Topics: Enron, Board of directors, Stock Pages: 5 (1536 words) Published: December 4, 2012
The Enron

Kaiwing Ho
Ethics, Governance & Accountability
Professor Crain
November 21, 2012
Since Enron Corporation has been bankrupt there were 20,000 employees lost their jobs, medical insurance and average severance pay was only $4500. However, the top executives were paid bonuses totaling $55 million. In 2001, employees lost $1.2 billion in retirement funds and retirees lost $2 billion in pension funds. Yet, Enron’s top executives cashed in $116 million in stock. In Titanic, the captain went down with the ship but in Enron the captain first gave himself and his friends some bonus and live boats and higher up and told employee and stockholders everything is fine. (Gibney, 2005) How is it that ethic for the executives in Enron earn that much of profits while the stakeholders have to suffer from their unethical decisions? Enron: The Smartest Guys in the Room is talking about the downfall of Enron Corporation that brings up the securities law, Sarbanes-Oxley Act, in order to regulate the wrongful acts of executives of those big corporations. Kenneth Lay formed Enron Corporation in 1985 in Texas Huston. Originally, the company initially engaged in a U.S. nationwide distribution of electricity, natural gas, and the construction of power plants in the world, laying of pipelines and other infrastructure. However, Lay was not satisfied so he hired Jeffery Skilling. Skilling came out with a better way to deliver energy rather than be bond by the pipelines Enron can actually become a ‘stock market’ for natural gas. He transferred energy into financial instrument that can be traded as stocks and bonds. This idea was appreciated as a new business market and named ‘America's most innovative company’ for six consecutive years. Yet, the news that leaded Enron Corporation fame in the world was the bankrupt in a few weeks after Skilling resigned the CEO of the company and institutionalized systematic financial fraud scandal.

The only condition that Skilling would join Enron Corporation was to use “mark-to-market” accounting and that was the major cause of the downfall of the corporation. According to Stewart Hamilton (2003) could call “The basic methodology is very simple…trader would forecast the future price curve in the underlying product, calculate the future cash flows and apply a discount rate to compute the net present value which could kept on Enron’s books as a merchant asset” (p. 299). Mark-to-market accounting can be really subjective and easy manipulation because no matter how little the profit made the corporation made; to the outside world, Enron’s profit can be whatever Enron said. Also, under mark-to-market accounting, whenever Enron has an outstanding energy-related or other derivative on their balance sheets at the end of a quarter, they must adjust them to fair market value, booking unrealized gains or losses to the income statement of the period. Enron having these types of derivative instruments are free to develop and use discretionary valuation models based on their own assumptions and methods. Yet, knowing that this is a high risk accounting, the Board skill allowed Skilling to use this method (Permanent Subcommittee on Investigations of the Committee on Governmental Affairs, 2002). Moreover, Skilling believed that money was the only thing that motivates people. By creating performance review committee, Skilling really changed the culture of the corporation. Employees were regularly rated on a scale of 1 to 5, with 5s usually being fired within six months. The lower an employee’s performance review committee score, the closer he or she got to Skilling, and the higher the score, the closer he or she got to being shown the door. Skilling’s division was known for replacing up to 15% of its workforce every year. As a result, traders would turn other traders back no matter what in order to gain more compensation and turns the ‘free maker’ into an ideology. One of the most...

References: Gibney, A. (2005). Enron: The Smartest Guys in the Room. New York, NY: Magnolia
Hamilton, S. (2003). Case study: The Enron collapse. In Ethical issues in business: A
philosophical approach, 8th ed.
Hartman, L. P., & Desjardins, J. (2011). Business ethics: Decision making for personal integrity
and social responsibility, 2nd edition
Permanent Subcommittee on Investigations of the Committee on Governmental Affairs
United States Senate (2002)
Prentice, R. (2010). Student guide to the Sarbanes-Oxley Act, 2nd Edition. Mason, OH: South-
Western Cengage Learning.
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