What Brought About Enron's Collapse?
There are several factors responsible for the collapse of the energy giant Enron. As many will tell you, the collapse can be contributed to the firm's complex financial arrangements and questionable accounting practices. Another factor, which can be considered an underlying factor to the previous two, is that of greed. The combination of greed, complex financial arrangements, and questionable accounting practices eventually lead to the company's collapse.The company had a long track record of making complex financial arrangements to help them show profits and expand their business. The following illustration from the Houston Chronicle's "Enrons convoluted partnerships" shows just how they did this. One example of the way Enron used complex financial transactions to hide debt is in that of the Raptor partnerships. Enron established these partnerships as a way of hedging profits and losses for the company's investments in areas such as water and Internet broadband. Through the Raptor vehicle Enron was able to hide 1 billion dollars worth of debt for over a year. As the illustration depicts, Enron never counted the debts associated with this company on corporate records since they owned less than 3 percent of the compan
This continued to assist in keeping the Enron stock steady regardless of actual company performance. Only then were the traders fired and charged with crimes. Instead of firing the traders and contacting authorities, Chairman Ken Lay and his management team kept them on the payroll and tried to cover up the problems. Individual that tried to stop these risky deals often found themselves getting poor performance reports under Enron's performance review committee known as the "rank and yank" program. They were rewarded through the use of bonus's based on projected financial gain instead of actual financial gain. While complex financial transactions and accounting practices were an important aspect of Enron's collapse, greed was also a major contributing factor. His own desire for expansion and keeping the stock price high overshadowed that of ensuring the income was actually more than the debt. This might have worked if the emerging companies had been extremely profitable but with the emerging companies falling stock prices and Enron's falling stock prices (because of the investigations), there was no rebound. Deals were put together quickly and even the internal controls for determining whether a deals was worth doing were overridden. When profits were not realized under one venture, Enron would start another partnership to finance additional ventures, help with the venture, or to manipulate the outcome. Before the fall of Enron, CEO Jeffery Skilling cashed in his stock shares for an estimated 60 million dollars pocketing money that the company was never really worth anyway do to the inflated stock price. So in the end, the Risk Assessment and Control group could only say that a deal wasn't realistic but could never stop the deal from being made. The company later reported an $85 million loss, but sources say it was probably at least $136 million. "In 1987, company auditors learned of a billion-dollar oil-trading scandal at the company's Valhalla, N.
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