Assignment 3

International Business Management

Dua Fatima (BBA171037)

Q: Explain the ethical dilemma which you have evident in any international
organization
ENRON CORPORATION CASE STUDY

Enron Corporation was formed in 1985 from a merger between Houston Natural Gas Company
and Omaha-based InterNorth Incorporated. Enron was once the seventh-largest corporation in
America and was named the ‘America’s Most Innovative Company’ by Fortune for 6 years
consistently. The corporation that took 10 years to build up to 60 billion dollars in value took less
than a month to go bankrupt. Enron had accumulated approximately $598 million in losses, $628
million in debt. (ColdFusion, 2019), billions of dollars stolen, thousands of jobs lost, dozens of
convictions, one suicide and a public display of corporate greed.

Role Of Financial Instruments In Downfall Of Enron.

In order to finance their corporation and subsidiaries, Enron was able to attract investors and
trading partners through offering their reputation as the most innovative company, credit,
expertise in energy, political backup and praise because of its expansion and ambitious projects.
Enron knew as long as the company met or exceeded its endless expectations their stock price
would keep rising. Enron’s executive management committee, therefore, violated the accounting
regulations under Generally Accepted Accounting Principles (GAAP) to hide losses and debt in
order to cover up the true value of their corporation.

1. Off-Balance Sheet

Enron understood that the information delivered to the market participants has a direct effect on
the returns that can be made. They used of special purpose vehicle (SPV) known as a special
purpose entity (SPE) to hide large debts and toxic assets from creditors and investors. They set
up side companies in which they pushed their debt over to them hence solving the ‘debt
problem’.
They also colluded with JPMorgan Chase, Citigroup bank that helped report loans as cash flow
from operations for the period 1992–2001.
2. Mark-To-Market

MTM is based on ‘fair value’ not the ‘actual value’ so it can be manipulated by allowing
organizations to log estimated profits as actual profits as in the case of Enron. An example is the
case of the partnership of Enron broadband services and Blockbuster where they entered or
logged expected earnings based on the expected growth of the VOD market.

3. Manipulation of Derivatives

Enron did this by hiding the losses in the derivative section (loans were presented in the form of
prepaid commodity swaps) some reasons why fraudulent transactions happened:

 Gas and electricity market deregulation.

 Absence of accounting standards for prepaid commodity swaps.
 Political ties to the then president of America George W. Bush