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The Enron Scandal: The Downfall Of The Enron Corporation

1270 words - 5 pages

Enron began business in 1986 as a result of the merger of two natural gas companies intent on creating the first nationwide natural gas pipeline. Enron wanted to take advantage of the newly deregulated markets for energy and become a market middleman for energy. They wanted to accomplish this by bringing together buyers and sellers of energy, in addition to delivering natural gas. But instead of simply bringing buyers and sellers together, Enron entered the contract with the seller and signed a contract with the buyer, making money on the difference between the selling price and the buying price. Enron kept its books closed, making it the only party that knew both prices. Over time, Enron began to design increasingly varied and complex contracts. Customers could insure themselves against all sorts of eventualities-such as a rise or fall in interest rates, a change in the weather, or a customer's inability to pay. By the late 1990s, the Enron Corporation controlled almost 25 percent of all electricity and natural gas contracts traded worldwide and were considered the best in the business.Three important factors that led to the decline of the Enron Corporation were poor accounting practices or "creative accounting", unorthodox human resources management, and greed among management and traders. Unfortunately, the focus of the upper management changed and they became obsessed with expanding the company at any cost. This drove management to override internal and external controls in an attempt to chase profits. This type of thinking not only led to the demise of Enron, but also negatively impacted investor confidence throughout the stock market.Enron began using "creative accounting" to avoid reporting its huge losses and to give the appearance of rapid earnings growth. For example, Enron would overestimate the value of one of its operations and claim that the contracts due in the future were worth more than they were. If there were any losses, it would then hide the losses in partnerships, or what were legally called "special purpose entities (SPEs)." Companies can cut their risk by moving assets into separate partnerships or SPE's that can be sold to outside investors. In Enron's case, assets that were losing money were sold to partnerships. Enron was so bold with their accounting practices that they would list the sales of these assets as earnings. However, accounting rules require that an SPE be legally isolated from the company that created it. Enron failed to do this. Not only did the SPEs rely upon Enron managers for leadership, but were completely dependent on Enron stock for capital. Over the years, Enron had created almost 4,000 SPEs. When outside auditors discovered them, they directed Enron to treat them as part of the company. This resulted in Enron taking a $1-billion charge against their earnings.None of this would have been possible had the internal and external controls not been overridden. Enron had an internal audit team and an...

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