Accessibility links

What Was Behind Enron Collapse? - 2002-01-24


The U.S. Congress Thursday held the first of many scheduled hearings on the collapse of Enron, the largest corporate bankruptcy in United States history. The energy company was an innovative trader of gas, electricity and other commodities.

What makes a company plunge from being one of the top U.S. Fortune 500 corporations to being virtually worthless?

The answer, analysts say, is bad business deals followed by highly questionable accounting practices.

Dallas attorney Steven Camp says Enron's problems started with the California energy crisis last year. "Enron had gotten in the business of being an energy trader," he said, "and had several contracts that it had to make good on and it could not buy energy at a price to make a profit, because it had a delivery contract: I will deliver you x amount of energy for a fixed price, and so it couldn't make a profit there."

In addition, Mr. Camp says, company investments in other highly experimental areas led to major losses. But instead of admitting its business problems, Mr. Camp says, the Enron management used creative accounting, establishing off-balance sheet partnerships with non-existent subsidiaries, to hide them. As a result, both the public and its own employees believed the firm was doing well. "The company was absolutely committed to keeping its stock prices up, so the corporate officers were saying to employees 'There's no reason to worry about this. Things are going fine!' And they really didn't give any indication of what was happening," he said.

In the end, Rice University management professor Steven Currall says, Enron's employees were left jobless with their pensions a fraction of their original worth. "This is an example of managers pushing to the limit, the letter of the law, concerned with what they could get away with legally," he said. "Then the normal safety nets, which are typically in place for corporations such as the board of directors, as well as the accounting firm, both did not fulfill their responsibility in monitoring and oversight."

Mr. Currall says the Enron case underscores the need for greater surveillance by corporate boards of directors. "For example, really requiring companies to have members on the board of directors to be financially literate and be very much in touch with the financial workings of the organizations and not just be a rubber stamp." he said.

Enron's failure also underscores the need for national financial accounting standards, he says, and for reforms that prevent employees from having all the stock in their pension funds tied to the health of the companies for which they work. Enron's ultimate legacy, he predicts, will be a more tightly regulated corporate landscape.

XS
SM
MD
LG