Business

Enron was a natural gas pipeline company (Healy 1). From the time of its creation in 1985, it grew to become one of the biggest companies in the United States reporting billions of dollars in revenue and a value of more than sixty billion dollars in 2000 (Ibid.). However, in 2001, Enron filed for bankruptcy. From a multi-billion dollar company Enron suddenly collapsed turning its stocks virtually worthless. This sudden turn of events, led to delving questions involving its financial reporting, accounting methods, and internal control. 
Enrons main business was to transport natural gas through its pipeline that ran 37,000 miles across the United States from natural gas producers to its customers (Ibid.). Due to a passed legislation deregulating the sale of natural gas, Enron was able to sell energy at more than its market value. One side effect of the deregulation was the price volatility of energy. In order to manage this, Enron entered into long-term contracts with its customers, selling natural gas at a fixed-price for the duration of the contract. Enron then used financial derivatives in order to meet its commitment of delivering natural gas to its long-term customers (Ibid. 2).
Enron soon began expanding its business. In 1998, Enron traded coal, water, weather, paper, and pulp (Ibid. 3). The expansion of its business led to a revenue and earnings growth by more than a hundred percent and more than two hundred percent, respectively, in 2000 (Ibid. 3). However, by 2001, Enron was declared bankrupt (Ibid. 11).
One of the causes of Enrons downfall was the method of its financial reporting. Enron simply stretched the limits of accounting (Ibid. 6).
Firstly, Enron adhered to the use of market-to-market accounting. By using the market-to-market accounting, the present-value of the net future cash flows for its long-term contracts were reported as income, and the present value of the costs were reported as expense for the accounting year at the time of the signing of the contracts. The amounts that were reported in its financial reports were based mainly on estimates thus the amounts did not truly reflect the actual revenue and expenses realized by Enron. Under this approach, the actual costs were not properly reported in its income statements (Ibid. 6).
Secondly, the use of Enron of Special Purpose Entities (SPE) also led to its downfall. SPEs were entities created for a specific purpose and funded by independent equity investors and lenders (Ibid. 6). Proper financial reporting required certain rules to be followed to allow companies to determine whether these shell companies were separate entities and should be considered as part of the equity of the sponsor, or part of Enrons equity and be included in its financial statements (Ibid. 6). Normally, to be considered as a separate entity from Enron, the sponsor must have at least three percent debt and equity interests and at least fifty percent controlling financial interest in the SPEs. However, in the case of Enron, for as long as the SPE met the three percent debt-and-equity-interest rule requirement, it would not report as liability in its balance sheet any debt it guaranteed or used as capital for a SPE, particularly Chewco and LJM, thereby, overstating its assets and understating its liabilities (Ibid. 7).
Management policy of providing exorbitant salaries and bonuses also led to the downfall of Enron. For 2000, Enron spent more than seven hundred million dollars in bonuses to its employees (Ibid. 4). These bonuses were based on the annual income reported by the company. Since Enron was not properly reporting its income, it could also be deduced that these bonuses were much higher than the amount that should be properly awarded to its employees (Ibid. 4). Enron likewise paid excessive salaries to its employees and board of directors (Ibid. 8).
The board of directors who were supposed to be responsible for the management of the company failed to prevent the collapse due to the inefficiency of its management. It failed to coordinate with its internal and external audit committees. The board merely relied on inaccurate financial reports of its auditors (Ibid. 8). The audit committee meetings were held sporadically despite the rising questions regarding its accounting practices (Ibid. 8). The board also failed to inform the public of its current financial situation by frequently avoiding questions regarding certain financial matters (Ibid. 10).
On paper, the Code of Ethics of Enron was a good model (Ibid. 6). The employees were required to certify in writing that they did not violate any provision of the code. For the senior managers, board approval was required to suspend the effectively of the code. However, in actual practice, the board transgressed the code of ethics by allowing the circumvention of the accounting rules. It violated some ethical consideration by receiving excessive compensation despite the companys financial hardship. Lastly, by concealing the true financial condition of Enron, the board was successful in deceiving the public and some of its employees regarding the companys condition. These violations eventually led to a billion-dollar companys demise in 2001 (Ibid. 11).