Business Leadership in Enron free essay sample

During the expansion plan, the debt acquired by Enron had increased substantially. The reason for this was that by issuing additional debt it would increase the company’s leverage and harm its credit rating. The alternative solution was to seek cash from external investors willing to invest in specific entities. When these entity was created, it could then borrow the capital separately from the sponsor company whilst maintaining Enron’s debt ratio and avoiding it being recorded in the balance sheet. 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 money 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 creative use of special-purpose entities (SPEs) similar as that to the â€Å"GasBank†. Enron exploited this immature accounting area which used the SPE as on off-balance sheet item, to keep liabilities and assets of the entities separated from Enron’s statements. We will write a custom essay sample on Business Leadership in Enron or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The SPEs became a convenient vehicle to unload losing trading contracts and to borrow money from outside for Enron. According to (GAO,2002) â€Å" A business may utilize a SPE for accounting purpose, but these transactions must still be subjected to certain regulations†. (Journal of Management Research, 2003b. ) This was initially a temporary solution for temporary cash flow problems. Enron later used SPE partnership under 3% rule to hide had bets it had made on speculative assets of the partnerships in return for IOU’s 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 buy out Calper’s stake in JEDI for $383million. (Deakin Konzelmann, 2004) Enron plans to give back short term loan to Chewco to permit tit to to buy out Calper’s stake.