At the turn of the century, the stock market rose and fell amidst the dot com boom and bust. Technology firms rose to the forefront, only for an innumerous amount of firms to crash and burn. In the midst of this chaos was Enron. Interestingly enough, Enron was an energy company who did not fit the new age technology description. As a misfit at the top of corporate America, Enron’s questionable practices would reshape the business world and the accounting practices that come with it.
Is Enron Overpriced?
In her 2001 article "Is Enron Overpriced?", Bethany McLean curiously questioned Enron’s success in Fortune magazine. She spoke to Enron executives and market analysts to get a better picture of the company. From their feedback it was clear that McLean had every right to question Enron’s success. No analysts could explain how Enron got its stock price so high. Some described what Enron did as operating in a “black box.”
While the analysts could not fully understand how Enron worked, Enron refused to give details about their operations. Enron’s executives protected its operations as trade secrets. Furthermore, Enron guarded its financial information as much as possible. This raised many eyebrows, but most analysts backed off. While a handful of analysts rated Enron stock with a ‘hold’ status, several analysts endorsed Enron—even though they could not understand how Enron was operating. At the same time, the Enron employees who were aware of what was going on (please note that most employees were not aware) kept quiet.
Ask Why
A further review of Enron’s “financialization of energy” revealed the use of hedge funds and derivative funds, bogus offshore businesses, and ‘creative accounting.’ Financial statement analysis found that the ‘creative accounting’ was simply an inconsistency in accounting practices. This, in turn, produced an inconsistency in key financial indicators. While Enron’s stock price skyrocketed, Enron’s cash flow was unimpressive.
Meanwhile, Enron’s substantial rise in debt resulted in an alarmingly high debt-to-capital ratio. What supposedly had been a smooth-running business model was actually a rather complex long-term, get-rich-quick scheme by Enron executives. Mixed in with this scheme were a multitude of arrogance and a lack of business ethics. Indeed, Bethany McLean was right: Enron was overpriced.
Enron had taken advantage of society’s—and its own employees’—naivety about accounting practices and the stock market. Despite a landmark rise to the top of the market, Enron could no longer sustain its success. In a matter of months, Enron collapsed into bankruptcy, with innumerous employees and shareholders losing their retirement savings. Arthur Andersen, which had been one of the world’s biggest accounting firms, also collapsed due to its contributions to Enron’s ‘creative accounting.’ This would lead the government to step in and create what is now known as the Sarbanes-Oxley Act.
Aftermath: The Economy After the Fall of Enron
Prior to Enron’s collapse, companies such as Enron inspired people to go back to school to get an MBA in order to make a lot of money. After Enron’s collapse, the same companies still inspired people to go back to school for an MBA, not to follow Enron’s example but to make sure others did not imitate what Enron had done. Enron was overpriced and its success was a sham.
In today’s struggling economy, it is completely appropriate to question any company’s success and “ask why,” because people may not know what road the company took to establish a higher stock price. The current economy (or lack thereof) is largely due to deceptive and irresponsible business practices of the executives of large companies. In trying to get ahead financially, these executives ruined their companies and poisoned the fiscal health of millions of people.
Despite the fall of Enron happening nine years ago, it remains relevant; Sarbanes-Oxley reiterates this. Now, when executives, employees, analysts, and shareholders evaluate business practices and reported results, they should never take success for granted. Rather, they should always remember when Enron was overpriced.
Sources:
Clausen, James. “The Sarbanes-Oxley Act and Corporate Governance: Accounting Ethics for External Financial Statement Reporting.” Suite101.com. Accessed May 3, 2010.
DeGrande, Barbara. “Enron – The Smartest Guys in the Room: Alex Gibney’s Documentary of Corporate Greed is a Timely Film.” Suite101.com. Accessed May 3, 2010.
Keeffe, Philip. “Creative Accounting Crimes in the 21st Century: Criminals in Business Suits can Make Us Laugh.” Suite101.com. Accessed May 3, 2010.
McLean, Bethany. “Is Enron Overpriced?” Fortune. March 5, 2001. Reprinted on CNN.com. Accessed May 3, 2010.
McLean, Bethany and Peter Elkind. The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. New York: Penguin Books, 2003.
The Smartest Guys in the Room. Dir. Alex Gibney. Nar. Peter Coyote. Writ. Peter Elkind, Alex Gibney, and Bethany McLean. DVD. Magnolia, 2005.
Richard Fajardo - Hello! My name is Richard Fajardo and I am an MBA graduate. As a Graduate Assistant at Bowling Green State University, one of my duties ...
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