Enrons collapse the biggest Chapter 11 bankruptcy in US hist

Enron’s collapse, the biggest Chapter 11 bankruptcy in U.S. history, has been attributed in part to the company’s reckless use of derivatives. Is this a valid accusation?

Solution

Enron’s collapse, the biggest Chapter 11 bankruptcy in U.S. history, has been attributed in part to the company’s reckless use of derivatives. This is NOT VALID accusatiion.

The reason is that Enro\'s collapse due to Accounting Manipulation.

Enron is the most well-known of the accounting scandals of the early 2000s. Enron started as an operator of natural gas pipelines but evolved into global trader dealing in a range of products including gas, oil, electricity.

Enron was one of the most successful and profitable companies in America. Fortune rated Enron “ The most innovative Company in America” for six years from 1995 to 2000. But while many aspects of Enron’s business were successful, subsequent investigations suggest that Enron executives had been manipulating Enron’s financial statements to mislead investors and artificially inflate the price of Enron’s stock and maintain its credit rating. In 2000, for example, 96% of Enron’s reported earnings were the result of accounting manipulation.

Although the accounting manipulations that Enron used were quite sophisticated, the essence of most of the deceptive transactions was surprisingly simple. Enron sold assets at inflated prices to other firms ( or in many cases, CFO created ) together with a promise to buy back those at an even higher future price. Thus, Enron was effectively borrowing money, receiving cash today in exchange for a promise to pay more cash in the future. But, Enron recorded the incoming cash as reserves and then hide the promises to buy them in a variety ways. In the end, much of their revenue growth and profits in the late 1990s were the result of this type of manipulation.