The Fall of Enron

1. Prior to 2001, Enron was an admired company due to its new economy, due to its investment in different sectors. The company overtook old industries due to its innovativeness and unique mode of operations. It bought and sold electricity and gas, some of the commodities which were on high demand (Fox, 2003). The utility business allowed the company to win over new markets, thus being able to earn huge revenues. Enron used the internet as a means of beating its competitors, since the internet was the new product in high demand. During this time, Enron’s was estimated to be worth $70 billion, with its singles shares trading at $90. This was what really attracted most customers, since they knew the company was out to make profits, and its consistency was good thus making most people to invest in Enron.
2. Enron’s failure was attributed to many factors, some of which included negligence, and issues of accountability. The company’s financial statements were puzzling to both the analysts and shareholders (Fox, 2003). The business model and dishonourable practices required that Enron use accounting boundaries in order to falsify earnings, hence adjusting the balance sheet in order to point out complimentary performance. Due to this issues, the company was faced with bankruptcy since it could not account for the lost money, and the revenues it had earlier on collected. In other words, the company had been providing false information regarding its revenues, hence attracting more customers, due to making them into believing the company was headed in the right direction when it was actually not.

The company had also made partnerships with other companies, whereby it the new companies were used as a means of hiding the debts which it had. The company had encountered huge debts and very heavy losses on the trading business, but this was hidden from the public through its partner companies (Fox, 2003). The company which also audited Enron’s statements refused to recognize the problems faced by the company. The auditor was also guilty of undertaking one of the major frauds ever committed in history.     

Due to ignorance and negligence, the company had ignored warnings surrounding the process of accounting. The executives were only concerned with pocketing a lot of money, and not with the issues surrounding the company (Fox, 2003).  This led to the collapse of the company since the company could not make any profits whatsoever. A lot of investors and employees were rendered out of service, and other companies also lost a lot of money which they had invested in Enron.        

3. The company’s internal checks and balances and incentive systems could not prevent it from the collapse because they were not done in an ethical way (Fox, 2003). The company was only concerned with the positive side of its performance, making it to use false means in order to cover up for its failures. The balance sheets were adjusted, thus allowing the company to cook up results hence making it look as if it was performing well. In addition, Enron used the companies it had partnered with, these companies’ being the companies it hard made, to seek debts. This made the company to look good before the public but in real sense things were not as they seemed. The company’s checks and balances were consequently falsified, a move which led to the collapse of the company.

Reference

Fox, L. (2003). Enron: The rise and fall. Hoboken, N.J: Wiley.