Enron

EN 112

Research Paper

Final draft: Accounting and Ethics

ENRON and ACCOUNTING

It is the duty of top management in a corporation to ensure that employees are behaving ethically by encouraging, rewarding, enforcing, and leading by example in ethical behavior. According to Robert Lussier, in his book Management Fundamentals, "Ethics are the standards of right and wrong that influence behavior." (61). Ethical behavior pays, because society regards it highly, and besides that, it is in line with the Law; such that in a corporation if you are about to do something and you are not to sure as to whether it is legal or not, normally if it is ethical then it is most likely to be legal.

Too often people act out of self interest, and forget all other stakeholders when they take any actions representing the corporation, thus many Americans have lost trust in top managers. In one instance ethical behavior was totally ignored, and this resulted in catastrophic events taking place. Thousands of people lost their jobs, security, savings, investments, and some even lost or took their own lives. Lussier reports that "Arthur Anderson, an accounting firm lost many of its clients and had to sell parts of its business as a result of unethical behavior during its business ventures with Enron"(61). At this point unethical behavior at Enron had affected only one accounting firm. The basis of my research is to show how unethical behavior at Enron had an effect on the accounting profession as a whole.

Enron and it's over ambition and greed is the sad story of what happened to corporate America, and how its actions in turn affected the accounting profession. In the story of the greatest bankruptcy in the history of America, a lot of bizarre accounting tactics were used by the management at Enron to record enormous profits and hide debt, thus fooling shareholders, stakeholders and the world for many years, leading it to come from being the seventh largest corporation in America to bankruptcy. Upon the discovery of Enron's trickery, it became quite apparent that some loopholes existed in the present accounting system of the world as well as the laws designed to govern ethical behavior, so some changes had to be made in order to avoid another Enron. Below is my research on how Enron flouted the laws of accounting, and ethics mainly as a result of its internal culture, and how Enron has changed the accounting profession and the corporate world.

In July of 1995, Houston Natural Gas and InterNorth, a natural gas company from Omaha came together in a merger in order to gain a larger share of the natural gas transportation market. Together the two corporations had a natural gas pipeline that spanned over 37 000 miles, $12.1 billion worth of assets, 15 000 employees and thus became the second largest pipeline network in U.S.A. In November of the same year, Samuel Segnar, the then CEO of HNG/InterNorth stepped down making way for Kenneth Lay, the Baptist minister's son from Missouri who had a PhD in Economics attained at the University of Houston. Loren Fox notes that, "Upon becoming CEO, one of the first things that Lay decided to change was the name of the corporation. With this in mind he hired the consultants Lippincott & Margulies to come up with a new name that represented power and energy, thus came about the birth and introduction to America and the world of Enron" (Fox 14).

Enron's core business at its formation was that of trading natural gas contracts in "spot markets" (Fox 22). Spot markets were markets in which gas was bought and sold at ruling market rates. Traders would negotiate for prices, and at the hub gas would be routed to the highest bidder. This process took place monthly and had an advantage over the old system whereby contracts were long term and prices were fixed over long periods of time resulting in losses to the transporters when the demand for gas fell. Enron also traded in oil, but not just in on the spot trading, Enron traders were involved in lucrative oil financial trading, which was based on betting on the prices of oil. It must be noted that from the 1980's oil became increasingly profitable and thus business in this department was big to all energy companies.

According to Alex Gibney's Enron-the Smartest Guys in the Building, in 1987, two senior traders by the name of Louis Borget and Thomas Mastroeni who had made good deals in the past started making big bets that oil prices would rise, but unfortunately, the oil prices started falling, resulting in huge losses. Not wanting to concede to defeat the two did not report the losses to Houston, but instead went ahead to make even bigger bets on the price of oil continuing to fall in the hope of recovering what they had lost, but even worse for them, the prices of oil started rising, resulting in losses at both ends. Upon investigations it was discovered that the two, had a separate set of books in which losses were recorded and had falsified its reports to headquarters. According to Mike Muckelroy, an ex Enron executive interviewed in the documentary Enron- The Smartest Guys in the Room, this was not the first time that Borget had done such a thing, but because he was Lay's "golden goose", he went away without even a warning, but in fact an encouragement to "keep making us money" the first time around. This time the losses were so big that they resulted in Enron Oil declaring bankruptcy and so the two were fired and sued in civil court. With Lay's main money spinner gone to the slams, and a subsidiary shut down, Lay had to find a new "big brain" that would come up with ways of making money. This is where Jeffery Skilling came into the picture.

On June 26 1990, Jeff Skilling was hired by Enron as the chief executive of Enron Finance. Skilling was a very smart and adventurous character who had ambition flowing all through his veins. Skilling asserted himself from the word 'go' and immediately went to work on restructuring the organizational hierarchy at Enron by flattening the management levels. Skilling administered the change of working relationships through the knocking down of office walls and creating the "open office", where everyone was in contact with each other more easily. The greatest changes that Skilling made were in the actual lines of business that Enron partook, and its culture. Being a finance man from Harvard, Skilling believed more in the finance or "asset light" side of business that had to do with trading rather than in the asset accumulation side of business as he saw this having increasing liability in the future.

"Skilling