Enron, at one point was one of the largest
corporations in the United States. It used the internet to sell and buy natural
gas and electric power supplies. It was growing company at one point that kept
arising. Enron was able to borrow and expand exponentially, stocks were soaring
all-time high. Enron’s employees also had a lot of stocks in the company and
kept growing. Although it seemed like it was a great company to invest in, the
truth behind it was something else.
Enron wasn’t as big as it was perceived to be. Enron was under a huge loss in
reality; to hide its loss, Enron purchased smaller corporations. According to
an article on Bizfluent, “What caused Enron to collapse? “Traded on an open
market companies are required to put forth their money related expressions
open, yet Enron’s accounts were an invulnerable labyrinth of painstakingly made
fanciful exchanges amongst itself and its auxiliaries that covered its actual
monetary state. As it were, misfortunes were held off the book by backup
organizations, while resources were expressed.”
Their accounting standards were found to be fraudulent
because they were just imaginary numbers that showed the corporation was
growing even though in the books they were losing a lot of money. Because they
were perceived to be a lot bigger than they were, investors were buying stocks
and thinking they were going to make a lot of profit.
Another company named Dynegy had agreed to buy Enron
at one point but when they discovered the that Enron was misrepresenting the
profitability of their business, they backed out of the deal. This is also when
the rest of the world started to find out about Enron’s fraudulent practices
and the company collapsed leaving employees and investor at a great loss.
Because of the compromising decision made by the
company’s management and tempering with the financial statements, it received
to be bigger than it was. Once the truth came out, the company collapsed. They
did everything that was against the business standards, values and ethics.
What this collapse thought us was that instead of
looking at just equity, we should also look at company’s liabilities. We have
to look at the debt-to-equity ratio when making investments. Congress also
passed several laws or regulations for internal auditing, so companies’
financial statements are more transparent. After all, the market and economy are
dependent on reliable financial statements.