The Types of Risks Involved in Enron Corporation Case

The types of risks involved in Enron Corporation case

1. Operational Risk

Operational risk is divided into two which are internal risk and external risk. Risk that involve in Enron Corporation is internal risk. In this case, the risk that relate is employee’s risk which are human error and internal fraud. The fraud is committed by the company.^[1] 

Enron Corporation suffered severe losses due to wrong from accounting practices and a mistaken gamble from the incision. It because Enron Corporation’s owner gave full freedom to the management in handling the financial matters.. It allows companies to hide the loss from the owners and shareholders. On paper’s Enron’s financial statement is very pretty and looks favorable, but in reality Enron was losing money. Fraud is committed by company executives and others remained silent. This is only to attract foreign investors.

In addition for the internal fraud is Chief financial officer leading his team to create a complex web site company in which the company does not exit. The company conducted transactions with Enron Corporation fake company aims to raise money and hide losses suffered in the financial reports and looks like Enron Corporation debt free. These actions have left the company and shareholders of Enron Corporation. At that time, Enron’s financial position is negative.

1. Market Risk

Enron Corporation also suffered market risk. As we know, market risk can defined as the risk related to the uncertainty of a financial institution’s earnings on its trading portfolio caused by changes and particularly extreme changes, in market condition such as market volatility. In a simple word, market risk is uncertainty resulting from changes in market prices.

If we see in Scandal Enron, the main reason for the collapsed of Enron is due to the use of ‘mark to market’ accounting process. The accounting practice of recording the estimated future profitability of each agreement at current market value rather than the future value or historical value. They applied the mark to market on the grounds that this accounting will reflect the real economic value. The accounting practices outlined when long-term contracts signed, income was estimated at the present value of the future.

Mark to market is a measure of the fair value of accounts that can change over time, such as assets and liabilities. Mark to market aims to provide a realistic appraisal of an institution’s or companies current financial situation. The accounting act of recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value. Problems can arise when the market based measurement does not accurately reflect the underlying asset’s true value. This can occur when a company is forced to calculate the selling price of these assets or liabilities during unfavorable or volatile time, such as a financial crisis.