Economics management help on: Texas Pipeline & Huston Company
Introduction 
It is evaluated that Enron was formed in year 1985, with the mixture of 2 businesses Texas Pipeline and Huston Company combining with the natural gas organization related in Omaha. Initially, Enron was the operator of the interstate pipelines, but in year 1989 Enron expanded in the trading energy based commodities. In last few years, Enron became as a greatest merchant of the energy in United Kingdom and United States. In year 1997, Enron moved ahead with the program to redesign its company image to the stylish looking, environmentally aware and modern type of Company (Luke & Robert, 2002). In year 1997, Enron declared that it would be working in the market place with new type of derivative products. By the 1999 year, Enron was developed so big and became indulged in all deals of energy in world. It is examined that Enron utilized various strategic partners to assist and cover up their schemes of accounting. Arthur Anderson was the auditor of the Enron. In fact, approximately 100 workers at the Anderson were committed to the accounts of Enron. It is believed that Anderson was persuaded to destroy documents of auditing due to the great consulting fees paid by the Enron to them. It is identified that four questionable deals had been done by Enron such as Raptor partnership, Candor Partnership, LMJ2 partnership and White wing Partnership.
Questionable Deals
LMJ2 Partnership: Merrill Lynch was considered as one of the greatest firms of investment banking. They continuously helped out the Company Enron to illegally record their incomes and earnings in year 1999 with selling out of Nigerian Barges. The partnership with LMJ2 was taken place in Oct 1999 with the objective of acquiring assets mainly purchased by the Enron. Enron utilized the partnership of LMJ2 to deconsolidate its least productive assets (Michaely, Roni & Womack, 1999). It is viewed that few transactions of business like some brokerage firms such as Merrill contributed to the scandals of Enron with the planned purchase of the Nigerian barges. For example: Lynch allegedly purchased the barges for about 28 million, out of which 21 million was funded by the Company Enron. Enron utilized reputation of the Anderson to increase the confidence of the possible investors. The firm of accounting reassured the stability of the corporation by certifying financial statements of Enron. With names such as LJM, Chewco and Raptor, these types of transactions were structured to permit Enron Company to borrow against the assets without mentioning the debt on its financial statement. The Company overstated its revenue by approximately 1.5 billion and understood its liabilities by approximately $828 million and Batson concludes that it had sold the assets at the profit and had borrowed them against the affiliated partnership (Weil, Jonathan & Barrionuevo, 2002). Enron utilized to record the gains of estimated upcoming tax savings and paying out higher payments of tax and millions of the dollars in the short period.
Raptor partnership: The board of Enron knowingly approved the transactions of Raptor, besides their great risk of accounting, inadequate economic matter and considerable possible claim to the stock contracts of the Enron. It is examined that, Board failed to make sure sufficient public disclosure in the financial statements of Enron and constant contingent liabilities for the transactions of Raptor (Robert, 2003). It is evaluated that Raptor was considered as a group of four difficult transactions which started in mid of year 2000 and ceased after a year in 2001. They were showed to the Board of Directors by the management of Enron as creative devices of accounting which may fascinate accounting scrutiny but had been approved and scrutinized by Anderson. Enron, argued again with the concurrence of Anderson, that it would utilize the hedges of Raptor to offset rising losses in its assets that Enron could have had to state on its comprehensive income statement and minus from his revenues. Within the time of 1 year, Enron utilized the alleged hedges of Raptor to reduce the losses amounting to Rs. 1 billion (Robert, 2003). It is examined that collateral and assets value continued to reduce throughout the year 2000& 2001. These minimizations showed that Raptor SPEs had no economic substances to hold the so-called hedges and other claims on stock contracts of Enron. This kind of internal environment impacted all the actions of the Company Enron. Enron made financial items called Raptors that were made to minimize the risks related with investment portfolio of Enron. With the help of Raptor, the Company Enron was able to hide the debt $3.9 million debt from the period 1992 to 2001 (Hilzenrath, 2001).
