Advance Business Communication

Question: Write report on role of derivatives in the Enron and how the company used derivatives in their transaction which has resulted in the collapse of the Enron. Answer: Discussion This section of the report highlights the role of derivatives in the Enron and how the company used derivatives in their transaction which has resulted in the collapse of the Enron. Derivatives played a crucial role in the functioning of the business, without the use of derivatives it would have tough for the company to achieve their goals. They used derivatives in inflating the profit and hiding the debt. Moreover, other deals related to derivatives, with other parties rather than the famous SPE's played an important role in the Enron collapse. The company made use of derivatives in different ways: Making use of derivatives to hide losses Firstly, the company makes use of derivatives to cover their loss of hundreds of millions of dollars, which they invested in different firms that are technology oriented. One example of such firm is Rhythm Net Connection, which is a start-up telecommunication company. Enron invested nearly 10 million dollars in the Rhythm Net Connection, and the company bought the shares in Rhythm net connection in less than 2 US dollars per share. The company used the derivatives to hide their incurred loss, which resulted due to investment in the firm that is technologically oriented (www.strongwindpress.com 2016). Making use of derivatives to hide debt Secondly, the company uses the derivatives together with SPEs to cover their debt amount, which they have incurred to invest in new business. It is evident that some very complex and undefined accounting rules allowed the company to hide their assets and liabilities (www.strongwindpress.com 2016). Other use of derivatives The conventional story of Enron and the SPEs, where the derivatives were the solution to the SPE, but in the Enron collapse the SPEs were not that important. It was the off-balance-sheet transactions and derivatives that are critical, different issues related to these agreements should be highlighted to interpret the collapse of the Enron (www.strongwindpress.com 2016). Conclusion It is the duty of the CEO to manage the entire function of the company so that they can increase their profitability. The policy of the company should be transparent and clear. However, in the case of Enron, they used the derivatives to hide their loss and debt. The accounting policy of the company should not concentrate on hiding the loss and debt, but they should try to cope up with these losses and debts. Rather the company should make its transaction and accounts clearer and well defined. Reference Enron and World Finance.