External causes for Enron to collapse

Topics: Enron, Futures contract, Enron scandal Pages: 3 (581 words) Published: December 18, 2004
1) Deregulation

Deregulation of the U.S. energy industry made possible Enron's emergence as a major corporation, but also ultimately may have contributed to its collapse. The company successfully seized the opportunity created by deregulation to create a new business as a market maker in natural gas and other commodities. Enron successfully influenced policymakers to exempt the company from various regulatory rules, for example in the field of energy derivatives. This allowed Enron to enter various trading markets with virtually no government oversight. Arguably, regulation might have prevented Enron from taking some of the risks and making some of the mistakes which it did. While deregulation may initially have helped Enron, by allowing it to create and enter new markets, it later hurt the company by removing the very restraints that might have kept it from becoming fatally overextended.

2) Lax regulatory enforcement

Arguably, government regulatory agencies failed to exercise sufficient oversight or to enforce the rules that were on the books. Regulatory bodies that failed to enforce the rules governing Enron's actions included the Securities and Exchange Commission (SEC), the Federal Energy Regulatory Commission (FERC), and the Commodities Futures Trading Commission (CFEC).

3) Weak and ambiguous accounting standards

Hindsight makes it fairly clear that the accounting standards promulgated by the Financial Accounting Standards Board (FASB) were too weak and too ambiguous with respect to the complex trading transactions and financial structures that Enron established and operated. Two areas stand out as ones of particular concern. First, the rules apparently permitted the widespread use of market-to-market (MTM) accounting in areas for which it was not originally intended. Second, the 3 percent rule for outside ownership of SPEs was arguably too low to maintain genuine independence. An underlying issue was that corporate practice (e.g.,...
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