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Category: Business and Industry

Date Submitted: 11/27/2012 11:15 AM

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Enron ultimately went bankrupt because countless number of bad investments as well as the company having to realize the true value of their assets. However, there are various steps Enron could have taken to prevent the losses. First, the corporate structure was one in which each business unit was treated as a separate entity. This structure created an environment where profitability of each unit was not known by any other unit. Employing greater transparency between business units would have stopped them from taking on riskier projects, as they would realize that each area was producing similar poor results. Secondly, the culture of Enron was one that focused strictly on profit. This included a performance evaluation system in which peer evaluations for each unit would be completed annually with the bottom 20% of employees being terminated. Adjusting this culture from a “make the most money at any cost” to one in which the company set more realistic growth targets and focused on organic growth would have been a preventative strategy to minimize losses. Enron would undertake less high-risk investment projects and not commit the blatant fraud to increase profits as the risk of being fired because of not meeting the unrealistic profit targets would disappear. Finally, more transparency and accountability at a board of directors level would have helped prevent losses. The companies board members all had an secondary interest in Enron either directly or from the financial services industry, however, adding new directors without conflict of interests would have provided greater incentives to represent the best interests of the shareholders. The risky projects brought to the board may not have been approved if more third party board members were used.

Cause of loss

Enron utilized three main activities that leveraged their transparency issues that eventually caused the financial loss and subsequent bankruptcy of the company. Enron’s obsessions with...