Deception, Fraud, and the Collapse of Enron Essay

1394 Words 6 Pages
Deception, Fraud, and the Collapse of Enron

Introduction

From America’s 7th most valuable company in December 2000, to a company in ruins by early 2002, Enron has been involved in one of the most incredible reverses of fortune ever. With shares riding high on
Wall Street at $84.87 on the 28th December 2000, and awards such as
“America’s most innovative company” from Fortune Magazine 6 years running, and “Energy Company of the Year” from the Financial Times also in 2000, it looked as though Enron were promising to be one of the biggest American companies of all time.

Things started going drastically wrong. As large losses were being reported, share prices tumbled, and Enron, within the space of only a year, was on the verge of collapse.
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Organic growth was possible through high profits and high share prices, so Enron diversified into not only providing energy, but offering the up and coming broadband service. This was a decision that would cost them in the future. Enron were confident that it would be a success and so took a risk into a market that had not yet fully taken off. It was here eventually where Enron lost most of its money. They overestimated prices, and ended up losing $102m, with only $16m coming in. They bought up too many fibre optic cables (required to deliver the broadband internet service) of which only 2% were used.

The broadband service was also responsible for Enron using the wrong accounting techniques that actually made them look as though they were making money. They used a style known as “mark to market”, where money from contracts worth a certain amount of money over a long period (eg 5 years) were shown in the account straight away.
Predictions were way out, as this accounting technique only works efficiently in a liquid market- where there are many buyers and sellers. By using it for assets that cant necessarily be seen- allocation of internet capacity, it didn’t work.

It is clear that this was a huge mistake. Using the wrong style of accounting meant that investors thought that Enron were making money, where in fact they were making huge losses. A former vice-president to
Enron, Sherron Watkins, sent a letter to Kenneth Lay, the chief