Enron Corporation based in Houston, Texas, United States was an energy-orientated corporation, which was formed by the merging of Houston Natural Gas and Internorth. Enron was declared bankrupt in 2001 because of numerous factors, and it was known to be one of the largest corporate bankruptcies in the U.S.A. The cause of malfunction and fall of Enron can ultimately be defined but the lack of ethnical management, lack of ethnical guidelines and ruthless business and financial practices. Enron’s recipe for success was doomed to fail because of the cooks in charge of the kitchen
In 1985 Houston Natural Gas and Internorth was merged by Kenneth Lay to form Enron.. The corporation initiated and sold electricity at market prices. Soon after this…show more content… Enron hired experts in all business fields and the recipe of their management was one of success. To prove the above statement: In 2000 the Chief executive named Enron as one of the five corporations to have the best board. Enron’s dysfunctional corporate culture had a main target: To maximize bonuses and therefore their employees were obsessed with short-term earnings. The greed of the employees led to the company’s downfall because the maximization of short-term earnings became more important to them than the long-term sustainable growth of the company. The management mispresented earnings and modified audit practices to indicate favorable performance. An example of misinterpretation of profits is the following: (Hays, Kirsten USA Today) Enron and Blockbuster video signed a contract in 2000. Enron recognized profits of &110 million, even though analysts questioned the technical viability and market demand. The network then failed to work and Blockbuster terminated the contract. Enron continued to write up future profits, even though they actually made a loss when blockbuster withdrew.
The favorable performance misperception shot their stock prices through the roof. According to C. William Thomas, in The Rise and Fall of Enron Part2, Enron was worth $70 billion at its peak point and they sold a single share for $90. October of that year the company’s management…show more content… The fall of Enron could have been redirected, but if they didn’t use unethical practices their vast growth would have never prevailed and their bankruptcy wouldn’t have been one for the books. Arthur Andersen was the auditors firm in charge of Enron’s finances. They generated a ridiculous amount of fees for consultation on Enron’s finances and therefore they were accused of having conflicts of interest in the corporation. Andersen also shredded relevant documents and deleted any form of evidence when news arrived that the (SEC) was investigating Enron. This also caused accusations of cover-up. All the negative publicity of Enron as well as its ill eagle practices led to a complete downfall in their stocks and worth. They were stuck in a kitchen filled with debt and not even their extravagant recipe for success could have saved them. (Paul, M; Krishna, G “The Fall of Enron” Journal of economic perspectives) The auditors understated its liabilities and its earnings were overstated. Enron told its Shareholders it had hedged downside risk in its own illiquid investments through using special purpose entities. What investors didn’t know was the fact that the special purpose entities actually used the company’s own stock and financial guarantees to finance the hedges. Thus Enron was not protected form downside risk. The fact that Enron used unethical practices actually caused them