Ethics and Enron
ENRON
Introduction
Enron was the country’s largest trader and marketer for electric and natural gas energy. Its core business was buying energy at a negotiated price and later, selling the energy when prices increased. As an energy broker, Enron provided a service by allowing producers to negotiate a certain price while Enron took the risk that prices would fall below what it bought energy. Buyers of energy also benefited because Enron could ensure the supply of energy. In 2000 Enron was listed number five on the Fortune 500. What happened to the company which was among the most admired for vision and quality thinking? Enron was the company that held virtual assets and not the real assets, such as power stations, which were capital incentive with low returns and ongoing debt.
The decline in the market starting in 2000 uncovered the financial structure on which Enron was built, eventually forcing the company into bankruptcy. The main reason was the Special purpose entities. As per law a company can create SPE for a particular purpose. The debt of the SPE is carried on the books of the creating company. However, it could be transferred to the SPE if an independent third party purchased a minimum of a 3 percent interest in the SPE. This financial structure became the favorite of Enron; it created more than 900 SPEs. During the 1990’s Enron set up special entities to transfer its debt off the balance sheet. Enron created businesses, sometimes joint ventures or partnerships. To capitalize these businesses Enron would find investors, sometimes; these were executives at Enron or friends. Sometimes there was no “investment”. The real structure violated the SPE statutory requirements. Enron used its working relation with Merrill Lynch to buy an interest in one of its SPE. However in order to entice Merrill Lynch in to the transaction it promised to make a $250,000 payment to repay $7 million. These promises changed the position of Merrill Lynch from equity to debt. But
Introduction
Enron was the country’s largest trader and marketer for electric and natural gas energy. Its core business was buying energy at a negotiated price and later, selling the energy when prices increased. As an energy broker, Enron provided a service by allowing producers to negotiate a certain price while Enron took the risk that prices would fall below what it bought energy. Buyers of energy also benefited because Enron could ensure the supply of energy. In 2000 Enron was listed number five on the Fortune 500. What happened to the company which was among the most admired for vision and quality thinking? Enron was the company that held virtual assets and not the real assets, such as power stations, which were capital incentive with low returns and ongoing debt.
The decline in the market starting in 2000 uncovered the financial structure on which Enron was built, eventually forcing the company into bankruptcy. The main reason was the Special purpose entities. As per law a company can create SPE for a particular purpose. The debt of the SPE is carried on the books of the creating company. However, it could be transferred to the SPE if an independent third party purchased a minimum of a 3 percent interest in the SPE. This financial structure became the favorite of Enron; it created more than 900 SPEs. During the 1990’s Enron set up special entities to transfer its debt off the balance sheet. Enron created businesses, sometimes joint ventures or partnerships. To capitalize these businesses Enron would find investors, sometimes; these were executives at Enron or friends. Sometimes there was no “investment”. The real structure violated the SPE statutory requirements. Enron used its working relation with Merrill Lynch to buy an interest in one of its SPE. However in order to entice Merrill Lynch in to the transaction it promised to make a $250,000 payment to repay $7 million. These promises changed the position of Merrill Lynch from equity to debt. But
References: Bohlman, H. M. (2005). The Legal Ethical and International Environment of Business. Thomson South Western . Scharff, M. (2005). WorldCom: A Failure of Moral and Ethical Values. Journal of Applied Management and Entrepreneurship .