Enron was formed in 1985 when two gas pipeline companies merged. They had a rough start with many near death experiences, but finally found their place in an innovative new market. Enron pioneered the development of large-scale energy trading and used fixed price contracts to sky rocket their returns. The strategies used were seen as cutting edge and first class, but after a scandalous bankruptcy in 2001, Enron became a key instance that changed the business world. The features of this bankruptcy can be used to learn how to avoid it in the future.
The use of off-balance sheet partnerships to move debt off of Enron’s balance sheet allowed for a false sense of well-being. When a losses occurred, they were covered up with the help of these partnerships. A $544 million loss was claimed to be due to four partnerships closing and a $1.2 billion reduction in shareholders equity was claimed to be due to an accounting error. After further investigation of similar transactions, it was found that the CFO, Fastow, acquired over $30 million from these off-balance sheet partnerships.
The company tried to become “asset-light,” because the physical assets do not generate as high of returns and although this worked in the gas industry, it could not be easily transferred to other products. When Enron bought Portland General Electric, they tried to split up the company and sell off the power plants, but the split failed. In the end, Portland General was sold for a $1.1 billion loss.
Enron had multiple companies within that competed for corporate funding, had different leadership styles and ambitions, different corporate cultures, and different compensations. This lack of global continuity created divisions in the company, which added to the downfall in December of 2001.
In the aftermath of Enron, accounting standards across the board were being questioned. The Sarbanes Oxley Act of 2002 addressed these issues by requiring stricter accounting methods for public companies. The cost-benefit of this act has been debated since it’s implementation because the compliance costs have been extremely high. However, the stricter accounting standards will benefit the industry to help minimize the risk of such a large scale bankruptcy in the future.