Enron:
The purpose is to examine how information asymmetry and opportunistic behavior of legal firms, executives and auditors and the incompetence of the owners ie. The principal to control it let to the catastrophic collapse of Enron. The implosion caused due to US in Enron had created massive havoc costing the economy a whopping $ 64 billion in 2002 with GDP declining by 0.67 % in the next two years and a major decline in investor confidence directing a 17% decline in share prices. The main motivation behind the fall of Enron have notable been stated as the individualistic greed that is sprouted in an environment of a bullish market. The greed can be quantified as digression in principal and agent interests, signaling the agency problem. …show more content…
This is no more evident than the erosion of Enron’s financial information, which became more readily available to the agents and less available to the principals. There was a continuous misrepresentation of financial reports and inefficient monitoring strategies that were progressively becoming harmful to the principal. Opportunistic strategies were also evident in the use of the SPEs. These were used to obviate the negative performance indicators due to the non-performance of assets and the inability to attain finance associated with the …show more content…
The new competitors exploited the competitive advantage that had provided the extraordinary returns for Enron. The company resorted to borrowings in a ordeal to maintain the market dominance, resulting it to be seen as more of a speculative hedge fund rather than a energy trading firm. In the light of the bullish market, riding along the short term greed, the management devastatingly continued to increase its stakes and arrogance. At this point the risk management policies of the company were of mere significance as the culture of Enron as briefly stated by an employee was “good deal vs. bad deal. The strategic goals of the company did not matter. All that mattered was whether it was a positive NPV.As the world progressed towards recession, the fate of Enron would have been clear to the executives privy to its secrets. The company’s high level of debt was rising to unsustainable levels as the energy market dampened, and the stock option rights to its SPEs were becoming burdensome with the stock prices starting to fall in a ‘Bear’ market.
Conclusion:
Though the Enron catastrophes debris has gradually vanished, it has graduated as a global lesson. The main causes as often highlighted by others is not in the opportunism, arrogance and greed, but the lack of cooperative governance and auditors independence, leading to a dramtic and quick collapse of a mammoth empire.Where were the alarm bells
The purpose is to examine how information asymmetry and opportunistic behavior of legal firms, executives and auditors and the incompetence of the owners ie. The principal to control it let to the catastrophic collapse of Enron. The implosion caused due to US in Enron had created massive havoc costing the economy a whopping $ 64 billion in 2002 with GDP declining by 0.67 % in the next two years and a major decline in investor confidence directing a 17% decline in share prices. The main motivation behind the fall of Enron have notable been stated as the individualistic greed that is sprouted in an environment of a bullish market. The greed can be quantified as digression in principal and agent interests, signaling the agency problem. …show more content…
This is no more evident than the erosion of Enron’s financial information, which became more readily available to the agents and less available to the principals. There was a continuous misrepresentation of financial reports and inefficient monitoring strategies that were progressively becoming harmful to the principal. Opportunistic strategies were also evident in the use of the SPEs. These were used to obviate the negative performance indicators due to the non-performance of assets and the inability to attain finance associated with the …show more content…
The new competitors exploited the competitive advantage that had provided the extraordinary returns for Enron. The company resorted to borrowings in a ordeal to maintain the market dominance, resulting it to be seen as more of a speculative hedge fund rather than a energy trading firm. In the light of the bullish market, riding along the short term greed, the management devastatingly continued to increase its stakes and arrogance. At this point the risk management policies of the company were of mere significance as the culture of Enron as briefly stated by an employee was “good deal vs. bad deal. The strategic goals of the company did not matter. All that mattered was whether it was a positive NPV.As the world progressed towards recession, the fate of Enron would have been clear to the executives privy to its secrets. The company’s high level of debt was rising to unsustainable levels as the energy market dampened, and the stock option rights to its SPEs were becoming burdensome with the stock prices starting to fall in a ‘Bear’ market.
Conclusion:
Though the Enron catastrophes debris has gradually vanished, it has graduated as a global lesson. The main causes as often highlighted by others is not in the opportunism, arrogance and greed, but the lack of cooperative governance and auditors independence, leading to a dramtic and quick collapse of a mammoth empire.Where were the alarm bells