Question

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

Answer 1

• Enron’s Board of Directors ignored to fulfil its fiduciary duties towards the shareholders and internal stakeholders
• The top executives of Enron were driven by personal moto of greed and acted own self-interest.
• Enron outsourced external auditing for its internal audit function instead of establishing a functionally internal audit mechanism
• The external auditor acquiesced in the application of questionable accounting and fraudulent financial reporting.
• It crumbled under its own weight. CEO Jeffrey Skilling hid the financial losses of the trading business and other operations of the company using mark-to-market accounting.
• This technique measures the value of a security based on its current market value instead of its book value. This can work well when trading securities, but it can be disastrous for actual businesses.
• In Enron's case, the company would build an asset, such as a power plant, and immediately claim the projected profit on its books, even though the company had not made one dime from the asset.
• If the revenue from the power plant was less than the projected amount, instead of taking the loss, the company would then transfer the asset to an off-the-books corporation where the loss would go unreported. This type of accounting enabled Enron to write off unprofitable activities without hurting its bottom line
• The mark-to-market practice led to schemes that were designed to hide the losses and make the company appear more profitable than it really was.