Later the mark to market accounting system posed to be a major flaw. Aggressive accounting by the company had polluted the books by being optimistic about the future performance. Any company for that matter should have a steady cash flow, but Enron had cash only on the papers. Therefore the cash crisis struck the company. Before the company could do anything to revive the losses, the false reporting had backfired and the company was in deep debts (Bratton, 2001).
Kenneth Lay was the major spokesperson of the company. In 1990’s the American government deregulated the sale of natural gas. This gave way to Enron to sell the energy at higher prices in the market. This resulted in high revenues for the company. Thus the company shifted from being an energy company to a trading company. The company started exploring ways and means to increase its revenue all across the world. Being an innovative company, it attracted students from top American Universities to work for Enron. The employees were given shares as the part of their cost to company. This made it important for the company to increase its share prices.
Special purpose entities are made so that the companies can carry out a temporary task. In this the sponsor creates the entities but these entities are funded by the investors. Enron used special purpose entities to do false reporting of the revenues and to hide debts. It also helped Enron to show inflated prices of the shares as well.
The company had to hide its losses. For this purpose, Andrew Fastow made many special purpose entities namely Chewco, LJM1, LJM2 and Raptor. When the world came to know that Enron was hiding the debts through its SPE’s then the stock prices of the company began to fall. None of the SPE’s introduced by Enron was legitimate. For an SPE to be legal, an outside investor should fund three percent of the equity, Enron should not control the SPE and Enron should not be liable for any loan or liabilities. These three criteria were not satisfied by the SPE and hence the debt levels were exposed to the world (Gordon, 2002).