The Enron Collapse Case

1. What are the implications for Enron of “mark-to-market” accounting?

This accounting method make it easy for company to manipulate their revenues. No matter how much they actually earned, the reported revenue they claimed to the public is determined by themselves. It paves the way for company to catch the purpose of continuing growth in revenue and also market expectations. With the “help” of this method, the company’s stock price could rise even the market index decreases. As a result , this accounting method would raise the problem of inefficient or even fake presentation of company’s performance and also lack of transparency in operating.

2. Why did the banks do inadequate due diligence?

There are maybe several reasons why banks do inadequate due diligence. One of the reasons is banks fully trust company like Enron which had a perfect performance in stock market and successfully making continuingly growing revenue and stock price. Banks would never imagine such kind of company would bankrupt one day. Banks may also have economic relations with the company. Enron could promise some economic benefit to the bankers such as personal benefit and depositing or investing in banks. Some other reasons like bribery, promising to help bankers establish networks to expand the bank business are all possible. However, banks help Enron to cover unpleasant fact is a kind of corruption, the only reason they would take the risk to do unethical deals is that banks or bankers could benefit from unethical deals.

3. What were the main reasons for Enron’s collapse?

a. The case study

b. The movie “Enron: The Smartest Guys in the Room”

a. In the case, there were several main reasons for Enron’s collapse. One is the flawed idea to apply mark-to-market accounting method which posed a potential harm to company’s future operation, although in short term it may shows a good performance of the company both in revenue and in stock price, but in long run, it is not a good way for company to operate. Second reason is Enron’s culture of ranking by performance. This causes the atmosphere of self-enrichment by employees and led to the ignorance of project management. The third reason is that Enron’s target was too aggressive and focused too much on how much they could earn instead of whether the money would make sense under business perspective. The fourth reason is that poor implement of the project, since Enron did not consider many important factors into consideration, managers could only see the large potential to make profit but ignored there may also be large potential to loss because the more you earn the larger risk you have to take. Another reason is inattentive oversight