Enron 2001

Enron Corporation was an American energy company based in Houston, Texas. Kenneth lay founded Enron in 1985 through a merger of two natural gas pipeline companies, Houston Natural Gas and Internorth. Enron expended its business as a trading company and later as a multinational that owned and manages pipelines, electricity plants, pulp and paper plans, broadband assets and water plants internationally and domestically. The company filed for bankruptcy in December 2, 2001. Enron Agency Problem: Agency problem is basically defined as the conflict in the interest of shareholders and management. The financial statements of Enron was nontransparent it does not show the exact picture of the performance of the corporation. Enron used the market to market accounting by which they used present value of future earning and cost of the long term contracts which show the high performance of the corporation. It also does not show the loss faced by any contract failure. Information provided to the stockholders was not accurate related to the business of Enron the corporation have hide many investments from the shareholders. Enron started many special entities which they show was independent while they were part of Enron and used its assets and financing. Two ways to minimize the agency problem is to monitor the performance of the management and by making the stockholder and management interest alike and one of the good way is by giving shares to the management but in the case of Enron the management interest was not same as of stockholders. Managers were focusing on short term performance in order to fulfill there own interest of maximizing share value for short time instead of long term performance of the corporation. Secondly the monitoring of management performance by audits was also a fraud in this case. The ultimate impact was the bankruptcy of Enron and huge loss for the shareholders.