years, these awards were expected to be exercised.

Mark-to-market accounting
This accounting practice requires that once a long-term contract was signed, the present value of net future cash flow is calculated and written as a full income although it is not fully earned. It inflated the financial earnings on the books. Such a sudden jump in one year’s report lead to a pressure on the employees because they were expected to come up with bigger numbers otherwise they might see the stock price spiral down. Adventurous and unreasonable projects/contracts continued. Despite potential pitfalls, the U.S. Securities and Exchange Commission(SEC) approved the accounting method for Enron in its trading of natural gas futures contracts.

3. Why were these activities not noticed and corrected until it was too late?...
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