Why Did Enron Collapse Essay

Enron’s collapse 2 Enron: What Caused the Ethical Collapse? Enron, a Texas based energy company, has improved the way that electricity and natural gas is purchased ever since its inception in 1985 when its owner, Kenneth Lay, merged his original company called InterNorth with Houston Natural Gas Company. In addition to this, Enron’s growth was attributed to not only the U.S. congress deregulating the sale of natural gas but its selling of electricity at market prices. Even though Enron’s started with natural gas especially shipping natural gas on its pipelines, this company desired larger profits and shifted into electricity trading operations and/or was one of the first energy companies or traders to get into the electricity trading, which started some of its troubles. In light of the fact that electrical traders in Enron involved themselves in schemes to defraud officials running California's power grid, these same electrical traders at Enron drove up prices during the California power crisis through controversial techniques that contributed' to severe power shortages (Isaacs, 2012, Oppel & Gerth, 2002, Brigham & Daves, 2013, Enron-The rise and fall of the Energy Giant, 2011). In fact, Enron, which was once a favorite to investors and an American energy company had filed the hugest corporate bankruptcy because of the major events that led to the eventual collapse of this corporation, the ways the top leadership at this company undermined the foundation values of its own Code of Ethics, and the unethical decisions and actions that were promoted by its corporate culture. Firstly, there were many causes that led to the eventual collapse of Enron especially under Kenneth Lay, Jeffrey Skilling, Andrew S. Fastow, and other top-level officers. For instance, not only the fraudulent or deceitful activities that were orchestrated by Lay, Skilling, and Fastow, but also the company’s criminal and dishonest corporate culture caused the eventual collapse of Enron. In fact, the violation of laws that were not enforced or applied by the chair,

Enron went bankrupt in December 2001 after it was revealed that the company had hidden hundreds of millions of dollars in debt. Enron’s infamous collapse resulted from the disclosure that it had reported false profits, using accounting methods that just did not follow generally accepted procedures.

Enron undertook some creative accounting schemes to avoid reporting its increasing losses and also to give the appearance of rapid earnings growth. For example, they claimed that contracts due in the future were worth more than they actually were. But, most famously of all, Enron hid its losses in “special purpose entities”(SPEs). The result was that many of Enron's debts and the losses that it suffered were not reported in its financial statements.

Many companies use SPEs as a common financing system. Companies can cut their risk by moving assets into separate partnerships or a limited company of some type, which can be sold to outside investors. In Enron’s case, assets that were losing money were sold to partnerships. Enron then listed the sales of these assets as earnings. Yet, to be legitimate, accounting rules require that an SPE be isolated from the company that created it. But not in Enron’s case, because the SPEs relied upon Enron’s managers for leadership and Enron’s stock for capital. When the outside auditors told Enron to treat some of the 4,000 SPEs it had created as part of Enron, the company had to take the $1-billion charge against its earnings. (Refer to Figure 1)

Enron’s managers, whose actions brought the company to the rim of devastation, escaped with millions of dollars as they retired or sold their company stock before its price dropped. Insiders and some high level executives at Enron may have known about the company’s financial secrets and situation for most likely some time. A number of top Enron executives have been charged with fraud. In addition to Enron employees, Arthur Anderson, LLP, the accounting firm responsible for auditing Enron, was convicted of obstruction of justice. Three British bank workers have also been indicted on charges of wire fraud. Michael Kopper, a former Enron executive

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