1. Enron was valued at $2.3 billion when it was formed in July 1985. On August 23, 2000, its stock was at $90 per share and it had a market capitalization of $65.9 billion. Explain the major business practices that created such dynamic growth in the price of the stock.
Enron used many different tactics to inflate their stock prices. The one that sticks out to me is when they signed a 20-year contract with Blockbuster. Early in the contract Blockbuster and Enron parted ways with a null and void contract. However, Enron still kept the contract on the books as future earnings when they knew that money was never going to come in. They did this so their stocks prices would stay inflated.
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Overall there were several business practices that caused Enron’s stock prices to increase and most of it was due to a flawed and failed accounting system.
2. Why did Enron go bankrupt?
Enron went bankrupt because they were artificially inflating their stock price. They had an audit company that did not report a fair opinion of their findings. The public started to back away and chose not to invest due to their lack of confidence in the company. In 2001, the SEC started investigating the organization and they had to restructure their losses. Another loss took place when Enron’s credit rating was downgraded by Moody’s and Fitch. I believe they ultimately went bankrupt due to their lack of integrity and honesty, especially when it came to their accounting methods.
a. What role did corporate governance (broad of directors’ and top management’s leadership and responsibilities) have in Enron’s demise?
Top management played an enormous roll in the fall of Enron. Management was always looking for loop holes to hide debt and keep their stock prices high. They also influenced their audit firm, Arthur Andersen, by paying them high consulting fees. By doing this they were essentially paying Andersen to look the other way.
b. What was the responsibility of the “independent” outside auditors, Arthur Andersen & Co.?
Andersen should have come in...