Ethical Failure of Enron

Topics: Enron, Financial statements, Balance sheet Pages: 2 (662 words) Published: March 8, 2013
The Enron ScandalEnron was an energy and commodities company based in America which went bankrupt out of fraud perpetrated by the employees which was favored by professionals acting for the company. The scandal developed over time and it came to the public knowledge in October 2001 when the company was restating its financial statements to correct accounting errors. The adjustments resulted in restatement of net income by $500 million for that period and reduction of shareholders equity by $1.5 billion and increased debt to $2.5 billion. At the wake of these restatement revelations of false financial statement the market lost its $68 billion market value leading to collapse and eventual bankruptcy in December 2001 (Milhaupt & Pistor, 2008).The specific issue arose from a chain of failures which developed over time rather than a single breakdown. The Enron engaged in accounting fraud. There was use of unlawful accounting procedures so as to present its statements as though they were in sound position. They misused the generally accepted accounting principles (GAAP) where it allows securities to be revalued at market value for their benefit. They established the market price by selling part of its securities to third parties affiliated to Enron thus setting inflated price which they used to revalue assets in its balance sheet. It also engaged in sham hedging with related parties under its control which was designed to conceal losses it sustained by making it appear as if the amount was owed by a creditworthy third party. However, the capital of the counterparty was actually contributed by Enron which meant it was actually hedging against itself (Milhaupt & Pistor, 2008).According to Milhaupt & Pistor (2008), the company then abused the special purpose entities (SPEs). This is an act of transferring risk to an independent entity which is legitimate. However, they cheated on the 3% rule that is required so as not to consolidate the statements because the...
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