Enron: the Fall of a Wall Street Darling

Enron: The Fall Of A Wall Street Darling

Read more: http://www.investopedia.com/articles/stocks/09/enron-collapse.asp?partner=basics120111#ixzz1fiw28U4O

Enron is a company that reached dramatic heights, only to face a dizzying collapse. The story ends with the bankruptcy of one of America's largest corporations. Enron's collapse affected the lives of thousands of employees, many pension funds and shook Wall Street to its very core. To this day, many wonder how a company so big and so powerful disappeared almost overnight. How did it manage to fool the regulators and the Wall Street community for so long, with fake off-the-books corporations? What is the overall lasting impact that Enron has had on the investment community and the country in general?

Tutorial: Introduction To Accounting

Collapse of a Wall Street Darling

By the fall of 2000, Enron was starting to crumble under its own weight. CEO Jeffrey Skilling had a way of hiding the financial losses of the trading business and other operations of the company; it was called mark-to-market accounting. This is used in the trading of securities, when you determine what the actual value of the security is at the moment. This can work well for securities, but it can be disastrous for other businesses.

In Enron's case, the company would build an asset, such as a power plant, and immediately claim the projected profit on its books, even though it hadn't made one dime from it. If the revenue from the power plant was less than the projected amount, instead of taking the loss, the company would then transfer these assets to an off-the-books corporation, where the loss would go unreported. This type of accounting created the attitude that the company did not need profits, and that, by using the mark-to-market method, Enron could basically write off any loss without hurting the company's bottom line. (Read more about the disastrous implications of mark-to-market accounting in Mark-To-Market Mayhem.)

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