Why did Enron fail?
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Enron failed because much of its success was built on accounting and business practices that concealed the actual financial health of the company.
As Enron grew, it created many shell companies with which it formed partnerships. Enron used these partnerships to make it look like it was doing better than it really was. It could put its debts on the books of the shell companies and thereby not have them show up on its own books. These sorts of practices were abetted by the accounting firms that audited Enron and did not call them on these practices.
Because of these practices, Enron looked like a booming company and its stock prices rose. Eventually, though, the whole system was uncovered and investors began to divest themselves of Enron stock. The price of Enron's stock plummeted and Enron came to be worth essentially nothing.
The primary reason for Enron’s fall can be classified as ethics scandal and corporate governance weakness. Several charges leveled against Enron in the court of law include involvement in securities fraud, conspiracy to inflate profits, and generally and deliberately nurturing a corrupt corporate culture. These charges revolve round ethics scandal and corporate governance weakness. However, none of these offences can be said to involve breaking the law unlike Arthur Andersen who was charged for criminal offences. Besides, Enron did not contravene any accounting principle but rather stretched applicable principles to the limit in recording transactions; that is, introducing complicated accounting treatments such as the mark- to-market accounting and creation of off-balance sheet partnerships or special purpose entities (SPEs). This is what has become known as creative accounting or earnings management.
Enron’s ethics scandal relate to management’s deceit of its employees to continue to buy shares in the company even when they know that the company has dwindling prospects.
Some common cases of weakness in corporate governance were the conflict of interest involving some key officers of Enron who also served as principals of these created SPEs, and related party transactions authorized by the chairman.
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