Why Enron Collapsed?

Enron had the largest bankruptcy in America’s history and it happened in less than a year because of scandals and manipulation Enron displayed with California’s energy supply. A few years ago, Enron was the world’s 7th largest corporation, valued at 70 billion dollars. At that time, Enron’s business model was full of energy and power. Ken Lay and Jeff Skilling had raised Enron to stand on a culture of greed, lies, and fraud, coupled with an unregulated accounting system, which caused Enron to go down. Lies were being told by top management to the government, its employees and investors. There was a rise in Enron 's share price because of pyramid scheme; their strategy consisted of claiming so much money to easily get away with their tricky ways. They deceived their investors so they could keep investing their money in the company.

The reason Enron failed so miserably was due to the failure to meet the important ethical challenges and dilemmas in its corporate environment, the majority of the liability falls upon Kenneth Lay, the company founder, chief financial officer Andrew Fastow and Kenneth Lay’s successor Jeffrey Skilling.

The Enron Corporation was an energy trading and utilities company that eventually failed due to the discovery that Enron was hiding large debts and losses in financial documents.

In 2001, Enron, the largest energy company in the U.S., collapsed after a vast creative-accounting scandal. Enron practiced a type of accounting called mark-to-market practice which it used to hide losses. Mark-to-market accounting it not illegal on its own but it was used improperly by Enron. The CFO and CEO of Enron were able to write off any losses to an off-the-book balance sheet and made the company appear financially healthy (Seabury, 2008). Investors lost $74 billion while thousands of employees lost their jobs and

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.

WorldCom, for example, was facing a downward trend in their industry. The telecommunications company was going south, especially thanks to text messaging and the internet. In addition, the government denied them the ability to merge with Sprint (a $129 billion dollar merger), which quickly halted their growth. WorldCom had built a growth strategy built upon mergers and acquisitions, instead of growing product lines and larger marketing campaigns. So when the federal government denied their ability to grow large enough to discourage competition, they had to look elsewhere to increase shareholder profitability. Another venue of motivation was of course based upon the Fraud Triangle. This diagram or model consists of three things for one to commit fraud: pressure, opportunity, and rationalization. WorldCom had all three things – leading them straight towards disaster. The CFO was facing immense pressure from stakeholders and the executive board to increase profits (and growth), he had the opportunity as he controlled the books, and he either had justification or, more probably, a lack of ethics. Applying this triangle to Enron, all three factors were present. Enron was facing immense pressure to continue their standing as one of the top 10 fortune 500 companies, as well as continuing to be named one of the world’s most

The company Enron was formed in 1985 after two natural gas companies, Houston Natural Gas and InterNorth merged together. Kenneth Lay, former chief executive officer of Houston Natural Gas was named CEO of Enron and a year later, Lay was assigned to the chairman of Enron. A few years later, Enron launched a website to allow customers to buy stock for Enron, making it the largest business site in the world. The growth of Enron was rapid; it was even named seventh largest company on the Fortune 500 list; however things began to fall apart in 2001. (News, 2006). In the third quarter of that same year, Enron posted an enormous loss of over $600 million in four years. This is one of the reasons why one of the top executive resigned even though he had only after six months on the job. Their stock prices fell dramatically. Eventually, Enron filed for bankruptcy protection. This caused many investors to lose money they had invested in the company and employees to lose their jobs and their investments, including their retirement funds. The filing of bankruptcy and the resignation of one of the top executives, also led to an investigation by the U.S. Securities and Exchange Committee, which proved to be one of the biggest scandals in U.S. history. (News, 2006). All former senior executives stood trial for their illegal practices.

Enron started as a sound company that had a promising future in the oil and energy business. The companies CEO and CFO were charged on 35 different accounts of fraud, conspiracy, and insider trading that cleared most of its employee’s retirement pensions and billions of dollars for others (Unknown, 2016). It is impossible to account for every transaction that a company will produce, but the revamping of government

Enron’s collapse had many causes. One of the causes was all the debt that Enron was having due to all the failed direct foreign investments (DFI) they made. At Enron, people tried to trade everything they could. They tried to trade weather derivatives, broadband internet access, water, news, etc.

Enron began by merger of two Houston pipeline companies in 1985, although as a new company Enron faced a lot of financial difficulties in the starting years, though the company was able to survive these financial problems (Enron Ethics, 2010). In 1988 the deregulation of the electrical power markets came into action and flipped the company from up to down, after deregulation company business updated from delivering energy to becoming an energy broker and soon after this Enron once a company struggling

The Enron corporation was formed in 1985 by the merging of two natural gas companies, Houston Natural Gas, and InterNorth; In the following year Kenneth Lay was appointed Chairman and CEO.2 Enron began its escapade of fraud and corruption in April of 1987 when it was discovered by Enron executives that Louis Borget and Thomas Mastroeni, traders in their Valhalla, New York office, known as Enron Oil, had been misappropriating funds; traders were “gambling beyond their limits, destroying trading reports, keeping two sets of books and manipulating accounting” (PBS, 2015) to make it appear as if the company’s profits were legitimate. The shocking yet not surprising response from CEO Kenneth Lay was not to fire the two

They decentralize their operation into few sub division and fake corporations, so Enron can hide tremendous derivative losses that would affect its growth, if the losses is disclosed. Public traded corporations have to show their financial statements clear to the public, but Enron's finances were a edited transactions between itself and its sub division that use to cover up its true financial state. In another words, all the lost and debt were cover up by subsidiary companies, but the assets are still stated (Nicholson, 2015).

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.

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.