Why Did Enron Fail?

Authors Avatar

        

        

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. As these things add up, it is no surprise Enron is now in the position it is.

In 2000 the company recorded record turnovers of $100m (See Figure 2, Appendix), a $60m increase from the previous year. Shares were selling at a high price, meaning that future expansion would have been possible due to high investment in the company. A collapse at this point seemed absolutely out of the question, it just seemed impossible, with future investment and high turnovers.

Join now!

In October 2001, the third quarter results were published, showing a mysterious loss. This of course set the share price falling, as investors lost confidence about Enron’s long term capabilities. This was the beginning of what was going to be a difficult few months for Enron, as different scandals and information was released.

The reasons for this loss have not been explained fully but there are many different possibilities, some through bad business decisions, some through bad accounting, and some from unnecessary purchases. All of these combined meant that Enron was facing debts of around $690m.

Enron consists of four ...

This is a preview of the whole essay