Business Leadership in Enron Essay

During the expansion plan, the debt acquired by Enron had increased substantially. The reason for this was that by return additional debt it would increase the companys leverage and harm its assurance rating. The alternative solution was to seek immediate payment from external graceors willing to invest in specific entities. When these entity was created, it could then borrow the capital separately from the browse company whilst maintaining Enrons debt ratio and avoiding it being recorded in the ratio sheet. 2. 3The Special Purpose Entities (SPEs)In order to cope with its growing pile of business, Enron undeniable a mechanism that could borrow an ever increasing total of gold but yet maintained an acceptable debt/equity ratio. Enron succeeded in hiding its debt by resorting to off-balance sheet financing. (Journal of Management Research, 2003a. ). Enron saw a originative use of special-purpose entities (SPEs) similar as that to the GasBank. Enron exploited this immature ac counting welkin 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 transactions must still be subjected to certain(p) regulations. (Journal of Management Research, 2003b. ) This was initially a temporary solution for temporary cash flow problems. Enron later used SPE partnership under 3% hulk to hide had bets it had made on speculative assets of the partnerships in return for IOUs backed by Enron stock as collateral (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 deal out Calpers stake in JEDI for $383million. (Deakin & Konzelmann, 2004) Enron plans to give ba ck little(a) term loan to Chewco to permit tit to to buy out Calpers stake.