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Enron Corporation, an energy and service provider was founded in 1985 as the result of federal deregulation of natural gas lines. Enron from inception attempted to gain investors, partnerships, and customers through marketing itself as innovative. The company experienced substantial growth and made aggressive investments that marked the peak of the company as market price of its stock was worth $90.75 per share which then plummeted to $0.26 per share in 2001 when the company announced that it was declaring bankruptcy(Segal, 2023). Now, how did a seemingly promising and young company become the center of one of the most notorious accounting fraud cases in history?

The collapse of Enron cannot be contributed to a single source and the downfall of the company remains complex however fabricated financial statements and deceiving financial reporting combined with a indulgent company culture ultimately contributed to the height of the Enrons demise. When Enron convergedto the mark-to-market (MTM) accounting method this supported the company to further over-value their assets and profits due to a limitation of mark-to-market accounting being that it "may not accurately represent an asset's true value in an orderly market"(Tuovila,2022). Enron executives began to hide their rapidly accumulating debt from investors through "off-balance-sheet special purpose vehicles (SPVs), also known as special purposes entities (SPEs)" these were presented in forms of offshore facilities or factories that produced little to no profitability to the company despite Enrons accounting for the projected profitof these SPVS in their balance sheets.

Enrons executives such as Kenneth Lay(CEO) and Jeffrey Skilling(CEO) abused their positions of authority to protect the companies unethical acts from being exposed. Lay and Skilling knowingly participated in numerous acts of fraud to maintain their position in the Wall Street lifestyle while exposingtheir employees to internal conflicts one being information asymmetry. Enrons management team operated on the basis of personal gain and benefit, one example being that "C-suite executives are compensated in company stock, as well as collect bonuses when the shares hit certain predetermined price levels"(CFI Team, 2022). This served as further motivation for CEO Kenneth Lay and Jeffrey Skilling to prioritize boosting their stock price over organizational management and employee well-being. The lack of values and unethical practices that Enrons top executives and managers held negatively impacted shareholders and employees who were coerced to keep investing in Enron stocks despite the companies knowledge of their current financial position at the time which was negative.

References:

CFI Team. (2022). Enron scandal. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/esg/enron-scandal/

Segal, T. (2023). Enron scandal: The fall of a wall street darling. Investopedia. https://www.investopedia.com/updates/enron-scandal-summary/

Tuovila, A. (2022). Mark to market (MTM): What it means in accounting, finance, and investing. Investopedia. https://www.investopedia.com/terms/m/marktomarket.asp

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The collapse of Enron indeed stands as one of the most infamous cases of corporate fraud in history and the discussion sheds light on several key fact... View the full answer