ELI5- What was the Enron scandal?

Question

I am reading a case study for a marketing law class, but the finance/accounting/legality aspect is difficult for me to understand

In: 13

Answer 1

Enron was an energy company. A lot of things went wrong with the company in complicated ways, but the main thing that destroyed them was their innovative approach to accounting.

They used something called “Mark-to-market” accounting which was legitimately used in financial organizations.

They used this to assign value and profits to things that didn’t actually had any value or made any profits.

Once people started actually looking at the books it became clear that there was a lot less money there than they claimed.

In general Enron pioneered the idea of treating energy more like financial instruments. This hist upon limits when people actually want to do things like use the energy to heat their homes and turn on the lights. A lot of things you can do with financial instruments you can’t do with megawatts and barrels of oil.

The idea that the whole point of the energy infrastructure was to maximize profits instead of providing light and heat to people, lead to blackouts when there was no real shortage and people just wanted to drive prices up. Line workers having their pensions stolen and generally business decision being made without any regard to human suffering that would be caused made the company hugely unpopular to a lot of people, but as long as they still made profits on paper the guys in charge were in the clear.

Only when it turned out that they had written anticipated earnings in their books as actual future profits that would never come into existence and that the whole thing was a house of cards did they crash.

They tried a lo of ridiculous things Weather derivative hat were basically gambling on weather it would rain. (different from buying insurance in case your big event gets rained out)

Crazy stuff that could only fly because of the dotcom boom and all the changes that came with it.

the mark-to-market thing to invent profits that weren’t real was what brought them down though.