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What Were the Consequences of the Enron Scandal? - Case Study Example

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Author : bjohns

Summary

The paper discusses the Enron scandal and its immediate consequences as well as the new legislation issued as a result of several fraud scandals: Sarbanes-Oxley Act. Enron Corp. is known as one of the largest scandals in U.S. history…

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What Were the Consequences of the Enron Scandal?

This case study represents a bold attempt to answer the question stated in the work's title: What Were the Consequences of the Enron Scandal?
Enron, “a provider of products and services related to natural gas, electricity and communications to wholesale and retail costumers” represented one of the largest fraud scandals in history. As a result of the fraud investigations, the company was forced to file for bankruptcy in December 2001. While the bankruptcy of a small company is taken as a routine, Enron’s case is different as the company was ranked seventh by Fortune 500.
During the 1990s, Enron expended quickly into several areas such as developing a power plant and a pipeline. This expansion, however, required large initial capital investments and long gestation period. By that time, Enron already raised a lot of debt funds from the market and hence any other attempt to raise funds would affect Enron’s credit rating. But Enron had to maintain the credit ranking at investment rate in order to continue business. On top of that, the company wasn’t making enough profits either, as it promised to investors. Hence, Enron began making partnerships and other special “arrangements” (Special Purpose Entity, or SPE). These companies were used to keep Enron’s debts and losses away from its balance sheets, therefore allowing it have a good credit rating and look good in front of the investors.
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