Business Leadership in Enron Essay

During the expansion plan, the debt acquired by Enron had change magnitude substantially. The reason for this was that by issuing additional debt it would increase the companys leverage and harm its quote rating. The alternative solution was to seek cash from external investors willing to invest in specific entities. When these entity was created, it could and so borrow the capital separately from the sponsor company whilst maintaining Enrons debt ratio and avoiding it being recorded in the balance ragtime. 2. 3The Special Purpose Entities (SPEs)In order to cope with its growing volume of business, Enron needed a mechanism that could borrow an ever increasing amount of bullion but yet maintained an delightful debt/equity ratio. Enron succeeded in hiding its debt by resorting to off-balance sheet financing. (Journal of Management Research, 2003a. ). Enron saw a creative employ of special-purpose entities (SPEs) similar as that to the GasBank. Enron exploited this immature accou nting area which used the SPE as on off-balance sheet item, to keep liabilities and assets of the entities separated from Enrons statements.The SPEs became a convenient vehicle to unload losing trading contracts and to borrow money from outside for Enron. According to (GAO,2002) A business may utilize a SPE for accounting purpose, but these proceedings must still be subjected to certain regulations. (Journal of Management Research, 2003b. ) This was initially a temporary worker solution for temporary cash flow problems. Enron later used SPE partnership under 3% rule to hide had bets it had do on speculative assets of the partnerships in return for IOUs backed by Enron stock as verifying (more than $1billion by 2002). In November 1997, Calpers wanted to cash out of JEDI and in order to keep JEDI afloat, Enron needed a new 3% partner. It then created another partnership Chewco to buy out Calpers stake in JEDI for $383million. (Deakin & Konzelmann, 2004) Enron plans to give back sh ort term loan to Chewco to permit tit to to buy out Calpers stake.