Businesses depend on many things. The Enron collapse happened due to various reasons. Here’s a look into the dark side of the business and the reasons for the collapse.
Title: Dark Side of Enron and Reasons Behind the Collapse
Students are often asked to work on the Enron case study and understand the reasons behind the different reasons for the collapse. Very few might know that Enron was a giant in energy, commodities and services in America. Therefore, it is essential to understand the different reasons why such a big company met the unfortunate fate and had to shut down operations. Many companies have risen and fell due to various reasons. Some died down because of their lack of foresight and making bad decisions. But when it comes to big companies like Enron, the whole economy gets disrupted, and there are no ways to overcome such a huge blow.
Let’s look into the history of Enron and its influence on other businesses. Also, let’s understand what caused the company’s fall and exposed the dark side of the business.
Enron: A Texan Energy Giant
Major companies have a long history and are well-known to people across the world. The Texan energy giant Enron found its roots in the year 1985. The company rose to fame after the merger between Houston Natural Gas and InterNorth. Kenneth Lay founded the company and influenced the merger. The company has a long history and has not achieved greatness all of a sudden.
InterNorth and Houston Natural Gas had a long history individually. The companies played an important role in the past and have been very active in providing natural gas. InterNorth rose to fame due to its massive role in producing natural gas at a low price and providing labour during the Great Depression. Big corporates noticed their success, and many were bidding to takeover the company. At this point, InterNorth proposed a merger with Houston Natural Gas, and thus Enron was found.
Enron got exposed to financial fraud and was forced to shut down despite all the success and applauses. Let’s look at the reasons why Enron fell and collapsed completely.
Why did the Texan Giant Fall? Whistle-blowers and Financial Scams
Big companies are significant reasons that influence the economy of the country. The share market is where the rise and fall of companies can be understood to some extent. Also, the economy fluctuates with the share market’s rise and fall. Being a major company, Enron had a massive influence on the share market and the country’s economy. So, what caused the company to collapse? Was it the sudden success? Let’s dig deep into it.
- Revenue Recognition
If you work on the Enron case study, you will come across this as a major reason for the company’s downfall. The company and its energy suppliers earned profits through wholesale trading and risk management services and the necessary processes. The company used the total amount of the trade as its revenue. It was completely wrong and spiked up the revenue by 750%. They have also highlighted the loan transactions as sales. This was a major mistake by the company and invited probes. The company was accused of fraudulent accounting activities and lost the long-gained trust.
- Mark-to-market accounting
The trading wing of the company used this type of marketing. The company was the first non-financial company to use this method of marketing. The company used to show profits to attract more investors and get the maximum investment. Under this method, the companies could record their income from the different projects before getting the actual money. The company had to keep taking in more projects to show a consistent income. The investors would not have invested money if the revenue fell. So, Enron kept showing consistent income to get more investors. But the way was wrong and had the risk of getting exposed to the investors. The company will not be able to return the investors’ money if the actual income is not consistent.
Whistle-blowers are there in all companies. You will be unable to avoid them. Enron was a major company, and the different scams made whistle-blowing inevitable. The people who were working with the company brought forward various fraudulent activities of the company. In 2001, the company was accused of hiding huge losses and was declared bankrupt. Despite the whistle-blowers’ influence, the company had almost lost everything by then. The company used several fraudulent activities to keep their share prices high and get more investors.
The fall of big companies like Enron has a significant influence on the overall economy of the country. It is essential to understand the right ways of doing business. Success is something all companies aspire for. But it is hard to keep your feet on the ground with huge success. Enron aimed to take its business to new heights. But the way of doing business was not right. The financial scams have influenced the downfall of the company. You cannot accuse the whistle-blowers for the downfall. They had to expose the company to maintain transparency. The reasons mentioned above contributed to the downfall of Enron.
Owning and maintaining a business is not easy. It isn’t easy to be consistent with the profits and maintain them all the time. Many companies rise and fall and work hard to rise again. Also, there are companies that avail of shortcuts to gain more profits and attract more shareholders. But once the company is exposed, the whole reputation goes to vain. Enron is a great example that shows how being too ambitious can ruin the entire business. The business collapsed for using several wrong ways of marketing and financial processes. As a result, they lost all the money to pay their investors and were unable to keep up with the faith and trust of the investors. Hence, do not use unfair means to do business. Being ethical will lead to a successful business venture.