*Originally published on Suite101.com in 2010; minor revisions made pertaining to Search Engine Optimization (SEO).
The price of Enron stock amazingly rose during the dot com
boom and bust. Journalist Bethany McLean
helped discover Enron’s secret by asking ‘why?’.
At the turn of the century, the stock market rose and fell
amidst the dot com boom and bust.
Technology firms rose to the forefront, only for an innumerous amount of
firms to crash and burn. In the midst of
this chaos was Enron. Interestingly
enough, Enron was an energy company who did not fit the new age technology description.
As a misfit at the top of corporate
America, Enron’s questionable practices would reshape the business world and
the accounting practices that come with it.
Is Enron Overpriced?
McLean curiously questioned Enron’s success in Fortune magazine in 2001. She spoke to Enron executives and market
analysts to get a better picture of the company. From their feedback it was clear that McLean
had every right to question Enron’s success.
No analysts could explain how Enron got its stock price so high. Some described what Enron did as operating in
a “black box”.
While the analysts could not fully understand how Enron
worked, Enron refused to give details about their operations. Enron’s executives protected its operations
as trade secrets. Furthermore, Enron
guarded its financial information as much as possible. This raised many eyebrows, but most analysts
backed off. While a handful of analysts
rated Enron stock with a ‘hold’ status, several analysts endorsed Enron—even
though they could not understand how Enron was operating. At the same time, the Enron employees who
were aware of what was going on (please note that most employees were not aware)
kept quiet.
Just Ask Why
A further review of Enron’s “financialization of energy” revealed
the use of hedge and derivative funds, bogus offshore businesses, and ‘creative
accounting’. Financial statement
analysis found that the ‘creative accounting’ was simply an inconsistency in
accounting practices. This, in turn, produced
an inconsistency in key financial indicators.
While Enron’s stock price skyrocketed, Enron’s cash flow was
unimpressive. Meanwhile, Enron’s
substantial rise in debt resulted in an alarmingly high debt-to-capital ratio. What supposedly had been a smooth-running
business model was actually a rather complex long-term, get-rich-quick scheme
by Enron executives. Indeed, Bethany
McLean was right: Enron was overpriced.
Enron had taken advantage of society’s—and its own
employees’—naivety about accounting practices and the stock market. Despite a landmark rise to the top of the
market, Enron could no longer sustain its success. In a matter of months, Enron collapsed into
bankruptcy, with innumerous employees and shareholders losing their retirement
savings. Arthur Andersen, which had been
one of the world’s biggest accounting firms, also collapsed due to its
contributions to Enron’s ‘creative accounting’.
This would lead the government to step in and create what is now known
as the Sarbanes-Oxley Act.
Aftermath: The Economy After the Fall of Enron
Prior to Enron’s collapse, companies such as Enron inspired
people to go back to school to get an MBA in order to make a lot of money. After Enron’s collapse, the same companies
still inspired people to go back to school for an MBA, not to follow Enron’s
example but to make sure others do not imitate what Enron had done. Enron was overpriced and its success was a
sham.
In today’s struggling economy, it is completely appropriate
to question any company’s success and “just ask ‘why?’”, because people may not
know what road the company took to establish a higher stock price. The current economy (or lack thereof) is
largely due to deceptive and irresponsible business practices of the executives
of large companies. In trying to get
ahead financially, these executives ruined their companies and poisoned the fiscal
health of millions of people.
Despite the fall of Enron happening nine years ago, it
remains relevant; Sarbanes-Oxley reiterates this. Now, when executives, employees, analysts,
and shareholders evaluate business practices and reported results, they should never
take success for granted. Rather, they
should always remember when Enron was overpriced.
Sources:
Clausen, James. “The
Sarbanes-Oxley Act and Corporate Governance: Accounting Ethics for External
Financial Statement Reporting.”
Suite101.com. Accessed May 3,
2010.
DeGrande, Barbara.
“Enron – The Smartest Guys in the Room: Alex Gibney’s Documentary of
Corporate Greed is a Timely Film.”
Suite101.com. Accessed May 3,
2010.
Keeffe, Philip.
“Creative Accounting Crimes in the 21st Century: Criminals in
Business Suits can Make Us Laugh.”
Suite101.com. Accessed May 3,
2010.
McLean, Bethany. “Is
Enron Overpriced?” Fortune. March 5, 2001. Reprinted on CNN.com. Accessed May 3, 2010.
McLean, Bethany and Peter Elkind. The
Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. New York: Penguin Books, 2003.
The Smartest Guys in
the Room. Dir. Alex Gibney. Nar. Peter Coyote. Writ. Peter Elkind, Alex Gibney, and Bethany
McLean. DVD. Magnolia, 2005.