Accounting Scandals: Enron and WorldCom

Only available on StudyMode
  • Download(s) : 145
  • Published : December 1, 2012
Open Document
Text Preview
The Accounting Scandal
Enron Corp. Collapse and WorldCom Accounting Scandal

11/18/2020

The Enron Corp. collapse

Formed in 1985 from a merger of Houston Natural Gas and Inter-north, Enron Corp. was the first nationwide natural gas pipeline network. Over time, the firm’s business focus shifted from the regulated transportation of natural gas to unregulated energy trading markets. The guiding principle seems to have been that there was more money to be made in buying and selling financial contracts linked to the value of energy assets (and to other economic variables) than in actual ownership of physical assets.

Until late 2001, nearly all observers – including Wall Street professional – regarded this transformation as an outstanding success. Enron’s reported annual revenues grew from under $10 billion in the early 1990s to $139 billion in 2001, placing it fifth on the Fortune 500. Enron’s problems did not arise in its core energy operations, but in other ventures, particularly “dot com” investments in Internet and high-tech communications businesses. Like many other firms, Enron saw an unlimited future in the Internet. During the late 1990s, it purchased on-line marketers and service providers, constructed a fiber optic communications network, and attempted to create a market for trading broadband communications capacity. Enron entered these markets near the peak of the boom and paid high prices, taking on a heavy debt load to finance its purchases. When the dot com crash came in 2000, revenues from these investments dried up, but the debt remained.

It is not unusual for businesses to fail after making bad or ill-timed investments. What turned the Enron case into a major financial scandal was the company’s response to its problems. Rather than disclose its true condition to public investors, as the law requires, Enron falsified its accounts. It assigned business losses and near-worthless assets to unconsolidated partnerships and “special purpose...
tracking img