My name is Lien

Enron was, at one point, one of the largest companies in the United States. Despite being a multi-billion dollar company, Enron began losing money in 1997. Although Enron's management had the responsibility to care for the shareholder’s best interests, the agency problem resulted in management acting in their own best interest.

Many analysts believe the company's board of directors failed to carry out its regulatory role in the company and rejected its oversight responsibilities, causing the company to venture into illegal activity. The company also started racking up a lot of debt. Fearing a drop in share prices, Enron's management team hid the losses by misrepresenting them through tricky accounting resulting in confusing financial statements. The company ended up filing for bankruptcy in December 2001.

Enron became the largest U.S. bankruptcy at that time with its $63 billion in assets. Criminal charges were brought up against several key Enron players including former chief executive officer (CEO) Kenneth Lay, chief financial officer (CFO) Andrew Fastow, and Jeffrey Skilling, who was named CEO in February 2001 but resigned six months later.

Discussing questions: How did agency problems lead the company to bankruptcy? Analyse the company’s corporate governance failure?

Answer:

1. First, Enron was one of the biggest companies in the United States Enron but by 1997 it started to lose money. The company's board of directors failed to fulfill its regulatory role in the company and denied its oversight responsibilities, exposing the company to the risk of illegal activities. The company also started to earn a lot of debt. Fearing a drop in the stock price, Enron's management team hid the losses by misrepresenting them through difficult accounting that resulted in misleading financial statements. Eventually the debt was so high that the company was forced to declare bankruptcy.

2. The causes leading to the bankruptcy of Enron company:

First and foremost, the company has a weak management department. The company's management just wants to put their own interests first, despite the growing debt.

Second, the company's board of directors does not yet have the vision and regulation of the company. They trust the management team so much that they falsify the company's data because they are worried that the stock will fall.