Enron's Business Risks Is When They Entered Into A Number Of Aggressive Transactions

Jumping right into the summary then. Enron was one of the most successful corporations in America during its prime. Marketing electricity and other commodities, as well as, providing financial and risk management services to other companies were the main types of business that Enron conducted. However, Enron’s successful appearance was found out to be a façade, when it came out that the corporation was making a plethora of unethical business moves. Once the corporation’s actions became public, Enron’s fall from grace quickly followed. (Johnson, 2003)

The focus of the corporation soon changed direction once it was realized that investing in selling intangible assets on the market could provide easier and higher revenue returns. This type of trading on the open stock market, with little regulations is what allowed the infamous criminal acts to take place and led to one of the world’s worst bankruptcy cases in United States history. An investigation finally occurred when investors found suspicious stock prices increasing exponentially and a whistleblower raised concern that finally revealed the fraudulent operations of Enron’s top executives conspiring with multiple businesses.

Above I stated that risks were everywhere in the case of Enron. The custom is that in order to stay in business one must take a risk. I agree that this is essential when done with good intentions and business practices. This is something that lacked in Enron before the bigger crisis emerged. The first red flag for me would have been the “Valhalla Scandal”. This showed the true character and intentions of Kenny Lay. Which were to get as much money as he could no matter the legality of the practices and who suffers. This shows that some of the risks taken by Lay were not the best, for his company or employees. Since the employee was doing the illegal work, and producing funding. The employee is also who ended up in jail.

Notably, the most widely recognized scandal of all time because it led to a systemic lack of trust in corporations and the financial markets in general. Enron’s fraud was twofold; it included complex financial maneuvering through the use of special purpose entities that were used to hide risky investments and financial losses, while the faulty valuation of assets and profits hid the true financial status of the company. Greed led executives to devise schemes

The business risks that Enron faced included foreign currency risks and price instability, which is common for the energy industry. In addition, Enron faced pressure to perform well so that the stock price would rise.

Enron executives and accountants cooked the books and lied about the financial state of the company. They manipulated the earnings and booked revenue that never came in. This was encouraged by Ken Lay as long as the company was making money. Once word got out that they were disclosing this information, their stock plummeted from $90 to $0.26 causing the corporation to file for bankruptcy.

Enron had many SPE’s that it used to help defraud the company. Emerging Issues Task Force (EITF) created in the 1990’s help Enron maintain and conceal the SPE’s. EITF only required 3 percent of capital/assets to be contributed by independent external sources in order for a SPE to exist. Albrecht, a PhD in the AICPA (American Institution of Certified Public Accountants), states in his report:

Enron Corporation used the symbol of ENE referring to an American energy, commodities, and services. The head office been established in Houston. Enron revenues of nearly $111 billion during 2000.Fortune named Enron "America's Innovative org" for six consecutive years up to Dec 2.2011 and they hired not less than 20,000 employees as it was one of the world's leader of electricity, natural gas, communications and paper companies.

All of the prior represents the business side of the downfall of Enron. That being said, businesses fail all of the time. The reason why Enron Corporation and its executives will always live in infamy is not because the company failed, but how and why the company failed. How, exactly, does a company worth about $70 million collapse in less than a month? It became clear that the company not only had financial problems, but ethical problems that started from the top of the company and trickled down. A key player in these problems was Jeffrey Skilling. He was a man brought to the company by Ken Lay himself. Skilling brought his own accounting concept to the company. It was called mark-to-market accounting. This concept allowed Enron to record potential profits the day a deal was signed. This meant that the company could report whatever they “thought” profits from the deal were going to be and count the number towards actual profits, even if no money actually came in. Mark-to-market accounting granted Enron the power to report major profits to the public, even if they were little or even negative. It became a major way

By 1993, Enron had a number of limited liability special purpose entities that allowed Enron to hide its liabilities while growing its stock price.

As competition increased and the economy started to plunge in the early 2000s, Enron struggled to maintain their profit margins. Executives determined that in order to keep their debt ratio low, they would need to transfer debt from their balance sheet. “Reducing hard assets while earning increasing paper profits served to increase Enron’s return on assets (ROA) and reduce its debt-to-total-assets ratio, making the company more attractive to credit rating agencies and investors” (Thomas, 2002). Executives developed Structured Financing and Special Purpose Entities (SPE), which they used to transfer the majority of Enron’s debt to the SPEs. Enron also failed to appropriately disclose information regarding the related party transactions in the notes to the financial statements.Andersen performed audit work for Enron and rendered an unqualified opinion of their financial statements while this activity occurred. The seriousness and amount of misstatement has led some to believe that Andersen must have known what was going on inside Enron, but decided to overlook it. Assets and equities were overstated by over $1.2 billion, which can clearly be considered a material amount (Cunningham & Harris, 2006). These are a few of several practices that spiraled out of control in an effort to meet forecasted quarterly earnings. As competition grew against the energy giant and their

When Enron's stock price subsequently fell, the SPE's value also fell, triggering the Enron guarantees, which guarantee payments in turn apparently further reduced Enron stock value, triggering additional guarantees.

The story of Enron begins in 1985, with the merger of two pipeline companies, orchestrated by a man named Kenneth L. Lay (1). In its 15 years of existence, Enron expanded its operations to provide products and services in the areas of electricity, natural gas as well as communications (9). Through its diversification, Enron would become known as a corporate America darling (9) and Fortune Magazine’s most innovative company for 5 years in a row (10). They reported extraordinary profits in a short amount of time. For example, in 1998 Enron shares were valued at a little over $20, while in mid-2000, those same shares were valued at just over $90 (10), the all-time high during the company’s existence (9).

Enron's entire scandal was based on a foundation of lies characterized by the most brazen and most unethical accounting and business practices that will forever have a place in the hall of scandals that have shamed American history. To the outside, Enron looked like a well run, innovative company. This was largely a result of self-created businesses or ventures that were made "off the balance sheet." These side businesses would sell stock, reporting profits, but not reporting losses. "Treating these businesses "off the balance sheet" meant that Enron pretended that these businesses were autonomous, separate firms. But, if the new business made money, Enron would report it as income. If the new business lost money or borrowed money, the losses and debt were not reported by Enron" (mgmtguru.com). As the Management Guru website explains, these tactics were alls designed to make Enron look like a more profitable company and to give it a higher stock price.

I find that Enron is a company that could have been very capable of success. They had a skillful talent pool that is very capable of achieving success if done in the ethical way. I find that these executives should have counted things like investments in merchant assets like power plants and natural gas pipelines as being long term. It seems that Enron was using their skills to inflate their profits and the stock prices. In 2000 and in 1999, Enron made sold approximately $632 million and $192 million but counted no gains or losses on these sales (Rankine, G., 2004). I find this to be another example of being deceitful in reporting their revenue in order to keep their business ratings, profits, and stock prices up.