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Enron Downfall

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Enron’s Downfall

In 1985 Enron was created from a merger between Houston Natural Gas and InterNorth, both companies dealing of natural gas pipelines. During the process of the merger, Enron incurred massive debt – the only hope of survival was initiating a new business plan and strategy to generate profits. Over the next decade, Enron’s reputation grew within the country. CEO Kenneth Lay hired Jeffrey Skilling to lead the company’s efforts, again to success. The business began to flourish while employees were expected to perform at top rankings and produce earnings after Skilling’s roll out of RICE went into effect. In 1999, Richard Causey, a previous Arthur Andersen accountant who left his former position to join Enron as assistant controller, is named Chief Accounting Officer and assists Andrew Fastow, one of Skilling’s first hires, in creating two partnerships maintained to buy poorly performing Enron assets and risky investments to hide company debt. Transferring these assets meant the losses would remain off of Enron’s financial statements. “Reducing hard assets while earning increasing paper profits served to increase Enron’s return on assets and reduce its debt-to-total-assets ratio, making the company more attractive to credit rating agencies and investors.” In 2000, Enron’s stock hit an all-time high of $90.56 and they were feature in Fortune magazine for Most Admired and Innovated Companies. On August 22, 2001, Sherron Watkins, a finance executive shares concerns of finances and accounting entries that could ruin the company and demise the employees forewarning Lay of the possible outcomes. Not two months later, Enron announces a $638 million 3rd Quarter loss and a $1.2 billion reduction in shareholder equity from trading venture write-offs. Causing much concern, Securities and Exchange Commission launches an investigation into the...

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