Theories of Business Ethics Applying to the Behavior of Enron - Essay Example

In the US, the federal government and all the other states except Louisiana use English common law in their courts. Applying the common law in the cases is important. The courts can also use legal precedence. Enron misled the outside world and misrepresented its financial position. Under US laws, fraud is a crime but no misrepresentation. Specific individuals working for Enron were charged with various counts of serious crimes. The courts might have used the written law to make their judgments.

Andersen was found guilty of obstruction of justice for destroying potential evidence by shredding their documents which could have been used by the Securities and Exchange Commission (SEC), the agency of the US Government With the primary responsibility for regulation of securities markets.Question 2Theories of Business Ethics Applying To the Behavior of EnronConsolidation of Controlled EntitiesUnder US GAAP, the only acceptable method of financial reporting is a consolidation of controlled entities .

non consolidation can only occur under specific conditions Outside the USA; consolidated financial reporting is called group accounting and is required when one entity owns more than half of the other entity and can dictate its operations. Consolidating financial reporting is complex and requires financial statements to be combined and reported as a single financial report. Enron failed to comply with this ethicDisclosure as a Form of Business EthicEnron major crime was misrepresentation and misleading the general public about their financial position.

Enron did not disclose its real financial figures. The major requirement in US financial reporting is the disclosure of information. The disclosure requirement is based on the premise that markets are efficient.Market To Market AccountingEnron traded on futures contracts called derivatives because they derived their value from underlying assets. The market of the contracts reduces the volatility of prices by fixing a price at a future date. The example assumes Enron have two option contracts matching the same amount of a commodity over the same period of time.

One contract was to purchase the commodity while another contract was to sell the commodity. Enron looked on to the future on the assumption that contracts were exercised and there were net results. After evaluating all cost, the net income (loss) was estimated. The net income (loss) was discounted to its present value and recorded as a loss.Earnings reported under the market to the market were easy to manipulate because active markets for contracts dating sometimes 20 years did not exist. Under this practice, Enron got many problems because the earnings were volatile.

There was a need for short term action. Additional contracts were sold to report generated income. The estimated earnings did not generate cash flows from the actual execution of the contracts. Enron had to create Special Purpose Entity (SPE) to avoid reporting market to market losses. SPEs are typically created for purposes such as owning and leasing real estate. Enron did not report any debt in its financial sheets. Enron had investments in companies (which were not SPEs) that it consolidated or reported on the equity method.

When their investments indicated losses, they were transferred to SPEs so Enron would not reflect the losses on its financial reports.