Enron And Ethics and Accounting

Enron and Accounting Ethics
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Introduction
Mentioning the name Enron to scholars and practitioners in accounting will always shift their thoughts to ethical accounting practices. This owes to the fact that the failure of organizations like Enron, WorldCom and Adelphia, led to changes in the standards of practice in accounting. Consequently, several authors completed studies on the collapse and demise of Enron. For instance, Conroy and Emerson (2006), Cunningham and Harris (2006), and Dembiski et al., (2006) made publications on the topic in question. According to Conroy and Emerson (2006), Enron’s failure represents the biggest company failure in the history of America. This is highlighted by the fact that Enron had revenue of US $101 billion and an estimated size of 21000 employees by 2000. However, Dembiski et al., (2006) reveals that the organization collapsed in 2001 owing to unethical accounting practices within the organization. This paper discusses how Enron led to increased emphasis on corporate codes of conduct by analyzing the entire fiasco.
What Happened
It is notable that Enron was implementing aggressive business strategies that attracted clients and investors from the entire world. As an evidence of this, the organization lowered the cost of gas and electricity by 40 to 50 percent in the 1990s (Dembiski et al., 2006). This is because Enron was involved in diversified business operations owing to its involvement in energy supply chain. Specifically, Enron specialized in allowance trading, natural gas, and power marketing. Simply put, business operations in Enron could be divided into two different financial entities: a financial institution and an energy supply company. The energy section of the organization had information on the distribution problems and production costs while the financial institution section of Enron focused on wholesaling and the use of financial derivatives. Further Moncarz et al, (2006) Enron had information on the flow of gas products in the market.
It is notable that Conroy and Emerson (2006) argue that business strategies employed by Enron ensured rapid growth. This owes to the fact that the organization accumulated assets aggressively using debt financing. As a result, Enron produced a high debt-to-equity ratio that was partly concealed from investors using special purpose partnerships. It is critical that another element that resulted in the rapid growth of Enron was the profits sourced from derivatives trading. Additionally, Enron profited from an energy crisis that occurred during the summer of 2000 in California (Conroy and Emerson 2006). The same author further asserts that Enron acquired market power because the organization contributed as both a dealer and market participant to the gas industry. Further, the organization ensured that it bought products at a lower price and sold the same products at its asking price.
It is clear that Enron developed a business model that acquired investments from market and leveraging the same investment. This was possible because the organization created elastic pricing structures using financial derivatives to manage risks. As a result, the model used by Enron assumed continuous growt...