Introduction:

Enron company incorporated in 1985 by a merger between Houston Natural Gas Company and
Omaha-based Inter North Incorporated. Kenneth Lay who had been the CEO of Houston Natural
Gas became Enron's CEO and chairman. Kenneth Lay rebranded Enron into an energy trader and
supplier within a short span of time. In 1990 the CEO Lay created the Enron Finance Corporation
and appointed Jeffrey Skilling who was work as a consultant in McKinsey and Company and had
impressed Lay to head the new corporation. Skilling was then one of the youngest partners at
McKinsey. Skilling joined Enron at an auspicious time. The era's minimal regulatory environment
allowed Enron to flourish. At the end of the 1990s, the dot com bubble was in full swing, and the
Nasdaq tried to hit 5,000 first time in the history. Revolutionary internet stocks were being valued
at very high levels and, consequently most investors and regulators simply accepted highest share
prices as the new normal in this era.
Enron employed around 21,000 people and was one of the world's leading electricity, natural gas,
pulp and paper, and communications companies with claimed revenues of $111 billion in 2000. It
was considered as America’s largest supplier of energy. In December 2001 Enron filed for
bankruptcy. Following are the causes of downfall of Enron:

Downfall of Enron:
Enron's complex financial statements were confusing to shareholders and analysts. In addition, its
complex business model and unethical practices required that the company use accounting
limitations to misrepresent earnings and modify the balance sheet to indicate favorable
performance.
The combination of these issues later resulted in the bankruptcy of the company, and the majority
of them were perpetuated by the indirect knowledge or direct actions of Lay, Jeffrey
Skilling, Andrew Fastow, and other executives such as Rebecca Mark. Lay served as the chairman
of the company in its last few years, and approved of the actions of Skilling and Fastow, although
he did not always inquire about the details. Skilling constantly focused on meeting Wall
Street expectations, advocated the use of mark-to-market accounting (accounting based on market
value, which was then inflated) and pressured Enron executives to find new ways to hide its debt.
Fastow and other executives "created off-balance-sheet vehicles, complex financing structures,
and deals so bewildering that few people could understand them.

Accounting and Transactional Techniques:

Enron use different accounting and transactional techniques like mark to market method, special
purpose entity etc, which shows how much it overstepped the limit imposed by the financial
regulations of the Financial Accounting Standards. Not all the seven techniques was in conflict
with the accepted accounting rules and regulation, but a great deal of it was classified as
questionable while investigating the bankruptcy of the firm. Financial Accounting Standards
transactions were used by Enron to convert liquid assets on its balance sheet, while in fact retaining
control over them. This was achieved by the sale of the assets through a number of steps to a
Special Purpose Entity not consolidated in its financial statements. Enron also hedged the value of
its investments by entering into derivative contracts with counter-parties related to itself. The
acceptability of a hedge from the point of view of accounting rules turns on the existence of an
unrelated party prepared to assume through a contract part or all of the economic risk of the
position being hedged. These conditions are not fulfilled if one of the counter-parties to the contract
is closely related to the firm. These conditions were thus not fulfilled for a number of important
hedges entered into by Enron since, first, the counter-parties to the hedges were entities in which
Enron employees participated and over which they exercised managerial control; and, second, the
resources of these entities were largely Enron stock, forward contracts to purchase such stock, and
warrants on the stocks of firms in which Enron had controlling investments.

Market to Market:
The use of mark-to-market accounting later backfired. The company's aggressive accounting had
corrupted Enron's books and had allowed the company to be far too optimistic in it's assumptions
about the future profits. Cash is a necessity for any company to run and Enron mostly had paper
revenue, so by the middle of 2001, they came to the conclusion that the cash crisis had struck them.
Bankruptcy:
On November 28, 2001, Enron's two worst possible outcomes came true. Credit rating agencies
all reduced Enron's credit rating to junk status, and Dynegy's board tore up the merger agreement
on Watson's advice. Watson later said, "At the end, you couldn't give it [Enron] to me."[11]:403
Although they had seemingly ironed out a number of outstanding issues at a meeting in New York
over the previous weekend, ultimately Dynegy's concerns about Enron's liquidity and dwindling
business proved insurmountable.[65] The company had very little cash with which to operate, let
alone satisfy enormous debts. Its stock price fell to $0.61 at the end of the day's trading. One
editorial observer wrote that "Enron is now shorthand for the perfect financial storm."[90]

Systemic consequences were felt, as Enron's creditors and other energy trading companies suffered
the loss of several percentage points. Some analysts felt Enron's failure indicated the risks of the
post-September 11 economy, and encouraged traders to lock in profits where they could.[91] The
question now became how to determine the total exposure of the markets and other traders to
Enron's failure. Early calculations estimated $18.7 billion. One adviser stated, "We don't really
know who is out there exposed to Enron's credit. I'm telling my clients to prepare for the worst.

Within 24 hours, speculation abounded that Enron would have no choice but to file for bankruptcy.
Enron was estimated to have about $23 billion in liabilities from both debt outstanding and
guaranteed loans. Citigroup and JP Morgan Chase in particular appeared to have significant
amounts to lose with Enron's bankruptcy. Additionally, many of Enron's major assets were pledged
to lenders in order to secure loans, causing doubt about what, if anything, unsecured creditors and
eventually stockholders might receive in bankruptcy proceedings.[93] As it turned out, new
corporate treasurer Ray Bowen had known as early as the day Dynegy pulled out of the deal that
Enron was headed for bankruptcy. He spent most of the next two days scrambling to find a bank
who would take Enron's remaining cash after pulling all of its money out of Citibank. He was
ultimately forced to make do with a small Houston bank.[65]