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Enron: What led to the collapse?
Enron was the largest company for energy and natural gas made possible through the merging of Houston Natural Gas and InterNorth based in Omaha. The merger made Enron the largest energy trader in the country and the seventh largest in the world. The company advanced into new fields of business by launching a broadband service unit and Enron online, where people can go to trade commodities. Enron rose quickly to become one of America’s most valuable companies. It had a peak of $100 billion in revenue and it was taking the market by storm (Williams, 2002). The company had many major projects and had plans to expand into foreign countries. With the much celebrated success, Enron would have a greater fall than its rise because of mismanagement and poor accounting practices. The company was known for hiring the smartest individuals in the country, but that did not prevent the company from its embarrassing collapse. Enron collapsed with millions of dollars of pension funds and about 5600 people were unemployed. The company that was thought to be performing in the eyes of the public was actually in deep trouble behind the curtains. The big question many people ask is what caused Enron’s collapse? The truth of the matter is that, Enron’s collapse was not caused by just one thing, it was caused by many things such as theft, lies, poor accounting practices, lack of auditing, political factors, and conspiracy. This is what Enron represented about a decade after the merger, this is how the company became successful and that is what destroyed the company.
The first cause of Enron’s collapse was bad accounting practices. The CEO, CFO and other leaders of the company were the cause of its downfall. The plans of expanding Enron was huge, but it was all a theory and an opportunity to make more money to cover for losses that were beyond recovery. Enron’s business was to buy and sell natural gas and energy in the country, but they entered other business that strayed from their mission statement. The company started a billion dollar project in India as an opportunity to expand its business. There was a lot of money pumped into the project, but Enron later pulled out of the project and started calculating profits that the infrastructure in India will generate before its operation. Enron did not make a cent on any of their projects yet the calculated profits for that project, this is known as mark-to-market practice. The company used those numbers in their financial statements to look good to investors and the general public. Also, Enron sided with a well-known and reputable accounting and auditing firm to buy some assets in their name (Investopedia, 2008).
Enron sold its debts to the accounting firm during the times of releasing quarterly reports, the company reported they had no debts, after releasing their financial statements they will buy those debts back. Most of Enron’s financial statement were made of numbers that the company has not even made yet. They would meet financial analysts and members of the SEC to tell them they think they will be making money when the new project starts and they record the profit of the project in their financial statements before actually earning it (Investopedia, 2008). Enron never used the money they made to cover losses, rather they made more losses by not using the little money they had wisely. Enron used poor accounting practices because they knew people from the SEC and they had their backs covered by powerful people. Enron were one of the financiers of Former President George W. Bush campaign in 2000. They funded Bush as a means to protect themselves from being audited and also to gain more grounds to other states in order to expand their business.
Secondly, there were political affiliations that led to the collapse of Enron. Funding George Bush’s campaign was only the beginning of a fruitful partnership for Enron to gain total control of controlling the country’s energy. When Arnold Schwarzenegger was elected governor of California, Enron controlled the energy distribution in the state. During this time Enron was looking for ways to make money. They started to turn off the power grid in some parts of California and as a result got people to pay more for energy. Enron were able to get the people of California to pay for more money and that time that was the only revenue the company was making (Williams, 2002). Many people started to doubt Enron’s financial performance during this time and they knew there was something fishy going on in the company. The CEO at the time held a conference to reassure people that Enron is doing well and now is the best time to invest in the company. Also, Enron sided with top officials in the SEC and other powerful politicians who protected the company from being audited and also prevented investigations of the companies continues profitable financial statement.
Thirdly, Enron was the master of the biggest fraud and deceit. Enron used the mark-to-market accounting practice to record profits on their financial statements. This accounting practice attracted many investor’s, at one point Enron’s stock rose to $90 which was one of the highest in the country because the company was just making up numbers on its financial statement. The masterminds behind this supposedly genius idea was the CFO Mr. Fastow and the CEO Mr. Skilling was in support of it. At that time this was the only way Enron could record profits on their financial statement. The continuous performance of Enron’s financial statement made them the darling of Wall Street. Enron always did exactly or better than Wall Street’s projections. Enron also used this tactic in their securities, but it didn’t work well for their financial statement in the long-term. Also, Enron deceived the public on multiple occasions by telling them the company was doing great when it was actually performing terribly. The CEO of Enron held public press conferences to ensure people that the company was in great shape. The CEO will also make presentation of future Enron projects to convince the people (Oppel and Sorkin, 2001). After many of these conferences many people will go and buy more Enron stocks, that also increases the stock prices. Enron’s deceit of the public was short lived because this was the final months when the company had nothing to its name.
