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Why Did Enron Fail?

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Introduction

Why Did Enron Fail? Introduction From America's 7th most valuable company in December 2000, to a company in ruins by early 2002, Enron has been involved in one of the most incredible reverses of fortune ever. With shares riding high on Wall Street at $84.87 on the 28th December 2000, and awards such as "America's most innovative company" from Fortune Magazine 6 years running, and "Energy Company of the Year" from the Financial Times also in 2000, it looked as though Enron were promising to be one of the biggest American companies of all time. Things started going drastically wrong. As large losses were being reported, share prices tumbled, and Enron, within the space of only a year, was on the verge of collapse. I shall be investigating the factors of this collapse, some of them due to business and economic factors, but mostly through deception and fraud. Analysis The timeline of events from when Enron were at the top to the bottom of the business world is quite outstanding. (See Figure 1, Appendix). The collapse seems to span a time of around 5 months, from August 2001 to January 2002. During this time, many scandals have come out, which suggest Enron has played a major part in its own downfall, through unsuccessful diversification to fiddling the accounts. ...read more.

Middle

They used a style known as "mark to market", where money from contracts worth a certain amount of money over a long period (eg 5 years) were shown in the account straight away. Predictions were way out, as this accounting technique only works efficiently in a liquid market- where there are many buyers and sellers. By using it for assets that cant necessarily be seen- allocation of internet capacity, it didn't work. It is clear that this was a huge mistake. Using the wrong style of accounting meant that investors thought that Enron were making money, where in fact they were making huge losses. A former vice-president to Enron, Sherron Watkins, sent a letter to Kenneth Lay, the chief executive, warning him of the fact that their accounting procedures were wrong, and that something had to be done. If he'd taken the advice, he might have been able to save the company, but unfortunately Mr Lay didn't have a business strategy in place to make a recovery. He failed to accept the fact that the financial accounts had been manipulated, and carried on as usual. With clear objectives and a strategy to make sure objectives were met, Enron at this point could have saved themselves. By November 2001 news of the Enron disaster starting hitting the company hard as people lost confidence. ...read more.

Conclusion

As the scandal came about, Enron needed to gain capital, and a takeover by Dynegy was planned to relieve some of the debt. They pulled out of the deal at the last minute leaving Enron with debts near $700m and a very poor looking future. Conclusion It is clear to see that there are many factors involved in the Enron scandal. From diversifying into an unsuccessful market which lost money, to using the wrong accounting techniques, Enron can only blame itself for its downfall. With better business planning and strategies to overcome problems, they might not be in the position they are today. With independent audits, financial irregularities might have come to light sooner. Poor communications with shareholders and potential investors meant they were unaware of the situation they were getting themselves in. Enron also spent a large amount of money on unnecessary items where perhaps better investment would have been a safer option. Overall, the factors all combine to the failure of Enron, and at time of writing it is still unclear the exact reasons for the downfall, and how much of the information released by newspapers and the company itself is reliable. Based on the information available at the time, it is clear there are many deceptions and poor business decisions that have meant Enron have a very bleak future ahead of them. ...read more.

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