Analysis Of The Factors That Led To Enron’S Collapse

Born in 1985, Enron’s life began as an interstate pipeline company in Houston, Texas. The company was headed by then-CEO of Houston Natural Gas, Kenneth Lay. From the pipeline sector, Enron began growing into new ones. In 1999, the company ventured into the. com and launched Enron Online, the company's website, which soon became the largest business website in the world. About 90 percent of the company’s revenue eventually stemmed from commodity trades over Enron Online. Growth for Enron was somewhat of a given - it did not take long for the company to become member of the heavyweights’ club in America’s market. In 2000, the company's annual revenue reached $100 billion USD. Enron ranked as the seventh-largest company on the Fortune 500 list and became the sixth-largest energy company in the world. Soon enough, the company's stock price skyrocketed to a whopping $90 USD. However, Enron’s time in the spotlight was short-lived. Soon than later, America’s sweetheart was out of the frying pan and into the fire. The last moments of Enron’s lifetime were met with lawsuits, jail time and bankruptcy. So, what really led to Enron’s demise?

Enron’s website, which accounted for the majority of the company’s capital, began collapsing - the company started losing money, only to find itself $30 billion USD in debt. Stock prices were vital to Enron’s managers, and in order to keep them high, they set up subsidiary companies and redirected the debt towards them. Management at Enron opted for not disclosing any information about monetary problems and instead used credit lines to obtain millions in cash, ultimately repaying them using company stock, soon to be worth a trifling sum. Adding fuel to the fire, top executives secretly began selling their stock all the while encouraging other big parties to purchase them.

A Profit-Focused Corporate Culture

Enron had a cutthroat and unforgiving corporate culture, rewarding those who took risks and bent the rules. While this strategy, if done correctly, can increase motivation, creativity and give the company a competitive advantage, Enron’s management failed at drawing the line between valor and fraudulence, which led to overly-eager employees and incentivized immoral decisions in order to reach the top. Enron’s executives - Chairman Lay, CEO Jeffrey Skilling and CFO Andrew Fastow - applauded recklessness instead of focusing on creating real corporate value with their management style. The internal integrity of the company remained challenged while the facade was the exact opposite. Enron’s only goal was maintaining the appearance of wealth and power, and managers were going to get their way one way or another - even if reality begged to differ. Moreover, and in order to bypass the law and carry out the deceit, the company relied and leveraged on political connections in both the Clinton and Bush administrations, as well as on Wall Street, for nepotism and the illusion of legitimacy that allowed it to pursue counterfeit. The latter exemplifies the dark side of American capitalism and has had its ramifications on other crucials elements in the events leading to Enron’s downfall.

Underhand Accounting

Enron’s bluff also had roots planted in the bookkeeping department. The company wrote off its losses as gains through market-to-market accounting - meaning Enron’s value was measured based on its current market value, rather than book value. The company was hiding financial losses, a sneaky - but smart - maneuver that avoided it a halted growth. On the one hand, investors remained interested and continued purchasing stock based on inaccurate information. On the other hand, officials couldn’t decipher how Enron made its money. The company was yielding steady profit while no legitimate money was being made and was reporting inaccurate trading revenues and was profiting from its partnerships to sell contracts back and forth to itself and booking revenue each time. In the thick of the double-dealing, management at Enron was ready to compromise company reputation, personal and professional relationships as well as face criminal charges in order to reach an undeserved and tainted victory.

Bogus Auditing

Another actor was an active ingredient in the knavish mixture: Arthur Andersen - an American holding company. It was hired to audit Enron and subsequently acted as its accomplice, shredding documents related to Enron’s books and inaccurately auditing the company’s financials. Eventually, and when numbers seized to add up, Arthur Andersen’s complicity went under intense scrutiny and the firm lost the public’s trust. Later, it voluntarily surrendered its license to operate in the United States and Enron was ultimately found guilty of conspiracy and fraud.

Enron’s Fallout from Fraud

The star of the whole debacle and the bread that wrapped it all was Enron’s own vice: fraud. In addition to its preferential treatment and money-hungry internal culture, the company was thriving off of manipulating earnings, gambling and lying. Top executives wagered all of Enron’s reserves, they bluffed the market and outmaneuvered the law. The latter proved fruitful as the company’s stock soared, with earnings increasing by 25 percent and revenues doubling to over $100 billion USD. Enron’s management reached for the loot and slipped right into their pockets. They were paid bonuses amounting to $55 million USD and cashed in $116 million USD in stock. To add insult to injury, they continued to assure investors that all was fine and dandy. As You Sow, So You Reap: The curtain call came for Enron in 2001, when cracks in their master scheme began to develop and grow. Once their accounting practices were proven to be deceitful, the company filed for bankruptcy, resulting in $2 billion USD in employee retirement funds gone and 20,000 employees jobless. Enron’s stock prices plummeted below $1 USD. The company was left with no other choice than to acknowledge its wrongdoings and, in the end, Lay, Skilling and Fastow found themselves victims of their own game. In 2004, Fastow, who pleaded guilty to multiple counts of conspiracy, agreed to a plea bargain and a 10-year jail sentence. In February of that same year, Skilling entered a plea of not guilty to 40 criminal charges, including wire fraud, conspiracy and making false statements on financial reports. Finally, Lay was charged with fraud and releasing misleading statements in July. He pleaded not guilty to 11 charges.

The Wind Up

It should come as no surprise that justice will be served to those who obstruct it. Enron’s executives believed they could bypass the law and come out on the other end of the tunnel unscathed. The unfortunate part is, that if everybody involved had put their untamable will to succeed into honest practices and channeled their commitment to succeed into hard work and honest efforts, triumph would have most likely been eminent for Enron - although perhaps harder to reach. While most companies earn their profits from standard and ethical business practices, there are some, similar to Enron, that choose to maximize profits amorally. This all relates to the business model companies choose to run their operations with. Firms that have understood the ways to be both ethical and valuable have mastered the notion of a sustainable business model - sometimes they even lose before they start gaining. Comparatively, Enron was focused on the short term gains and the company’s high executives’ choice to take the ethical route was clouded by their desire bank in the money.

31 October 2020
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