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The Failure Of The Enron Corporation

1369 words - 5 pages

To explain the causes of collapse for Enron, you must first examine the company history till its downfall and what it actually did as a company.Enron was formed in July 1985 form the merger of two large natural gas line companies called Internorth and Houston Natural Gas in the US. The company began trading natural gas commodities in 1989 and electricity in 1994. The company made extensive use of the internet to broker sales and quickly became a powerhouse in the natural gas and electricity markets. Beginning in the mid 1990s the company tried to build upon its earlier success in the energy markets by expanding into other more speculative markets and diversifying into global commodities trading.The key to understanding Enron's collapse is to know what the company actually did.The initial product markets in which Enron moved were gas and electricity supply in which they fought hard for deregulation so they could compete further across the US. This deregulation meant that Enron's initial successes led to a flood of fresh entrants into the field i.e. more competition. This contributed to a reduction in Enron's business margins no mater however efficient Enron's trades were. Declining returns meant its trading margins collapsed and therefore sales growth did not translate into higher profits. This meant that Enron was not as profitable when actually trading specific gas and electricity products. As the asset based markets declined Enron moved to function primarily as a "middleman," buying and selling energy contracts between suppliers and companies that delivered this energy to consumers. It also decided to branch out into water supply and technology networking brokerage i.e. internet band width brokering. This meant that Enron had very few business assets and had to trade upon trust.The decline in Enron's profits led to its managers adopting special techniques some of them questionable to boost profits in their published accounts. This was done to support Enron's previous track record were gross sales per year had been up to $200bn. This meant Enron's managers came under increasing pressure to sustain their profit margins and to do this they specifically miss stated the profits from asset sales as trading gains.The reasons why Enron could do this were that it was a most unusual company even when things appeared to be going well. It was acting as a huge, unregulated trading company in effect, an investment bank that escaped all the normal prudential and conduct of business rules. It did this by confining itself to un-regulated markets and was thus not classified as a bank, insurer or fund manager. It went to great lengths to ensure that its trading continued to escape regulation even up to the point of donating huge amounts of money to its political interests in the White House.This meant that even its auditors, Andersons came in to check Enron's books they were under great pressure for them to read appropriately to financial market expectations....

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