Enron was operated like a family business because of the way the company’s finances were managed. The workers at Enron were known as the nation’s smartest people. The CEO’s both Skilling and Lay were the smartest people in the industry and the CFO, Fastow, was a genius and the mastermind behind the company’s accounting. The CEO’s of Enron retired with millions of dollars, the level of theft in the company was extremely high. The executives of Enron spend most of the time figuring out how to come by other means to scam the public rather than focusing on why the company is in business. The company’s also did not give their investors the returns in money they rather give them the company’s common stock as a return on their investments (Investopedia, 2008). Enron’s problems kept piling up one after the other. Finally, the CEO, Skilling, resigned as CEO and Enron recorded a loss of over $600 million on its financial statement (CBC, 2006). This turned many heads in the country and also sounded the alarm that the end of Enron was near. Wall Street was exceptionally surprised by the turn of events for Enron, their darling company. The company recorded another loss on its financial statement and people started to get really worried. The SEC finally stepped in to investigate Enron’s business and account for their assets. The company started shredding many of their documents of purchases, meetings, debts, financial statements and many other things. Many of the workers came to work to shred and burn documents. This was to prevent the SEC from finding out about Enron’s accounting scheme, but the suspicion was inevitable.
Enron, was America’s largest energy trading company and the 7th largest energy trading company in the world. Enron developed fast and it had its peak revenue of $100 billion, this attracted many investors and United States had a company they could count on to bring growth in the economy. Enron was one of the darling companies on Wall Street. The collapse of Enron was a shock to the United States and also the country’s largest bankruptcy (Oppel and Sorkin, 2001). Enron went from billions of dollars to nothing. The once great empire disappeared overnight, the company stock that once sold for $90 was selling for under a dollar before the collapse. Workers came to work to find out the company out of business, people had a few minutes to clear out their work space before the building was locked down. The sad part of the story is not the collapse of Enron, but the amount of money that perished with it and financial peril it caused many people. Workers lost millions of dollars of their pension funds and payments, investors lost everything they invested.
The lesson from Enron’s collapse is that the SEC should investigate and audit every company financial statement to make sure they were accurate and most importantly, true. Financial statements are the most important part of a company because it informs, investors and the general public on the financial health of the company. Also, no company should be trusted in the hands of supposedly the smartest people in the country. The smartest people have proven that they can be geniuses, but they can also make a billion dollar company worth nothing overnight. Also, no company should be affiliated with politics because it is bad business. Enron’s collapse had a lot of names associated with its collapse, whether it was direct or indirect. The big lesson here is for companies to use accounting practices that GAAP or IASB standards. Enron’s accounting practice, mark-to-market, is smart but it was wrong. If every company was doing that, the financial sector will go bankrupt in a matter days.
"Enron: The Fall Of A Wall Street Darling." Investopedia. 6 Nov. 2008. Web. 4 Jan. 2015. <http://www.investopedia.com/articles/stocks/09/enron-collapse.asp>.
News, CBC. "The Rise and Fall of Enron: A Brief History." CBCnews. CBC/Radio Canada, 25 May 2006. Web. 4 Jan. 2015. <http://www.cbc.ca/news/business/the-rise-and-fall-of-enron-a-brief-history-1.591559>.
Oppel, Richard, and Andrew Sorkin. "ENRON CORP. FILES LARGEST U.S. CLAIM FOR BANKRUPTCY." The New York Times. The New York Times, 2 Dec. 2001. Web. 4 Jan. 2015. <http://www.nytimes.com/2001/12/03/business/enron-s-collapse-the-overview-enron-corp-files-largest-us-claim-for-bankruptcy.html>.
Thomas, William. "The Rise and Fall of Enron." Journal of Accountancy. 1 Apr. 2002. Web. 4 Jan. 2015. <http://www.journalofaccountancy.com/Issues/2002/Apr/TheRiseAndFallOfEnron.htm>.