Enron’s Downfall and Its Causes

Subject: Company Analysis
Pages: 2
Words: 346
Reading time:
2 min

A number of things are likely to have led to Enron’s failure. It is evident that there was shareholder protection practiced and which was not genuine. It is likely that the; “Managers simply undertook aggressive interpretations of accounting principles then challenged auditors to demonstrate that such practices were not in accordance with GAAP accounting rules.”

Such protection, which was later on uncovered, was done with hidden wrong motives. There was no revelation of the actual information regarding the company performance as required in the GAAP accounting rules for reporting company information. Enron was not the first company to have had such a practice, but it has been argued that it has been ongoing since the 1980s. Since it took so long for the problem to be discovered in Enron, it may be argued that the free market failed its duty and that shareholder protection practices are not desirable. The company was faced with debts, while other problems such as reduction of its stock prices came as a result of the reaction of the public to the situation.

It has been argued that the company had built risks on several businesses that it did not own. This was problematic and dangerous trading. The assets were owned by others, and there were so many complications in the systems established by the company, including marketing systems. In fact, the company owned only less than 3%, always in interest. The company formed “complex financial maneuvering and off-balance-sheet partnerships” mechanisms in an attempt to remove everything, ranging from “telecommunications fiber to water companies from the firm’s balance sheet and into partnerships,” was dangerous and failed to work.

The partnerships formed by the company were not normal because other partners were not free to act independently from Enron. There was the use of “Enron’s stock as collateral to leverage the partnerships.” In case the partnership failed to pay debts, “lenders in effect had direct recourse to Enron stock,” thus Enron guaranteed loans with its stock and carried all risks.