In laymans terms, how did they hide the poor health of the company from regulators and tbe public, why did the house of cards eventually collapse? And why couldn’t every company be doing the same or similar houdini tactics then and now?
In: Economics
Enron was a big and complicated company, with big and complicated financials. This allowed them to do various ‘tricks’ to make their numbers look better than they really were, because tracking the reality of all of their finances/deals/etc. would’ve been a full-time job, and regulators and investors have more than one company to worry about.
They used various tricks, but a big one was signing long term deals, and then ‘accelerating’ that long term revenue to their books immediately. So say they had signed an agreement to sell $10 million dollars worth of widgets to a company each year for the next 10 years. They’d count that as $100 million of revenue this year, in order to make their short term financials look better.
It fell apart because even though regulators/investors aren’t tracking 100% of their finances, they do occasionally take passing looks at them, so you need to have at least a little bit of reality to fudge, if you’re just making it all up from nothing that’s going to get noticed. But as Enron got deeper and deeper into its creative accounting, it got harder and harder to find numbers and deals that it could massage. Eventually enough cracks started showing that outside people started taking a closer look, and that was the beginning of the end.
Why couldn’t every company be doing the same thing? Well regulators and investors have learned some lessons from Enron (and other such scandals) so sometimes they’re more savvy about watching for similar issues. But the reality is that plenty of companies can and likely do fudge their numbers to various degrees. But at the end of the day it’s illegal, and if you get caught there can be some pretty rough consequences. Generally significantly worse consequences than the likely results of your company straight up failing and going bankrupt.
Latest Answers