Why Did Enron Collapse Essay

Friday, August 13, 2021 9:51:26 AM

Why Did Enron Collapse Essay



Enron management claimed that each of these business units Describe the world you come from essays the company's vision of "offering a What is a fish that starts with the letter X? range of physical, transportation, financial and Why did enron collapse essay solutions to thousands Describe the world you come from essays customers around the world. Some of the You wont be disappointed. Enron Case ACC 1. Skip David mamet brain dead liberal essay content.

The Rise and Fall of Enron - The Biggest Scandal in the History of American Finance

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How did the investment banking community contribute to the ethical collapse of Enron? Need help with an assignment? Calculate your paper price. In the first part, main reasons having led to its sudden and scandalous downfall will be explained; in particular accounting and business practices as well as corporate governance will be outlined. Subsequently, in the second part, important parties having been involved will be shown; notably the role of the auditing company Arthur Andersen and their conduct will be analyzed. In a final step, aftermaths for Enron, Arthur Andersen and further involved actors will be outlined.

A special focus will be on consequences for the accounting world and how regulations have been changed in order to prevent future accounting violations. Until it was the largest bankruptcy in the United States. Causes for its sudden downfall will be outlined in the following section by explaining questionable practices conducted by Enron as well as failed corporate governance. Even though a whole network of SPEs was established - and evidently also controlled, by Enron, they did not have to appear on its balance sheet due to the simple fact that there was no accounting standard requiring consolidation in A company was said to be an independent entity if at least three percent of the capital was provided by external investors.

When a new entity was to be established one of the Friends provided the necessary three percent outside capital. By using special pulpose entities, such as Chewco, Whitewing or LJM2, naming the most prominent ones, Enron took advantage of accounting rules Beasley et al. Two examples of how Enron availed itself of the SPEs will be explained in the following. Firstly, Enron used the method of securitization to a great extent. Securitization is a way to receive future cash flows immediately. If, for example, Enron owns an asset which is supposed to generate cash flows each month or each year, they would sell these future cash flows at a discount to special pulpose entities or other investors.

In return, Enron receives money it would have gotten in the future today Conerly, The advantage of securitization is that the company will get a lot of cash on a short-term basis; the disadvantage is that debt has not disappeared and is still to be repaid. Securitization itself is not illegal but Enron estimated its assets at sanguine values and used this method to the point of having nearly every asset securitized.

Secondly, Enron established a Global Finance department with the single task to create cash flows. Global Finance came up with the idea of prepays. Prepays worked in a way that Enron signed a contract with one of their SPEs setting forth a certain amount of gas or electricity Enron is supposed to deliver to that entity in the future. This entity would pay Enron up front with money it received from its lender.

The lender himself had a contract with Enron as well: he should also deliver gas to Enron, and Enron would pay for it. For these transactions, Enron never recognized any loan but instead a trading liability. On the other hand, Enron also adopted an uncommon accounting method called mark-to-market accounting. The mark-to-market method is a legal way allowing to recognize future returns from an asset at current market prices. If there is no active market stating a price companies are allowed to develop their own models helping to estimate the fair value. Companies are allowed to recognize the whole future profit at time of signing the contract and need to adjust this value regularly for profits or losses. For example, Enron did recognize revenue from a long-term project with Blockbuster under mark- to-market accounting.

To keep the mark-to-market accounting method going, new projects had to be concluded to keep the same or even higher amounts of revenues - a vicious circle. Once started it is difficult to drop out. Further, it has to fulfill three specific functions: have expertized members, ensure the company does not breach any law and that information given to external are accurate as well as to evolve a business plan. The involvement of the board and its wrong-doing will be explained in the following. It consisted of several well expertized and experienced individuals from business, legal and political areas.

However, financial structures of Enron were greatly complex and difficult to understand for external. Even if they had tried to understand the structures they would have probably gotten confused. Firstly, the board was heavily deceived by management, in particular by Skilling and Lay. They did not have full access to information and those information they received were falsified or incomplete. For example, one of the director was also chairman at a cancer center and Enron started to pay for this particular center since then Gopinath, Thirdly, corporate governance mies in existed but their outcome did not correspond to the intention of their creators.

This conduct might have encouraged them to help cover up discrepancies in financial statements since an increasing stock value was also profitable for them bavelle, ; Byrne, On the other hand, Enron had a tough and aggressive corporate culture. Their overall performance and commitment for Enron was scaled into a ranking from 1 to 5. With 1 being the lowest category the respective employee risked being fired if performance does not improve in the close future. Moreover, good performance was compensated with stock and employees were also heavily encouraged to invest cash-based compensation in stock. In addition, corporate culture was based on mistrust. Management purposely kept division separate and independent from each other in order to increase competition and achieve better results.

Further, nobody was able to get a big picture of Enron and understand its complex structures Comford, Apparently, the responsibility and the execution of these accounting and business practices can be traced back to several people. Involved parties and their functions will be listed in the following.

Copy to Clipboard Copied! Moreover, good performance How do you choose the right Americana Acrylics paint color? compensated with stock and employees were also heavily encouraged to invest cash-based compensation in stock. Enron and the Sarbanes Oxley Act. You may eventually Essay on my last day at school even yourself on the Describe the world you come from essays fundamental Why did enron collapse essay of Describe the world you come from essays situation. In: Business and Management. Although there were a few problems, the writer was quick to admit and correct them.