The Fall of Enron
This research paper talks about the Enron case – how it rose to the level of one of the top companies in the world and then fell from grace so that it eventually had to file for bankruptcy. The paper will discuss the financial and accounting manipulations that Enron resorted to and the analysts approach towards its stock prices and will discuss its eventual fate. The study will revolve around how Enron shed its ethics in an attempt to report ever increasing income and keep its stock prices high and how despite its short-lived surge of growth, it is still, even 11 years after a bankrupt, struggling to stand on its feet. The role of Enron’s top management and ...view middle of the document...
Enron Corporation was originally set up in 1932 as Northern Natural Gas Company in Nebraska and it was only in the mid-1990s that the name was changed to Enron. The company was led by Kenneth Lay and during the late 1990s and 2000, it was considered to be America’s most innovative company. It was started as a natural gas producer and marketer and slowly diversified into several energy and energy related projects across more than 30 countries. It also started acting as a trader and service provider for energy related matters and expanded its business portfolio across multiple lines.
Enron’s business was divided into 3 main units – wholesale services that dealt with marketing of many commodities; energy service or retail of energy related services to commercial and industrial companies; and a global services unit that comprised of its pipelines business as well as wind and hydro energy projects across the globe and Enron Online, a global commodity e-commerce website.
Enron was also one of the loudest voices fighting the case for deregulation of energy during the California crisis. While market data was confidential, a 40% YOY increase in Enron’s reported earnings during the second quarter of 2001 sparked speculation that Enron was one of the companies to profit from deregulation of energy and had manipulated energy prices to profit out of California’s poor deregulation plan.
Enron’s fall from the most innovative and fastest growing company to a bankrupt business with an “opaque business model” was primarily due to its unethical business practices and botched financial accounting, where debts were kept off the balance sheet and profits were added even before they were made just in order to keep the stock price up. Stock prices went off the charts and reached unrealistic levels, but analysts kept pushing and promoting the stock without any in-depth knowledge about the company’s work. In fact, merely two months before Enron declared bankruptcy, analysts recommended its stock as a “strong buy”.
The primary aim of this research paper will be to delve into the details of the Enron case and bring to light the main reasons behind Enron’s fall. Secondarily, it will talk about the side effects of Enron’s bankruptcy and its effects on its stakeholders. Further, it will cover the changes that were made in the laws after the Enron case so as to ensure that the accounting systems become more transparent for the future and such crises can be prevented.
The Fall of Enron
Enron was named “America’s most innovative company” by Fortune magazine for eight consecutive years from 1992 to 2000 and during this period, it was a favorite among stock analysts. From the early 1990s to 1998, the value of Enron’s stock increased by 311%. In 1999, it rose another 56% and during 2000, it gained an astonishing 87%. During these 2 years, the stock index in comparison to Enron’s stock growth of over 190% had only risen by an average 8%. This surge in share...