woensdag 24 november 2010

What caused Enron to collapse?

Enron collapsed because of their creative accounting practices. It didn’t collapse because it was so big, but because people thought Enron was much bigger than it actually was.

Enron had many subsidiary companies around the world which made it possible for them to hide big losses. The transactions between Enron and the subsidiaries masked Enron’s real financial state. Losses were hidden, assets were stated.

This way, Enron could borrow much money from other Wall Street firms without any problems. When the fraud was finally found, accounting firm Arthur Anderson lost their liability to the public and was forced out of the market. Enron’s stocks lost all their value.

Of course this wasn’t an accident. The focus was the appearance of the value to rise stock prices, the focus was not creating real value. This was part of Enron’s management culture. It’s a good example of the dark side of American capitalism.


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