Collapse of Enron

4178 Words Oct 23rd, 2008 17 Pages
August 11

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Introduction 3
Background of Enron 3
Enron Business Model 4
Summary of transactions & Partnerships 5
Corporate Governance Issues 8
Post-Enron Governance Reforms 12
Conclusion 13


"The secret of success is honesty and fair dealing," Mark Twain, once said. "If you can fake these, you 've got it made."
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Enron went a step further. It entered into separate contracts with both buyers and sellers in a contract, making a profit on the difference between the two quotes. The general lack of federal controls and monitoring of energy trading enabled Enron to keep its books shut. Of the three sides involved in energy-trading contracts, only Enron knew both sets of prices.
Over time, Enron began to design more complex contracts - essentially derivatives purportedly aimed at hedging risks arising out of uncertainties in interest rates or currency fluctuations. Since Enron 's collapse, it has been revealed that the company employed a battalion of doctorates in mathematics, physics and economics to manage these complex contracts.
Between 1996 and 2000, Enron 's sales increased from $13.3 billion to $100.8 billion. These were far above revenues generated by other large American companies such as Microsoft, General Electric or Exxon Mobil.
Enron was described by an analyst as "a giant hedge fund sitting on top of a pipeline". While its revenues were boosted through innovative accounting practices, its operating margins were rather thin - about 5 per cent in 2000 and 2 per cent in 2001. Its return on capital in 2001 was just 7 per cent - rather low in the highly risky business of hedging. Consequently, while revenues were successfully inflated by ingenious accounting devices, Enron 's profitability was never as high. Wall Street analysts, tuned to the

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