Computers and Technology
Submitted By jrlazar
American Business Ethics: Enron
Born from the merger of InterNorth Inc. and Houston Natural Gas Company in 1985, Enron began an energy trading corporation. At the time of its creation, the natural gas market was extremely volatile. As such, a considerable amount of uncertainty existed about the future price of natural gas. Consumers could not obtain reliable prices for natural gas because suppliers and sellers of natural gas could agree to long-term prices due to this volatility.
From these circumstances, Enron emerged as an innovator and market leader because it understood that it could help calm volatility in the natural gas market by acting as an intermediary between producers and sellers of natural gas. They did this by purchasing large amounts of short-term natural gas contracts from suppliers and subsequently contracting long-term agreements with sellers. This, in effect, eased volatility and allowed consumers to obtain constant or steady prices for natural gas.
Though it began as a trading company, Enron diversified by buying many different types of assets, both energy and other consumer goods. At its peak, Enron was worth $60 billion dollars and had a stock price of $90 per share. In fact, Fortune Magazine named Enron “The Most Innovative Company” for six straight years.
Enron’s downfall began with poor and misleading financial reporting which led to the discovery of fraudulent activity by Enron’s officers. The fraud Enron perpetrated center around two acts: (1) inaccurately reporting trading revenue, and (2) unloading debt obligations on special purpose entities. Proper revenue recognition for a trading company such as Enron would have been to recognize revenue for the trading fee only. Instead, Enron recognized the entire price or value of the trade as revenue. This inflated Enron’s...