Enron was the country’s largest trader and marketer for electric and natural gas energy. Its core business was buying energy at a negotiated price and later, selling the energy when prices increased. As an energy broker, Enron provided a service by allowing producers to negotiate a certain price while Enron took the risk that prices would fall below what it bought energy. Buyers of energy also benefited because Enron could ensure the supply of energy. In 2000 Enron was listed number five on the Fortune 500. What happened to the company which was among the most admired for vision and quality thinking? Enron was the company that held virtual assets and not the real assets, such as power stations, which were capital incentive with low returns and ongoing debt. The decline in the market starting in 2000 uncovered the financial structure on which Enron was built, eventually forcing the company into bankruptcy. The main reason was the Special purpose entities. As per law a company can create SPE for a particular purpose. The debt of the SPE is carried on the books of the creating company. However, it could be transferred to the SPE if an independent third party purchased a minimum of a 3 percent interest in the SPE. This financial structure became the favorite of Enron; it created more than 900 SPEs. During the 1990’s Enron set up special entities to transfer its debt off the balance sheet. Enron created businesses, sometimes joint ventures or partnerships. To capitalize these businesses Enron would find investors, sometimes; these were executives at Enron or friends. Sometimes there was no “investment”. The real structure violated the SPE statutory requirements. Enron used its working relation with Merrill Lynch to buy an interest in one of its SPE. However in order to entice Merrill Lynch in to the transaction it promised to make a $250,000 payment to repay $7 million. These promises changed the position of Merrill Lynch from equity to debt. But Enron showed it as cash income and did not show that amount was really a loan to be repaid. Enron was not legally required to reflect any of its debt of the SPE (Bohlman, 2005). World Com
WorldCom, now named MCI, recently emerged from bankruptcy protection after reporting accounting irregularities of $11 billion. During the late 1990s there was formidable pressure on WorldCom to preserve historic levels of cash flow and EBIDTA (earnings before interest, depreciation, taxes, and amortization) while new telecommunications orders were in decline as well as continued pressure on existing price points. It was during this period that WorldCom began many of the fraudulent accounting practices. The SEC Report (2003) on WorldCom identified fraudulent behavior in three main areas: the unauthorized movement of line costs to capital resulting in decreased expenses, the improper release of accruals reducing current expenses, and questionable revenue entries producing an increase to earnings. These accounting irregularities have resulted in many of WorldCom's previous executives being prosecuted on securities’ charges. As part of emergence settlement, MCI paid the Securities and Exchange Commission (SEC) fines totaling $750 million and former bondholders received 36 cents on the dollar in stock in the new company (Scharff, 2005). Legal & Ethical Issues
Both the companies filed bankruptcy under chapter 11 and had similar accounting issues. This paper highlights the ethical issues faced by both the companies. Organizational dilemma
Executives of the organizations faced a situation where the economic and financial performance of the business was in conflict with the organization's social obligations. As it is known that legal standards sets the floor for ethical standards. The organizational issues are best identified by researching three main behavioral and cultural components which further caused these legal problems. These three components are also known as...
References: Bohlman, H. M. (2005). The Legal Ethical and International Environment of Business. Thomson South Western .
Scharff, M. (2005). WorldCom: A Failure of Moral and Ethical Values. Journal of Applied Management and Entrepreneurship .
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