Candor partnership: It is examined that new entity searched by Watkins as Candor who creates additional concerns. In letter she, mentioned to layman that on street it shall look like we recorded fund flow of around $800 mm from sales of merchant assets in year 1999 through selling to the vehicle called Condor which we capitalized with the promise of the stock of the Enron in subsequent years (Bethany, 2001). It is examined that new entity searched by Watkins as Candor who creates additional concerns. The letter revealed for the 1st time that the survival of the entity known as Condor, that was financed with the stock of Enron and that created investments which produced $ 800 million in cash for the Enron. It is examined that, expert of the industry who has examined the letter revealed that there is a query regarding how $800 million must be deducted from revenues. On the other side, letter also reveals that another business entity called Raptor, the previously disclosed vehicle of the investment purchased by another partnership of Enron, created nearly 500 million in revenues.
White Wing Partnership: It is examined that White Wing partnership was another considerable SPE formed by the Company Enron, indulged in buying of power plants, water projects and pipelines originally bought by the Enron in mid 1990s which were positioned in Latin America, Turkey, India and Spain (Healy &Krishna, 2003). The partnership with White Wing was vital to the Enron, because they shifted from energy provider to the trader of the energy contracts. White Wing was the component through which company sold its assets of energy production. In forming this partnership, the Company guaranteed investors that if assets of White Wing were sold at the loss, then company Enron would reimburse the investors through shares of Company common stock. It is also analyzed that credit downgrade made the requirement that Enron was required to pay around 690 million to the investors of White Wing.
Accounting Scandals according to the Watkins
It is examined that Watkins had written a letter to the CEO of the Enron and revealed that ‘I am nervous and we shall implode in the wave of the accounting scandals’. She mentioned in the letter that, Enron is a risky place to work (Healy &Krishna, 2003). Enron was very aggressive in its practices of accounting notably the Condor vehicle and Raptor transactions. Watkins also mentioned in the letter that her 8 years of working experience will be nothing because of these accounting scandals took place in the Enron. Although, executives of the Company might have been indulged in questionable practices of business and failure of the Enron was ultimately because of the collapse of the customer, trading partner’s confidence and investors (Heal &Krishna, 2003). It is evaluated that, due to the collapse, debt holders started to redeem the loans because of the reduced stock price of the Enron and the Company searched its positions of accounting significantly problematic to sustain (Brown, K et al, 2000). The considerable loss of the confidence by the customers and trading partners dried up the trading volume of the Enron and the organization searched itself experiencing a crisis of liquidity in year 2001.
Another major concern showed by Mr. Watkins to the Lay is, we have realized nearly $550 million gains on shares through our swap with Raptor but now that shares had reduced considerably. The swaps value could not be there for Raptor and once again the Company will issue shares to minimize these losses. Most of the investors had bought the shares at 70 & 80 and looking for the value of 120, but due to collapse values of the shares came at 38 or less than that (Bethany, 2001). Besides this, lay remained to tell workers that the stock of the Enron was undervalued. He was allegedly selling some parts of his stake in the organization to gain some profit. It is examined that Lay was considered as one of the employees who integrated to sell the considerable portion of his shares before the prices of the shares collapsed completely (Brown, K et al, 2000). But at the same time, employees of Enron did not have a chance to sell their investments of Enron. The partnership with White wing is another considerable SPE formed by the Enron indulged in acquiring the assortment of pipelines, power plant and projects of water bought by Enron in mid of year 1990 which were positioned in Turkey, North America, Spain and India (Weil, Jonathan & Barrionuevo, 2002).
The scandal of Enron comprises several accounting issues. One concern was associated to the procedures governing and whether the financial statement of SPE’s initiated by the Company should be associated with the company financial statement for convinced SPE contracts at issue, consolidation was not mandatory if other things like independent party spends as few as 3% of the financing capital (Bethany, 2001). The second kind of issue related about the implementation of derivatives to persuade outcomes of the accounting. The third kind of issue related about the calls for raised disclosure, either in financial statement & management discussion for arrangements of the financial inclusive of contingent liabilities.
