According to the case study the company had never gone for any braking of any rules and regulations or the laws. Actually the company was following the practice of the Financial Accounting Standard Board’s (FASB) rules. According to this the company the using “Mark To Market Accounting”. As per this accounting system the company can include in current earnings those profits that they expect to earn on energy contracts and related derivatives estimates. The company was posting earnings, quite substantial, for non cash gains that they expect to realize in the future. In lay mans terms they were following the earnings on the assumptions. They policy follows the assumption of the raw material or the finished goods price as per the expected in the near future. Although the company was using the price of the goods which was expected in the future but circumstances change and every time the overvaluation or the undervaluation of the energy was there. This resulted into non match of the balance sheets with the actual figures which should have been there in the balance sheets.
Secondly the company was using the concept of special entity projects, according to which the company was using the money of the profits but there were many of the projects which were not accomplished and resulted into debts and such valuation was being used in the balance sheets.
Thirdly the company was following the standards of compensation to their employees. Option of stock options was given as a part of compensation to the company officials. The only thing lacking on their part was that the company gives excess compensation to the executives.
Thirdly there was a concept of off the books entities. According to the set standards the company can go for some of the off the book entities of which there would be 50% stake in the other companies but here the company was using 3000 off the book entities with 49% stake in the projects.
In nut shell the company went all the way with the set standards but the only problem was with the interpretation of the whole rules and regulations.
According to the analysts the balance sheets are still not clear to most of the CFOs of the officials. The company was using the concept of mark to market. This concept was totally based on the assumption in the near future. But the main area of concern that are the customers are not taken into consideration. The concept is not clear to most of the people. The concept named off the book entities also adds to the over puzzling nature of the balance sheets. Adding to this the company paid zero tax in the balance sheets. With the help of special entity projects they were able to manipulate the assets and liabilities of the company with the transfer of the same with the Cayman Island projects.
Question 3) Does it matter that most investors in Enron were relatively sophisticated financial institutions? What about the employee’s ownership of the stock and their 401(k) plans?
it matters a lot to the company’s reputation that most of the investors in the company were sophisticated institutions. For example, when for the first time Enron traded its energy as commodity in Wall Street Market, the share prices of the company raises. The price was $85 each when floated even for the first time. With the help of such a strong financial institution the prices of the stock raise so much that created the overvaluation of the company’s wealth. Also due to this strong backing the company controlled all the energy market in U.S.
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The company’s employees were given 401(k) plans. According to such plans, the employees were given stock option plans with the basic compensation. They has invested heavily in the company’s stocks and the company has a matching program in which it contributed additional shares of the stock to saving and retirement plans when employees chose to fund them with Enron stock . This has added a great value for the company. When most of the shares or the stake has been controlled by the employees then it has contributed to the value addition for the company. As per the case also under 401(k) plan the company offer the compensation as per the performance of the employee and relate it to the balance sheet of the company where it uses mark to market policy.
Question 4) How the top leadership at Enron undermined the foundation values of Enron code of ethics?
for the company it’s the top management always made the code of ethics. As per the case, The top management never go for ruining the rules and regulations but it has always said its employees to manipulate the laws. The company officials themselves have given the orders to their accountants to got for the best way to save the taxes. It was on e of the employee’s saying that we don’t ruin the things when just manipulating the things. Willingly of the unwillingly the company officials specially Lay and Skilling who were the in charge of handling the financial of the company were totally unethical and they were concentrating on the profits of the company. They were also using the unfair means for getting the profits. The financial frauds, insider trading were some of the practices common in the top level executives. Also they laid emphasis on the creating superficial financial reports which is totally unethical.
Question 5) could another Enron occur now? Why or why not?
yes there has been recent scam in the corporate world named as Indian Enron as Satyam scam. The financials were hampered in this company as well. The only difference in Enron and Satyam was that the top level admitted its hand in the case of Satyam.
* The company uses experienced skill sets which were manipulating the regulations in a logical way.
* Uses the accounting standard different to other being used by the ordinary companies so that manipulation is done in better way.
* Expanding business of the company was one its strengths
* The company was taking the help of top most financial institutions which were acting as a support for the company also.
* Also the company was having a large no. of employees who relied on the company’s stock options and were having the large chunk of stocks or shares.
· The upcoming projects in the power generation businesses act as opportunity to grow.
· The special entity projects also act as an opportunity for the growth as well as the financial confusions.
· Employee’s agreement of non selling of their stock options also act as an opportunity to invest employees money by the company.
· Open hand welcome by Wall Street also acts as an opportunity.
· The competitors act as threats.
· Ethical employees act as a threat for the company unethical deeds.
* Relationships in terms of employment also act as a threat.
* Rules of government and other financial regulators act as a threat.
* Complex business model.
* Complex business financial principles.
* Complex balance sheets.
* Non understandable business balance sheets.
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