Enron Case

JEREMY RIVERA

Bus 475

2/22/16

Enron: The Smartest Guys in the Room

Introduction

Enron, one of the nations most powerful corporations, disappeared in a matter of weeks when it was revealed they were using mark to market accounting to falsify and boost profits.

Background

Enron was the seventh largest corporation in the world before their unfortunate fall in 2002. Enron went from 10 billion to assets pertaining to 60 billion in just 10 years. Enron was one of the fastest growing companies in the world and became the largest provider of natural gas in North America. Ken Lay founded Enron in 1985 through various business deals, taking advantage of the governments deregulation of the natural gas industry. The government allowed gas to float with the market, which Lay saw as a gold mine to make money. The Enron corporation was also heavily backed by the Bush administration since the days of George Bush Sr. The Bush administration gave billions in subsidies to Enron. In 1987, the fall of Enron was foreshadowed when two rogue traders were caught gambling recklessly in the market. Over 90 million was spent by the traders and it was greatly affecting the company. When Ken Lay heard about this, he began to encourage more gambling by his traders, which helped sealed Enron’s fate more than 20 years later. Eventually, Enron moved to a mark to market accounting, which allowed them to book profits they expected with ongoing deals. This allowed the company to increase profits that weren’t actually there. In 2001, Enron began to lose profits and subsidites and to hide the fall, they needed to make the company look in proper shape. This was achieved by special purpose entities. An SPE can be used to hide any assets that were losing money, as to keep it off the company’s books. This couldn’t go on forever as by April of that year many analysts’ began to question Enron’s earnings. The CEO quit before the first quarters showed a loss, and the company refused to sell stock which...