Balance Sheet and Enron Derivatives Trading

Topics: Enron, Balance sheet, Andrew Fastow Pages: 6 (1810 words) Published: September 1, 2010
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. 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 executive 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&E for $30 million. As part of the deal, the law firm will also drop its claim for $3.9...

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, 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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