Introduction
The Enron bankruptcy is one of the biggest corporate governance failures in the
contemporary business world. Having been considered one of the most innovative companies in
the energy industry, Enron was able to grow rapidly in terms of energy trading, mixed financial
strategies, and diversification into international markets. However, under its triumph lay severe
moral and financial problems in terms of harsh accounting, ineffective supervision, and conflicts
of interest among the senior officials. The practices hid the real financial position of the company
and misled investors and other stakeholders. The paper will discuss the most important issues
that have led to the collapse of Enron, suggest what measures ought to be taken, what should be
implemented, and what results can be expected in case of better management and transparency.
Enron Key Risks
The fall of Enron was not due to one failure but a combination of various types of
organizational risks. These risks have been formed over the years as the company did not stick to
a normal business model of operating as a pipeline company but transformed into a global
trading company. The major risk categories that were linked with the collapse of Enron were the
financial risk, the governance risk, ethical risk, reputational risk, and the operational risk. All
these risks supported each other and the ultimate failure of the organization.
The financial risk was especially enormous, since the company depended much on the
elaborate financial schemes and speculative trading operations. Enron was relying more and
more on mark-to-market accounting, which permitted it to rely on future earnings as present
income. Although such an approach was not legally forbidden in some circumstances, this gave
the managers a chance to control the financial outcomes through exaggerating the worth of long-
term contracts. Meanwhile, the company had many special purpose entities to off balance sheet
, its liabilities and create the illusion of a firm enjoying good financial health where it had a lot of
hidden debts.
The collapse of Enron was also largely due to governance and ethical risks. The senior
executives and the board of directors had the mandate of ensuring accountability and
transparency at the organization. Nevertheless, the management of the company undermined
oversight systems through a conflict of interest, lack of transparency in its financial reporting and
the proximity of the Enron management to external auditors. These lapses in governance ensured
that dubious accounting schemes coupled with risky investment options were being perpetuated
without proper questioning.
The crisis was also enhanced by operational and reputational risks. With the entrance of
Enron into the new markets like broadband trading and weather derivatives, the firm has exposed
itself to the industries that were not stable in terms of regulation and valuation models. Investor
confidence had decayed very fast when issues regarding the financial practices of Enron started
to surface. This loss of trust provoked falling shares in the stock markets, credit ratings and later
a critical liquidity crisis which plunged the company into bankruptcy.
Three Important Enron Risks
Despite the large volume of organizational risk to Enron, three of the risks were especially
critical to the speed at which the company was destroyed, and they are financial reporting risk,
governance and ethical risk, and credit risk. These risks were inter-dependent and eventually this
played out to the disadvantage of the stability and credibility of the company.
The risk of the financial reporting was the first and the most important risk. The
management at Enron was very reliant on the mark-to-market accounting and the use of
The Enron bankruptcy is one of the biggest corporate governance failures in the
contemporary business world. Having been considered one of the most innovative companies in
the energy industry, Enron was able to grow rapidly in terms of energy trading, mixed financial
strategies, and diversification into international markets. However, under its triumph lay severe
moral and financial problems in terms of harsh accounting, ineffective supervision, and conflicts
of interest among the senior officials. The practices hid the real financial position of the company
and misled investors and other stakeholders. The paper will discuss the most important issues
that have led to the collapse of Enron, suggest what measures ought to be taken, what should be
implemented, and what results can be expected in case of better management and transparency.
Enron Key Risks
The fall of Enron was not due to one failure but a combination of various types of
organizational risks. These risks have been formed over the years as the company did not stick to
a normal business model of operating as a pipeline company but transformed into a global
trading company. The major risk categories that were linked with the collapse of Enron were the
financial risk, the governance risk, ethical risk, reputational risk, and the operational risk. All
these risks supported each other and the ultimate failure of the organization.
The financial risk was especially enormous, since the company depended much on the
elaborate financial schemes and speculative trading operations. Enron was relying more and
more on mark-to-market accounting, which permitted it to rely on future earnings as present
income. Although such an approach was not legally forbidden in some circumstances, this gave
the managers a chance to control the financial outcomes through exaggerating the worth of long-
term contracts. Meanwhile, the company had many special purpose entities to off balance sheet
, its liabilities and create the illusion of a firm enjoying good financial health where it had a lot of
hidden debts.
The collapse of Enron was also largely due to governance and ethical risks. The senior
executives and the board of directors had the mandate of ensuring accountability and
transparency at the organization. Nevertheless, the management of the company undermined
oversight systems through a conflict of interest, lack of transparency in its financial reporting and
the proximity of the Enron management to external auditors. These lapses in governance ensured
that dubious accounting schemes coupled with risky investment options were being perpetuated
without proper questioning.
The crisis was also enhanced by operational and reputational risks. With the entrance of
Enron into the new markets like broadband trading and weather derivatives, the firm has exposed
itself to the industries that were not stable in terms of regulation and valuation models. Investor
confidence had decayed very fast when issues regarding the financial practices of Enron started
to surface. This loss of trust provoked falling shares in the stock markets, credit ratings and later
a critical liquidity crisis which plunged the company into bankruptcy.
Three Important Enron Risks
Despite the large volume of organizational risk to Enron, three of the risks were especially
critical to the speed at which the company was destroyed, and they are financial reporting risk,
governance and ethical risk, and credit risk. These risks were inter-dependent and eventually this
played out to the disadvantage of the stability and credibility of the company.
The risk of the financial reporting was the first and the most important risk. The
management at Enron was very reliant on the mark-to-market accounting and the use of
