The Downfall of Enron Valerie Glushkov
Enron Company was once one of the biggest energy company in the U.S. Fortune magazine ranked Enron as #7 in April 2001 in Fortunes ranking by market capitalization of the five hundred largest corporations in the United States. On December 2, 2001, Enron filed for Chapter 11 bankruptcy. The unexpected and rapid collapse in the market value of this corporate giant has had immense consequences for nearly all of its stakeholders including its shareholders, employees, creditors, and auditors. In July of 1985, Houston Natural Gas Inc. merged with Inter North Inc., a natural gas company based in Omaha, Nebraska, to form Enron – a natural gas pipeline company. In 1989, Enron began trading natural gas products. In just a few years, Enron became the largest natural gas merchant in North America and the United Kingdom. Steered by the strategic advice provided by world-renowned business consultants McKinsey and Company, and the leadership of its former CEO, Jeffrey Skilling (a former employee of McKinsey), Enron transformed itself from an energy company to a risk management firm that traded everything from commodities to derivatives. The use of special purpose entities (SPEs) allowed Enron to operate wide-ranging undercover and risky trading procedures in a manner that did not properly reflect their debt on its balance sheets. The asset-light strategy, the SPEs, and the off-balance-sheet financing they provided to Enron seems to be the core cause of Enron’s ultimate failure. The first sign of weakness in the firm’s financial structure became clear on October 16, 2001 when the firm reported a $638 million third-quarter loss and revealed a $1.2 billion decrease in shareholder equity, partly related to SPEs run by CFO Andrew Fastow. This discovery brought closer attention to the way in which Enron was financing its operations. After that, a quick fall in the stock price of the firm followed,...
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