Enron's Collapse: An Analysis Of The Root Causes

1. How did such an apparently successful company collapse in this manner? (What caused the collapse?)

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Enron's collapse was caused by various factors such as accounting issues, the fallout from fraud, preferential treatment, and bad management culture. The company became bankrupt because it used fraudulent accounting practices and therefore, the tide of losses occurred after it was discovered and this brought the energy hulk down. The company did not collapse because of its vast size; instead, it was because it was believed to be bigger than it was (Benston & AEI-Brookings Joint Center for Regulatory Studies, 2003). The losses that the company was making was hidden while assets were stated, therefore hiring its actual financial situation. The company fell out after its corrupt deals were revealed because it could no longer borrow as used to, to expand its business. The scandal pushed away business and also caused the prices of stock to collapse, which forced the company out of business. The misleading accounting practices are considered the cause of the company's downfall. Further, it used its influence to get legitimacy from the country's administration which helped to progress its frauds. The management culture was so wrong that it was more concerned about the appearance value rather than the real value of the company and this made it collapse as people realized what it had been doing (McLean & Elkind, 2003).

2. With all the laws and regulations instituted, have things changed since the Enron scandal; backup your answer with examples from the current business world.

Things changed since the Enron scandal as it brought a set of rules and regulations as well as federal oversight in the accounting industry. Sarbanes-Oxley is a law that was passed to help create the Public Companies Accounting Oversight Board whose role was to oversee the audit firms. The Board has the mandate to audit the auditors and therefore go over audits performed and question the decisions made, and this has subjected companies to extraordinary scrutiny leading to less opportunity to be corrupt (McLean & Elkind, 2003). Further, the law ensures that the management of a company can be held responsible for financial reports that are filled to the SEC. It also helped to improve the independence of corporate boards, independence of auditors and increased the penalties for those found guilty of tampering with documents and violation security legislations. The regulation has also affected the stock market in that today, there is more reliable information regarding stock prices and information which raise the confidence of investors (McLean & Elkind, 2003).

References

Benston, G. J., & AEI-Brookings Joint Center for Regulatory Studies. (2003). Following the money: The Enron failure and the state of corporate disclosure. Washington, D.C: AEI-Brookings Joint Center for Regulatory Studies.

McLean, B., & Elkind, P. (2003). The smartest guys in the room: The amazing rise and scandalous fall of Enron. New York, NY: Portfolio.