The particular causes of Enron's failure

1416 WordsApr 29, 20046 Pages
The particular causes of Enron 's failure are complex. There are lots of issues that have to do with the Enron collapse. Enron is a company that was called as Houston Natural Gas and then Enteron. It becomes politically connected player in the new deregulated market of energy. At one time Enron appears to have been a successful and innovative enterprise, principally engaged in trading and dealing in energy-related contracts. At some point it expanded by making substantial investments in a variety of large-scale projects. Although some of these were initially successful, others resulted in Enron incurring large economic losses. Then it appears to have embarked on covering up losses and manufacturing earnings. This succeeded for a time, but…show more content…
It created so-called special purpose entities (SPEs) like the Chewco and JEDI partnerships to get assets like power plants off its books. Enron was able to do this because, under standard accounting, a company is allowed to spin off its assets -- and related debts -- to an SPE if an outside investor has put up capital worth at least three per cent of the SPE 's total value. These methods also stretched across the lumping of assets into its trading business and the booking as operating revenues the proceeds of the sale of fixed assets. Originally, it appears that initially Enron was using Special Purpose Entities appropriately by placing nonenergy-related business into separate legal entities. What they did wrong was that they apparently tried to manufacture earnings by manipulating the capital structure of the Special Purpose Entities; hide their losses, did not have independent outside partners that prevented full disclosure and did not disclose the risks in their financial statements. Or to put it another way, they got greedy. Any system can be abused and misused. If management uses nonpublic SPEs as a way to hide debt and manipulate earnings, it will lead to Enron-type disasters. Between 1996 and 2000, the energy trading outfit reported an increase in its sales from $13.3 billion to 100.8 billion. In one single accounting year, 1999-2000, Enron

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