THE ENRON CORPORATION DOWNFALL

The Enron Corporation Downfall

Abstract

Enron Corp. was one of the world's largest energy, commodities and services companies before its bankruptcy filing, it marketed electricity and natural gas, delivered energy and other physical commodities, and provided financial and risk management services to customers worldwide. Based in Houston, Texas, Enron was formed in July 1985 by the merger of Houston Natural Gas and InterNorth of Omaha, Nebraska. Initially a natural gas pipeline company, Enron rapidly evolved from delivering energy to brokering energy futures as energy markets were deregulated. The company began marketing electricity in 1994 and entered the European energy market in 1995. What then went wrong with Enron, we will attempt to analyze.

The Enron Corporation Downfall

Introduction

The Enron Corporation (Enron) was once one of the worlds's leading energy companies. In December 2001, Enron filed the largest corporate bankruptcy claim in United States history. The collapse led to investigations of both Enron and Arthur Andersen, an accounting firm employed by Enron. Investigators focused on charges that Enron deliberately concealed its financial problems, misled investors, and failed to pay income taxes. Enron has taken a downward slide since January making their stock worthless today. With corrupt executives and the help of their auditing firm, they have been able to provide investors with false financial information, which gave them a false picture of the company's true state of affairs. The collapse of Enron has made thousands of employees lose their life savings in 401k plans, and company stock holdings. Investors were defrauded out of billions of dollars and everyone is asking the questions, "How did this happen, and can we prevent this from happening again?"

Key Problems and Issues

The Energy financial group ranked Enron the sixth largest Energy Company in the world. In January 2001, Enron's stock hit a closing high for the year at 82.00 dollars per share (www.c-span.org). Investors and analysts knew Enron's financial statements were very complicated, but because Enron did not show any big fluctuation in their earnings growth, nobody wanted to question the company and took them at face value. On October 16, 2001, Enron reported that they were taking a major loss on their third quarter earnings. As a result, everyone was questioning their financial stability. The third quarter losses were connected to the ending of the relationship with a pair of investment partnerships that were created by Chief Financial Officer (CFO) Andy Fastow. The partnership LJM Cayman and LJM2 were formed using Enron's equity and outside capital. They were designed to help the company grow quickly without adding too much debt to its books or diluting the value of the company's stock.

The CFO's relationship with these entities was a cause for concern because it put him on both sides of the deal; representing himself as the buyer and seller simultaneously. This was a major conflict of interest on his part because they did not really know whom he was representing in any of the transactions during the ...