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The Enron Scandal - Essay Example

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The Enron Scandal [Course] Abstract This paper highlights various economic concepts in view of the scandal that tarnished the US corporate image – Enron Corporation. This brief paper examines economic concepts including supply and demand, incentives and unemployment, market failure, property and ownership and cost analysis…
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The Enron Scandal
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The Enron Scandal

Download file to see previous pages... There have been several causes suggested by various experts and analysts that actually caused the failure of the company. Experts have indicated Enron as the biggest audit failure in the American history. The biggest energy company in the world rapidly collapsed which drew attention on its several economical and commercial aspects (Wilkinson, 2005). For the purpose, this paper shall analyze the case study of Enron scandal. Several management and strategic decisions and policies contributed to the major fall in the US corporate history. The paper shall further analyze the causes of the failure from economic perspectives. Background Enron was established in 1985, and it was one of the leading seven American energy companies. It was one of the world’s leading natural gas, electricity, and communication companies. The annual revenues of the company rose from $9 billion to more than $100 billion in just 5 years after 1995 (Salter, 2008). According to reports and published financials, in 2000 the company’s stock price stood at $90; however, at the end of 2001, the stock price of Enron felt to less than $1. Furthermore, the last published financial statements of Enron depicted that the company made a loss of $586 million (Sterling, 2002). This caused the company to financially fail and by the end of December 2001, the company went bankrupt. As a result of this, billions of dollars were wiped out from the US capital markets and investors across the globe lost their trust in the US financial and corporate sectors, which were not efficient enough to build strong checks and balances on businesses like Enron. The case of Enron opened up investigations into several other unethical practices of other organizations, and the ripple effect shook up the entire US corporate sector. Supply and demand During 1990’s, the population of California raised by thirteen percent, whereas, the government did not make any enough investments in building power plants to cope with the rising requirements of electricity. The government expanded the existing energy plants’ capacity by 30% during 1990-2001. Furthermore, in 1991 the drought in the northwest states caused the supply of hydroelectric from Pacific Northwest of Oregon and Washington to decline (Barreveld, 2002). Both drought and energy shortages created a supply gap in the country, and the government faced several issues to cope with the energy demand in the region (Swartz & Watkins, 2004). With the rapid increase in the population and the breakdown in California’s electricity generating capacity created a situation of less supply as compared to the energy demand. The industrial sector was highly affected as the supply of energy remained very low during the peak working hours. Furthermore, the private industries were using privately owned power generating plants as energy reserves of California were not sufficient to meet the demand. On the other hand, the state owned energy plants were deliberately shut down in order to manipulate energy prices (Swartz & Watkins, 2004). The gap between supply and demand of energy was deliberate in order to raise prices of the electricity generated by private generators (Miller & Fusaro, 2002). Enron secretly exercised with the government to create a gap between the energy produced and its requirement in the ...Download file to see next pagesRead More
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