Question

considering everything you saw what factors do you believe most contributed to the collapse of Enron

Answer 1

Factors most contributed to the collapse of Enron

Enron corporation came into existence by Merger of InterNorth and Houston Natural Gas.

In the starting of 2000 Enron corporation were the 7th biggest listed public company in the United State of America(USA) and trading at $100. After some days the stock price of the company declined at a very fast pace and this stock was worth a few pennies this event confused and shocked all stakeholders like shareholders, investors, the public, employees. Hence we will discuss the factor that contributed to the collapse of Enron Corporation.

In 1990 Enron corporation invested a huge amount in online marketers and service providers, build a fiber optic communication network and tried to make a market for trading broadband communication. the company entered this segment at the peak of the boom and paid high prices by taking a loan to finance these expenses. In 2000 dot com crashed the revenue from this business dried up but the debt remained, this event put a challenge to the company.

Corporate governance

The board of directors was involved in wrongdoing. The main function of the board of director is to see the affairs(work) of the company and maximize the value of the corporation and ensure the company is following all rules and law, providing accurate information to the shareholders, investor, and all other stakeholders as well as hire expertise executive to evolve the business plan. The board of directors was unable to perform the discussed functions. The financial structure of the company was complex and very difficult to understand for externals.

Board members were not independent, many directors were found to have a conflict of interest as board members have provided capital for special purpose entities. Every decision was taken only to raise the price of the stock and all ethical values and law books were ignored. Management purposely kept division separate and independent from each other in order to increase competition and achieve better results.

Auditing and Accounting Issues

The federal law ensures that the accounting statements of public listed corporations be certified by an independent auditor. Arthur Andersen, Enron's auditor did not report improper accounting practices but also involved in devising complex financial structures and fake transactions. General-accepted accounting principles and accounting standards lack clarity and consistency and also used for window dressing of financial statements.

Securities Analyst Issues

Securities analysts perform and make recommendations with supporting reasons to make buy or sell or hold. These recommendations are widely circulated and are relied upon by many public investors. Analyst support was crucial to Enron because it required constant infusions of funds from the financial markets. On November 29, 2001, after Enron's stock had fallen 99% from its high, and after rating agencies had downgraded its debt to "junk bond" status. The role of a securities analyst was doubtful.

Banking Issues

Enron corporation relations with Citigroup and J.P.Morgan were doubtful because these banks were involved in both commercial banking i.e. deposits and advance and investment banking i.e. securities. conflict of interest, between duty to avoid excessive risk on loans from the banks versus to obtain profit from investment banking deals.