The accelerated earning policies at Enron made the company enter into some deals that were not well thought out, and therefore ended in cash negative outcomes for the company (Hamilton 9). An example of this is a gas supply deal done with a company from the Far East which was done hurriedly without due consideration of price swings. The result is that by the time Enron was getting the supply, it had to do so at reduced earnings for the company. This situation always made the finance officers at Enron uneasy and they had to resort to creative accounting to cater for the reduced earning. The description given to this type of behavior is “marking up the curve” (Hamilton 9). This type of financial indiscipline was mainly practiced by the senior financial officials of the company and those in lower ranks who genuinely had an interest in doing things according to the rules found it hard to operate. This is the senior managers turned sour and nasty whenever anyone tried to question whatever they were doing.
Making poor investment decisions is perhaps a wide phrase but it captures what the Enron executives did. The Enron Broadband Service is a case in point. The acquisition of the cable assets of Portland General Electric in 1997 has been described as being more “opportunistic than planned” (Hamilton 10). Being opportunistic is not inherently a criminal offense in business but it is better for planned cases since opportunistic takeovers can have risks that may not be easily identified due to the harried nature of the deal. Upon the acquisition, Enron moved forward and added a total of eleven thousand cable miles to the original one thousand five hundred in 1998 and 1999, and at the end of it all, the company made a loss of $ 60 million on this opportunistic business venture (Hamilton 10).
Leaving the above aside, too much compensation has its implications too. The fact that this compensation took the form of cash and shares in the company means that it affected the finances of the company. It is even serious given the fact that this kind of compensation was being extended to board members at levels not witnessed in the case of nonexecutive employees of United States public companies (Hamilton9). The Enron story goes that salaries, bonuses, and stock options for board members moved from $193 million in 1998 to a massive $1.4 billion in 2000 (Hamilton 9). This had an impact on the company’s balance sheet.
Far from the above, the Special Purpose Entities (SPEs) that are a valid business option for corporations took a new role in Enron. Having realized that the company was running at a loss, the management succumbed to the pressure to maintain the public image of a blue-chip company that Enron had convinced the public it was (Fusaro & Miller 21-27). The Special Purpose vehicles were created in record numbers (more than 3,000) and used to take off the Enron balance sheet unfriendly entries or losses and other liabilities. This made it impossible to reflect the true financial position of the company for the financial officials of Enron itself and the public. The effect of this is that the public was not in a position to notice the dangers of the now ailing company. Thus it was not possible to avoid purchasing the company shares or even sell the ones already held so as to avoid losses in case of bankruptcy, which eventually befell the company.
Works cited
Fusaro, Peter& Miller, Ross. What Went Wrong at Enron: Everyone’s Guide to the Largest Bankruptcy in U.S. History. New York: Wiley, 2002.Print.
Hamilton, Stewart.The Enron Collapse. Lausanne: International Institute for Management Development, 2003.Print.