Term Paper on "Enron Code of Ethics Enron Executive"

Term Paper 7 pages (1954 words) Sources: 1+

[EXCERPT] . . . .

Enron Code of Ethics

Enron

Executive Overview:

Enron, once the epitome of the American dream, quickly became America's nightmare. Kenneth Lay, Enron's first CEO, was a master of recognizing the unique opportunities presented by the deregulation of the American energy utilities, as well as the increased privatization abroad. What was once an oil and gas exploration and pipeline development company quickly evolved into a derivatives trading company. it's stock soared on fiscal soundness most organizations only dream about, however, that soundness was merely smoke and mirrors. Stock that had more than quadrupled in price, over a four-year period, to more than $80 per share, plummeted to less than a dollar in less than half that time. And as one of America's top companies turned to bankruptcy and then became embroiled in scandal, the repercussions were felt across America.

Enron had a Code of Ethics as part of their organizational culture.

This Code demanded morality, fairness, honesty, lawfulness, and a commitment to the organization for employees to conduct themselves in a manner that would not be detrimental to the company. However, this Code was completely ignored by those leading the company, as unlawful and immoral business dealings, fraught with dishonesty and unfairness, were conducted that would eventually lead to the company's demise.

Enron was an organization where immorality and disregard for laws was cultivated and this would repeat itself in the business opportunities they would create. Whether it was illegal gambling with the annual NCAA basketball tournament pool or the inappropriate ogling of female coworkers and rating them as potential calendar pin-up models, the corporate culture of Enron was more akin to a den of iniquity then what one would hope would be a top-ranked, global business organization. It is no wonder that such a culture would cultivate the innovative yet highly unethical use of special purpose entities (SPEs). These SPEs not only destroyed the company, but was devastating for the employees that worked there, shareholders, and a wide range of subsequent entities, like a stone cast in a pond, the ripple effects were ever-widening.

Problem Statement:

SPEs are financial devices designed to give companies greater flexibility in finance and risk management" ("On the Side of Angels" 6). Typically, an SPE is established to allow an organization to pursue opportunities with greater risk levels than would be acceptable to shareholders, without negatively impacting the parent organization.

SPEs are a legitimate business tool, however there are guidelines for their use including a 3% outside equity position and that this outside capital must clearly be at risk.

Although the use of SPEs was a reasonable strategy for Enron, their failure to follow the guidelines established to ensure that their endeavors were legitimate.

In fact, Enron clearly had ignored these guidelines in an effort to shield their parent company from debt and losses. It was through the unethical use of SPEs that Enron not only defrauded direct investors of their money, but caused financial harm to a multitude of others from their employees to local charities, resulting in a period of corporate suspicion that negative affected the energy industry as well as the American business world, as a whole. Enron robbed people of their retirement funds, lost investors millions of dollars and wreaked havoc upon the American economic and social systems (Kranacher).

Enron created SPEs to buyout the outside equity holders of other SPEs in their control, in hopes of encouraging the outside investors to reinvest in an even larger venture.

SPEs were used to correct financial challenges the organization was suffering and protected their needed high credit rating. SPEs were used to move the debt from Enron's balance sheet to facilitate this continued high credit level. When new investors were needed to meet the SEC requirement of the 3% rule, but could not be easily acquired, Enron created them. The "Friends of Enron" were a group of friends and relatives of Enron executives that were used as dummy outside investors.

The money they used to act as "outside equity" was given to them by Enron.

And the web of deceit continued to grow and grow as in the end more than 3,000 off-balance sheet subsidiaries and partnerships were created, many skirting SEC regulations, as a means of keeping debt off of Enron's books and providing capital ("On the Side of Angels" 6).

However, it was not simply the charlatan-like subsidiaries that were a part of Enron's smoke and mirrors trick performed for shareholders, investment bank relationships and auditing ethical challenges too deceived investors.

Enron's relationships with investment banks also helped pad their balance sheet and, in the end, defraud investors.

Short-term loans from investment banks were disguised as sales revenue, allowing Enron to unload unprofitable entities from their balance sheet. Eight billion was borrowed between the years of 1992 and 2001, but instead of appearing as loans on Enron's books, it appeared as gas trades. The effect? Enron's debt was understated "by $4 billion and (overstated) its $3.2 billion cash flow from operations by 50%" ("On the Side of Angels" 8).

Other similar unethical transactions, totaling $1.4 billion, were found.

The unethical transactions continued with the creation of the LJM subsidiaries. Andrew Fastow, then CFO of Enron, was named the general partner of the SPEs, investing $1 million in LJM1 alone.

Clearly Fastow would now personally gain from the performance of the subsidiary, in strict contrast to one of the Code of Ethics rules Lay had established. However, it was the beginning of the end for the organization. The house of cards Enron had built using SPEs with names such as JEDI, Chewco and Raptor was about to topple at their fett. On November 8th, 2001, accountants for Arthur Andersen revealed that three of Enron's SPEs had been improperly accounted for and a $1.2 billion reduction to shareholders' equity was made, along with a $200 million write-down resulting from a contractual difference between the Raptor SPEs and Enron. SPEs back to 1997 were consolidated back into Enron's books, resulting in a reduction in Enron's income of $591 million and an increase in their debt to just under $2.6 billion ("On the Side of Angels" 11).

Obviously, shareholders should have been significantly concerned about these dubious dealings, but the ramifications of Enron's unethical actions went far beyond the direct investors in the company.

Many large funds had Enron as a significant holding. This was particularly true of pension funds. It is estimated that $1.5 billion was lost from pension funds, funds retirees depended on to pay for their basic living expenses, around the country.

Every state in the nation was negatively affected by Enron's unethical dealings, including the University of California's pension and endowment fund that singularly lost $145 million.

Charitable causes were negatively affected as well. In 2002, Enron was unable to fulfill its $10 million pledges. Rice University's Jesse H. Jones Graduate School of Management was to receive $5 million of that money to fund chairs in e-commerce and risk management. Other charities, such as the United Way of the Texas Gulf Coast was devastated by the loss of sizeable donations.

Trickling down, the public who depended on programs from these charities that were now under-funded, felt the ramifications of greedy business people who though they were above the rules and ethical standards common to humanity.

Entire industries were negatively affected by Enron's greed.

The accounting profession was rocked by the scandalous actions of Arthur Andersen. The shredding of important Enron documents, prior to the Department of Justice's ability to impound them, led to criminal obstruction of justice charges being brought against David Duncan, Andersen's lead Enron auditor. Andersen lost its license to audit public corporations, in the U.S., as Americans wondered how many other firms were doing business so nefariously.

The energy industry too was damaged by Enron's unethical business strategies. The energy segment was tainted, in the eyes of investors, following the release of the scandal. Despite rising energy prices, financing simply had disappeared. Organizations such as Aquila withdrew from the energy trading industry, as did El Paso Energy and UBS ("On the Side of Angels" 13). Loss of investor confidence, thanks to Enron, resulted in a significant market contraction that resulted in millions of dollars of losses for organizations. Loss of confidence in American corporations in general sent companies back to their books to double check their numbers. Corporate fraud was foremost on investors' minds. Companies such as MCI/WorldCom, Tyco and Adelphia restated their numbers in an effort to correct any errors and set off whole new chains of corporate scandal reactions.

The question then becomes what social good was threatened by Enron's actions? Clearly individual good was threatened in the fact that investors were defrauded due to the misreporting of billions of dollars of errors on the company's financial statements. Social good however goes far beyond this. Enron's key management members, supported by a corrupt corporate culture, weighed billions of dollars in organizational profit and personal profit via the sales of Enron stock against the livelihood of the… READ MORE

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