Fraudulent Practices
It could be said that one of the fraudulent practices had taken place at Enron because of the involvement of the Arthur Anderson in dubious and misleading practices. It is evaluated that involvement of the Anderson in dubious practices of Enron produced the collapse of the firm. In, fact Enron was considered as one of the respected consulting and accounting companies. It is examined that, Anderson helped Enron as the consultant and the auditor. For 2 years, Anderson worked as an inner auditor for the Enron. The biggest client of the Anderson was Enron in year 2000 and Arthur Anderson earned around 52m in fees for the auditing and consulting (Akerlof, 1970). The interdependency of Enron and Anderson at that point of time was obvious and employees of Anderson and Enron were crossed over to each other. It is also viewed that vital consultants worked at the Anderson were eradicated from the Enron and given to other kinds of projects. For example: Carl, Bass was a senior associate of the Anderson and eliminated from working on accounts of Enron in year 2001 after criticizing the accounting practices of the Enron (Michaely, Roni & Womack, 1999). At the time of the investigation, he examined that documents proved that he was indulged in various transactions and had been altered without any knowledge to him. It can be said that criminal actions among managers of Enron and questionable practices between the distinct consultants, investment bankers and the representatives of the government authorities could be possible due to particular compositions of energy market and special regulations of New Economy.
Another fraudulent practice had taken place at Enron was, Enron made financial items called Raptors that were made to minimize the risks related with investment portfolio of Enron. Raptors had covered the loss on investments of Enron till the time; stock market remained to do well. Enron also hid the debt by using one of the complex transactions of financial derivative and the Company hid around $3.9 million debt from the period 1992 to 2001 (Bravin , 2005). It is observed that the Enron Company had done illegal activities by hiding a great amount of Company liabilities. The company was treating liabilities as revenue and did not show them in the balance sheet. The company had taken the help of others in hiding a large amount of company debt. With the help of LJM2 Enron company had deconsolidate its unproductive assets which generated annually 30 percent revenue to the company. At last all the partnerships and help from others were basically done by the company to hide a large amount of debt and to show that the company was in profit.Another fraudulent practice at Enron was one of the basic players such as stock analysts and investment bankers were accountable for misleading stock and dubious transactions in the game of Enron (Luke & Robert, 2002). As an outcome of the Enron reorganization from the classical energy creating company with power plants and pipelines to the provider of global energy, the sales volume of the company had increased. Two groups of issues proved particularly problematic. First, its business of trading comprised difficult long –term agreements (Hilzenrath, 2001). Current rules of accounting utilized the existing value framework to store the transactions, requiring the management to create forecast of the future earnings. This kind of approach is called as mark-to market accounting and was central to the income recognition of the Enron and showed in its management creating estimations of the interest rates and energy prices well in the future. Second, Enron depends broadly on the structured transactions of finance which indulged forming up special objective entities (Hilzenrath, 2001). These kinds of transactions shared the rights of the particular risks and cash flows with outside lenders and investors. Traditional accounting that concentrates on transactions of arms-length among independent entities and experiences challenges in transacting with such kind of transactions. Mechanical procedures have been utilized to record such type of transactions and making a divergence among accounting numbers and economic realities.
Conclusion
At last, it can be said that all other accounting firms had blamed accountants of Enron and the company for the scandal in hiding the claim of the mischief. The scandal took place in Enron made other accounting firms to disrupt the lives of investors and employees. As in the case of Enron, the administration of the company had done illegal activities by escaping the large portion of debt. It is desirable for companies not to do any type of illegal activities in financial statements because it affects the functioning of the company and reputation among the investor. It is concluded that if unethical activities took place in accounting decisions then it would affect the performance of companies in industry and make the investor rigid to do any kind of investment in companies.
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