Enron inflated its profit and income figures in its accounting statements by using strange and arcane accounting procedures with intent to obfuscate the truth. For example, Enron used a type of accounting referred to as the “merchant model” in order to report its revenues.
Instead of reporting revenues only as trading or brokerage fees, Enron reported the value of the entire transaction as revenue, thus making the company’s apparent profit skyrocket. There was, in fact, no extra profit being made, but the simple change in accounting practices allowed Enron to appear as a much stronger company than it was, making the company appear to be growing yearly at a fantastic rate, while in truth it was not growing anywhere near as much as it might have seemed.
These accounting practices showed a complete lack of business ethics, as they were not designed to give shareholders and others with an interest any kind of accurate, truthful account, and were instead designed to abuse the trust of such shareholders in those accounting practices in order to further increase profits.
Enron would also hide any loss of income, with such practices as selling unprofitable subsidiaries to shell companies. These shell companies were actually owned entirely by Enron, but because the unprofitable subsidiaries were now off Enron’s accounting sheets, it looked as if Enron was no longer losing profit. Furthermore, Enron would be able to list the supposedly gained profit of the subsidiary’s sale on its financial reports, thereby appearing even more profitable.
The lack of business ethics apparent throughout any examination of Enron’s practices shows exactly where lay the source of the Enron collapse. Enron did not hesitate to effectively lie to those to whom it had an obligation to present the truth. The problems were exacerbated by the collusion of Arthur Anderson, LLP, the accounting firm responsible for keeping Enron’s books.
A great deal of the criminality present in the entire Enron scandal came when Arthur Anderson began shredding papers, deleting documents, and eliminating e-mails in order to prevent investigators from finding anything incriminating. This is beyond just a lack of business ethics; the destruction of such information was a clear obstruction of justice.
The criminality of Enron’s profit inflation comes primarily from the way in which it deceived those who attempted to make a judgment about Enron based on its profits. Enron lied to the public, even if it was theoretically a lie of omission, in which the business practices were simply obscured and hidden under layers of manipulation, instead of being outright falsified. Inflating income in such an artificial, deceptive fashion is undeniably wrong, as it violates the most basic tenets of business ethics upheld by any kind of law.