The Downfall of Enron

1573 WordsJan 12, 20186 Pages
Enron: The fallout from the accounting scandal Determine the primary factors that contributed to the downfall of Enron's financial practices "Corporate managers are expected to maximize investor returns while complying with regulatory standards, avoiding principal-agent conflicts of interest, and enhancing the reputational capital of their firms" (Patrick & Shearer 2002). Before its demise, the energy company Enron was envied for its burgeoning balance sheets. However, gradually it emerged that its profits were based in sand. Through the use of creative accounting, Enron mislead shareholders, employees, regulators, and the media about its financial solvency. "A combination of aggressive accounting, off-balance-sheet deals and brow-beating of employees and advisers, allowed Enron management to create a virtual company with virtual profits" (Hill, Chaffin, & Fidler 2002). For example, "Enron bolstered profits by booking income immediately on contracts that would take up to 10 years to complete," quite literally 'counting its chickens before they hatched' (Hill, Chaffin, & Fidler 2002). In fact, many of these contracts were highly speculative, given that they were dependent upon the assumption that the energy market in the state would be deregulated something for which Enron had no assurance. "In those cases, Enron forecast when the states would deregulate those markets and then projected what prices would be under the currently nonexistent deregulated market" (Norris &

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