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Learning’s from the fall of a Wall Street Darling: Enron

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Enron, was an American seventh largest of its time company, bankrupt in 2001, destroyed more than $60 billion of shareholders value, more than 5,000 employees fired just after bankruptcy declared. More than 20,000 employees lost their billion dollars in the pension plans, its stock saw a decline from a high of $90.75 to a low of $0.26 just after the bankruptcy declared in December.

Not only Enron’s complicated governance structure put them in a risky situation, such as chairman and CEO, both positions held by the same person, but also mark to market accounting was a dangerous – technique used by Enron accountants.

Under their accounting technique, assets were held on a company’s balance sheet at their current value (instead of book value, which is typical for large corporations). Under a traditional book value accounting scheme, assets are listed as less accumulated depreciation at their purchase value.

Mark-to-market accounting can work well for businesses that hold many securities (Enron included), but extended to other types of assets can be very dangerous. This is exactly what happened at Enron. By doing this, the Enron parent company hid the losses and reported artificial gains through mark-to-market accounting. This leads them into a riskier situation. 

The beginning of 2001 came with a fall for Enron executives and shareholders.

Technically, Enron’s leadership fooled regulators with fake holdings and off-the-books accounting practices. Jeffrey Skilling became the CEO after Kenneth Lay resigned in February. Skilling resigned in August, Lay resumed the CEO post, and Enron eventually declared bankruptcy in December. Enron was delisted from the New York Stock Exchange in the following month.

What we learned from Enron’s bankruptcy, what we should do to lead a company and what should not, let’s talk about them:

What went wrong?

The top Officials in Enron abused their power and privileges. Manipulated information and use shady accounting practices (such as Mark to Market and SPE).

Unethical behavior and putting their interest before employees and the public to save repute hide losses and showed artificial gains.

What should we do to lead in a better way?

Setup a better, healthier corporate culture and a transparent organizational governance structure:

Follow the best accounting practices and accounting systems which disclose financial information

Follow fundaments principles, such as code of ethics, integrity, and professional competence. Especially for accountants, keeping the disclosures of the financial statements with accurate and fair profits and loss information is the primary responsibility.

Do not invest in a business which you don’t understand:

Warren Buffett – literally the most successful investor ever – claimed that even he did not understand some of the transactions described in Enron’s financial statements. 

It’s for all investors to never invest in any company before they have done their homework about the company’s financial statements, earnings, business model and governance structure, current, and future expectations.

Accountants and auditors are the people who play a vital role in your company’s success through financial strategies and help you move towards growth and profit in the most legitimate way. The way you handle your finances can decide the success or failure of your business. Whether your business is a sole proprietorship or a Limited Liability Partnership (LLP), you must know when to help ensure accurate accounting and financial management.

After all, you certainly do not want to be in a crisis and close all doors to your dream venture’s success.

Choosing the right accountancy firm helps you to have numerous benefits such as;

  1. Access to Experts; updated knowledge and best practices
  2. Save Time and Money
  3. Tax submissions and filing on time; save you from any legal consequences and penalties
  4. Automated and organized accounting system
  5. Fosters business growth and Secure Future focused.

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