The Fall of Enron Essay

1134 Words Feb 8th, 2016 5 Pages
Case: The Fall of Enron

1. Why was Enron such an admired company prior to 2000? What innovation do they bring to the table? Be specific and support your statement with concrete information.

Enron was an admired company prior to 2000 because at that time it surfaced as a frontrunner in the deregulated energy market, making it possible to sell energy at higher prices, thus significantly increasing its revenue. The company, through efficient management team, has built leading businesses in energy trading and international energy asset construction. The company has managed to maintain high return from its investments through ideal placement of resources by creating long term and fixed price contracts with clients that guaranteed stable
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2. Why did the company fail? Comment on each of the following areas:
A. Accounting issues?
B. Firm governance?
C. Incentive system?
D. Conflict of interest between different parties?
E. And…?

Enron used various methods in order to trick people into think it was more profitable than it really was, including creating off-the-book organizations where Enron transferred its debt. While the company’s stock rose, so did its debt, and company leadership began using insider information and trading millions of dollars in company stock.
Due to the large discrepancies of attempting to match profits and cash, investors were typically given false or misleading reports. While using the method of market to market accounting, income from projects could be recorded even if the money was never received and in turn this information would increase financial earnings on the books. However, after a while, the profits could not be included, so new and additional income had to be included from more projects to develop additional growth to appease investors.
Enron used special purpose entities—limited partnerships or companies created to fulfill a temporary or specific purpose to fund or manage financial risks. It chose to disclose minimal details on its use of these special purpose entities. These companies were created by a supporter, but funded by independent equity investors and debt financing.
Enron's balance sheet was

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