Why Did Enron Go Bankrupt?

enron

One of the most successful natural gas merchants in North America, Enron Creditors Recovery Corporation was established by Kenneth Lay in 1985 from the merger of big natural gas pipeline firms InterNorth and Houston Natural Gas. The approval of legislation in the U.S. concerning the deregulation of natural gas sale is one of the events that affected the outstanding financial performance of the company in the 1990s. The development of the online business model known as EnronOnline also contributed to the popularity of the company in November 1999. However, stockholders were alarmed by the sudden decision of the firm to file for Chapter 11 bankruptcy protection in December 2001.

History of the Company

Why did Enron go bankrupt? There are several reasons for the bankruptcy of the firm. One of the reasons is the faulty and alleged fraudulent financial reports released by the natural gas company since 1997. Arthur Andersen, the firm’s auditor, announced that the profits posted by Enron before the 30th day of June in 2001 were overstated by almost $600 million or 16 per cent. After the release of the official statement of the firm regarding the fraudulent financial activities, its stock value decreased from $83.13 to $0.10.

Another reason for the bankruptcy of Enron is the poor performance of its investments in South America and India. According to the firm, this is caused by several factors like the improving world energy crisis and the alleged declining performance of the Internet broadband market.

The company also blamed its bankruptcy to the irrevocable resignation of CEO Jeffrey Skilling in August 2001. Skilling’s resignation alarmed the shareholders of the firm, which led to the decision of the U.S. Securities and Exchanged to investigate the declining financial performance of Enron in October.

The company reduced Enron’s stockholder profits by $1.2 billion. The move was caused by the losses incurred by the firm from its international subsidiaries, broadband division as well as partnerships with Chewco and LMJ. Days before November 2001, the company fired chief financial officer Andrew Fastow due to the failing and deceptive partnerships with energy firms.

In the mid November 2001, Enron was faced with troubling financial performance when the Securities and Exchange Commission forced the company to pay its debts to stockholders immediately. Because of the declining performance of the firm, Dynegy Inc. did not agree with the proposed merger with Enron. Before 2001 ends, the collapse of the largest energy company in North America was officially announced.

Related Posts