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Enron's Collapse and Ethical Framework - Essay Example

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In the paper “Enron’s Collapse and Ethical Framework” the author analyzes using the mark-to-market valuation for evaluating the value of Enron’s assets. This made Enron the very first company in such volatile business climate to use this kind of accounting system. …
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Enrons Collapse and Ethical Framework
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"Enron's Collapse and Ethical Framework"

Download file to see previous pages This was an eerie accounting policy that Enron came up with. Although the present earning look very appealing, but the profits earned today could not be shown in the future statements which made the future proforma financial statement looked a little weak.  Enron adopted another extremely innovative accounting policy of starting to make more future contracts in order to make financial statements of future years also look better. This created a never ending spiral and at the end of that spiral was destruction for the company. There were certain other accounting malpractices at Enron. They kept a debt of $600 million off book just to make sure that the financial statements of the company looked good. The reason why this practice is not encouraged is because it does not reflect the true accounting position of Enron.  Debt would have decrease the net value of the company, and share price would have come down. However, this action prevented this from happening and share prices of Enron’s stock remained constant. This is misleading because owners and investors were evaluating a company at a much higher price than the true value of the company.  This is an example of an open violation of truth and trust. Investors usually select the board of directors to make the long term policy for them. Directors hire managers to run the business for them. This shows divorce of ownership and control. This means that owners are not directly controlling the business, but they entrust it to their people selected....
There were certain other accounting malpractices at Enron. They kept a debt of $600 million off book just to make sure that the financial statements of the company looked good. The reason why this practice is not encouraged is because it does not reflect the true accounting position of Enron. Debt would have decrease the net value of the company, and share price would have come down. However, this action prevented this from happening and share prices of Enron’s stock remained constant. This is misleading because owners and investors were evaluating a company at a much higher price than the true value of the company. This is an example of an open violation of truth and trust. Investors usually select the board of directors to make the long term policy for them. Directors hire managers to run the business for them. This shows divorce of ownership and control. This means that owners are not directly controlling the business, but they entrust it to their people selected in the Annual General Meeting. These people than entrust the responsibility of day to day operations to managers. In this way, there is a series of trust contract being formed. Ethics of any action require that trust should not be betrayed and whatever happens truth should be told to the real owners who have trusted the directors with their responsibility. The first breach of trust in Enron case started when the directors started sending misleading reports to the owners to make the financial statements of Enron look healthy. This is open violation of truth and trust and shows that in the case of Enron there was a clear evidence of breach of trust. Another problem in this case is the abuse of powers from directors. They started a new system of accounting and started fooling the real ...Download file to see next pagesRead More
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