Fraud

The Fall of Enron

- despite this elaborate corporate governance network, Enron was able to attract large sums of capital to fund questionable business model, conceal its true performance through a series of accounting and financial maneuvers and hype its stock to unsustainable levels

- the stresses that the business model created for Enron’s financial reporting, and how key capital market intermediaries played a role in the company’s rise and fall

- growth impressed the capital markets and few asked questions

- the company was unsure if it could continue to earn high returns from gas trading

- it was believed that the major barrier to entry in gas trading was Enron’s market knowledge achieved through its dominant market position

- many other firms were positioned to challenge Enrons dominance, including large gas producers

- in comparable markets, early rents to first movers had quickly dissipated as competitors entered

- the internet provided a low cost platform for existing or potential competition to develop energy markets that could compete with EnronOnline

- Enron had some success in applying the gas bank trading model to electricity, but the viability of the model for some of the other products selected for expansion was uncertain

- Even if Enron was successful in the international energy market questions could be raised about whether the company could create a sustainable advantage over competitors that later sought to enter the market

- Enron took full advantage of accounting limitations in managing its earnings and balance sheet to portray a rosy picture of its performance

- Enrons primary challenge in using mark-to-market accounting was estimating the market value of contracts, which in some cases ran as long as 20 years

- Enron used special purpose entities to fun or manage risks associated with specific assets

- Special purpose entities are shell firms created by a sponsor, but funded by independent equity investors and debt financing

- Enron provided only minimum disclosures on its relations with special purpose entities

- Investment fund managers failed to recognize or act on Enrons risks because they had only modest incentives

- A range of academic research finding have found evidence tat sell-side analysts are influences by their proximity to investment banking

- The experience with Enron – stock compensation programs can motivate managers to make decisions to pump up short-term stock performance, but fail to create medium or long term value

- Enrons audit committee had more experience then many

- The audit committee was in no position to second guess the auditors on technical questions related to the special purposes and did not challenge several important transactions

- Most of the proposals for improving auditing have focused on the potential conflicts between auditing and consulting

- Incentives inside the firm need to encourage audit professionals to exercise judgement and walk away from