Why did Enron fail?

Question

Enron, the large corporations a few years ago.

Answer 1

their debt was leveraged into high risk off-shore accounts in made up corporations. While legal, it was done so large that the debt cost spiraled out of control at the slightest risk. Andy Fastow created something like 4000 dummy corporations to hide the deception.

Answer 2

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RE:
Why did Enron fail?
Enron, the large corporations a few years ago.

Answer 3

Many of Enron’s troubles can be traced to a number of special purposes entities (SPE), dubbed the Raptors, that Enron established to shield itself from mark-to-market losses in its growing equity investment business. When these investments went south, Enron’s attempts to shore the Raptors up with its own stock proved to be a temporary solution at best. The presence of Enron’s CFO on the board of directors of the SPE that funded the Raptors, LJM2, probably ensured that the entire house of cards would eventually come down. The authors detail the byzantine structures of these SPEs and demonstrate how existing GAAP requirements, though somewhat ambiguous, should have led to different treatment.

On October 16, 2001, Enron’s routine announcement of $0.43 recurring third-quarter earnings per share led to a series of events that would bankrupt this global Fortune 10 corporation, inaugurate an unprecedented series of large-scale accounting scandals, and permanently change the dynamics of the auditing profession. The end of the press release included a carefully worded announcement of an after-tax nonrecurring charge of $1.01 billion, or $1.10 per share, attributable to asset impairments at a subsidiary, Azurix Corp. ($287 million); the restructuring of another division, Broadband Services ($180 million); and “$544 million related to losses associated with certain investments, principally Enron’s interest in the New Power Company, broadband and technology investments, and early termination during the third quarter of certain structured finance arrangements with a previously disclosed entity.”

A year earlier, Enron stock had been trading at $90 per share
http://www.nysscpa.org/cpajournal/2003/0403/features/f042403.htm

Answer 4

Very good question Peter Griffin. Any relation to .... nevermind.

A very high-level overview of the Enron Scandal:

Enron is a perfect example of financial statement fraud. Enron senior management falsifield accounting records to make it look like they made a lot more money then they actually made. They also shfted around liabilities (a liability is money you owe like a loan outstanding to a bank) to subsidiaries and special purpose legal entities that Enron owned to make it look like the owed a lot less money then they actually owed. Enron and all publically traded companies are required to report on their finances to the public and to the Securities and Exchange Commision (SEC) who regulates financial reporting over publically traded companies.

The underlying reason Enron committed fraud comes down to stock prices. In the long run stock prices don't continue to rise unless Net Income is increasing every quarter and every year. They also were likely short on cash and needed additional bank loans and bond issuances to keep their business growing. They were also being investigated for doing shady things like shifting electricity around within the US power grid to maximize profit as opposed to providing power to the most people. This lead to many blackouts all over California in 2000 and 2001.

The SEC caught wind of the potential for financial statement fraud and launched investigations into the alleged fraud and the rest is history.

The Department of Justice later got involved and later filed Obstruction of Justice charges against Enron's external auditors, Arthur Andersen. The external auditors are supposed to prevent companies from committing financial statement fraud by catching these errors. The obstruction files were charged because when the DOJ served subpeonas to Andersen, Andersen allegedly shred documents and didn't fully comply. Andersen several years later was acquitted of all charges in appeal to no avail since the firm was no longer in business due to the obstruction charges.

Answer 5

Shred,shred,shred.