Business Ethics
...artnerships that hid billions of dollars of liabilities. “Many entities, like Enron, used special purpose entities (SPE) because as long as at least 3% of capital comes from outsiders, an SPE can be left off the consolidated financial statements of the parent company” (Accounting 21). Enron’s management allowing the establishment of SPEs shifted Enron’s liabilities to be taken off the books. Enron executives began using these SPE’s to enrich themselves. Enron used about 500 of the SPE’s and thousands other questionable partnerships in order to achieve off-balance sheet transactions. Enron needed to create more SPE’s to keep moving debt off the balance sheets. When it became difficult for Enron to find replacement independent investors they started using their own stock as collateral. By doing this the fallacious SPE’s would record an increase in Enron’s stock as income, which in turn would increase Enron’s income by using the equity method of accounting. SPE’s are not against the law. Many companies put real estate obligations, like a headquarters building and other obligations not directly involved in their core business activities, in SPE’s to keep the debt off their books. The problem arises when the SPE’s are shells used to hide real liabilities, many executives at Enron made large personal gains from these transactions. But where was Enron’s audit committee, they have the responsibility of regulating the company. The Andersen Company was in charge of auditing Enron; Andersen received $25 million from Enron for its auditing services. Andersen also received $27 million form Enron for its consulting services. Paying millions of dollars in audit and consulting fees to Andersen was enough for them to turn their heads and not report what was really going on. The U.S. Government set up organizations to regulate companies and keep them honest. The U.S. Securities and Exchange Commission (SEC) was created after the great depression to give confidence into the public about buying stocks and bonds. The main task of the SEC is to protect investors and maintain the integrity of the securities markets. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. The SEC basically had two rules when created, “Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing. People who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly, putting investors' interests first” (U.S. SEC, 2003, 14) Congress established the SEC in 1934 to enforce these newly-passed securities laws, to promote stability in the markets and, most importantly, to protect investors. (U.S. SEC) Another regulating organization is the Financial Accounting Standards Board (FASB), the private organization that sets U.S. accounting standards, is making several change...