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Ethics of the Corporate World

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Created: January 31, 2002
Latest Update: February 4, 2002

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Enron, A Case Study

Copyright: Jeanne Curran and Susan R. Takata and Individaul Authors, February 2002.
"Fair use" encouraged.

This essay is based on the extensive coverage of the Enron fiasco in the New York Times on February 4, 2002. The hardcopy edition had some excellent graphs not available on the interactive graphics of the web site. The graphics online, and the articles, are helpful to an understanding of what precisely happened.

I have been confused through the whole collapse of Enron as to what precisely th corporation did. I'm still not sure I know what the did precisely, but I've got a better sense now of what the criminal charges are coming from.

According to the chart on p. A 19 of the New York Times on February 4, 2002, Kurt Eichenwald explains that, according to the report issued by Enron on February 3, 2002, "certain transactions [conducted by Enron executives with partnership companies they formed and controlled] served no purpose other than to manipulate the reported earnings of the company."

In the Chart, called Raising Red Flags: "Near the end of the third and fourth quarters of 1999, Enron sold interests in seven assets to LJM1 and LJM2. These transactions appeared consistent with the stated purpose of allowing Fastow to participate in the partnerships--the transactions were done quickly, and permitted Enron to remove the assets from its balance sheet and record a gain in some cases. However, events that occurred after the sales call into question the legitimacy of the sales. In particular: (1) Enron bought back five of the seven assets after the close of the financial reporting period, in some cases within a matter of months; (2) the LJM partnerships made a profit on every transaction, even when the asset it had purchased appears to have declined in market value; and (3) according to a presentation Fastow made to the Board's Finance Committee, those transactions generated, directly or indirectly, "earnings" to Enron of $229 million in the second half of 1999 (apparently including one hedging transaction)." Enron Report, p. 12, New York Times pdf file.

"Accounting and Financial Reporting Issues. Although Andersen approved the transactions, in fact the "hedging" transactions did not involve substantive transfers of economic risk. The transactions may have looked superficially like economic hedges, but they actually functioned only as "accounting" hedges. They appear to have been designed to circumvent accounting rules by recording hedging gains to offset losses in the value of merchant investments on Enron's quarterly and annual income statements. The economic reality of these transactions was that Enron never escaped the risk of loss, because it had provided the bulk of the capital with which the SPEs would pay Enron." Enron Report, p. 13-14, New York Times pdf file.

Talk of Crime Grows Louder, Spurred by Report News Analysis. By Kurt Eichenwald. New York Times. February 4, 2002. Backup.

Audacious Climb to Success Ended in a Dizzying Plunge By Kurt Eichenwald. New York Times. January 13, 2002. Backup - p.1, Backup - p.2, Backup - p.3, Backup - p.4.