The Enron case: a story of failure

The Enron case: a story of failure

In economic-financial literature, the Enron case is cited. Now consolidated, among the most well-known scandals in the sector worldwide. The company suddenly transformed from an acclaimed model of innovative and efficient strategy. In the typical case of managerial failure and forced bankruptcy. Founded in 1985 in Houston, Texas, as an energy company, Enron Corporation was the result of InterNorth’s acquisition of Houston Natural Gas (HNG). At the time, the US gas market was in a period of deregulation, and it didn’t take long for Enron to emerge as a pioneer. In fact, with FERC (Federal Energy Regulation Commission) order 436, the purchase and delivery of gas became two disjointed processes. As a result, companies operating in the industry were transformed from providers of bundled gas purchasing and delivery services , to intermediaries between gas producers and buyers.

The main side effect of this deregulation was undoubtedly

A greater exposure of users to the volatility of gas prices. A consequent complication in tariff planning. The key figure in the history of the Enron Corporation was, almost from the Afghanistan WhatsApp Number List beginning, Jeffrey Skilling. First responsible for financial operations and later CEO. Under his leadership, the company was directed along a particular strategic-managerial path. During the first half of the 1990s, and in particular until 1997. The company expanded into new markets, focusing its attention on the less regulated and more fragmented ones (first and foremost the electricity market). The internal revolution led by Skilling even involved the company’s accounting model, and in this context the problematic roots of the bankruptcy were established. Enron, in fact, began to use the so-called mark-to-market (MTM) method.

The problem inherent in the MTM method is that

The fair value is difficult to determine, as it is linked to different market conditions; in the specific case of Enron. Therefore, a significant discrepancy appeared between the declared and actual cash flows. To overcome these accounting difficulties and to hide losses. The company resorted to the use of particular shell USA WhatsApp Number List companies called. Special Purpose Entities (SPEs) or Special Purpose Vehicles (SPVs). In this way, all the most “turbulent” and problematic accounting operations were transferred to the SPEs. Disappearing from Enron’s balance sheets and smoothing out the accounting imbalances. Furthermore, the company used SPVs to request loans on its behalf: having now entered a vicious circle. Therefore, the Enron Corporation continued to increase its debt, and then hide it through shell companies. In 1999, the Corporate Audit and Compliance Committee.