What Brought About Enron’s Collapse?

What Brought About Enron’s Collapse?

There are several factors responsible for the collapse of the energy giant Enron. As many will tell you, the collapse can be contributed to the firm’s complex financial arrangements and questionable accounting practices. Another factor, which can be considered an underlying factor to the previous two, is that of greed. The combination of greed, complex financial arrangements, and questionable accounting practices eventually lead to the company’s collapse. The company had a long track record of making complex financial arrangements to help them show profits and expand their business. The following illustration from the Houston Chronicle’s “Enrons convoluted partnerships” shows just how they did this. One example of the way Enron used complex financial transactions to hide debt is in that of the Raptor partnerships. Enron established these partnerships as a way of hedging profits and losses for the company’s investments in areas such as water and Internet broadband. Through the Raptor vehicle Enron was able to hide 1 billion dollars worth of debt for over a year. As the illustration depicts, Enron never counted the debts associated with this company on corporate records since they owned less than 3 percent of the company. They did count any profits from the companies though. This might have worked if the emerging companies had been extremely profitable but with the emerging companies falling stock prices and Enron’s falling stock prices (because of the investigations), there was no rebound. When profits were not realized under one venture, Enron would start another partnership to finance additional ventures, help with the venture, or to manipulate the outcome. They would use Enron stock as collateral to start these additional companies. These were confusing and complex deals that represent some questionable accounting practices even though they were legal. The following example from the Houston Chronicle a…


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