Enron and Theranos (MANAGEMENT 7)

How was Enron different from other energy companies

1. A shift from traditional energy production to energy trading/ financial engineering

2. Complex opaque financial structure

3. Culture of growth at all costs

4. Strong political connections

Highlight some of the features of mark-to-market accounting

1. Recognized future expected profits as current revenue

2. Created inflated earnings that weren’t real 

3. Investors and analysts misled 

SPE/SPV

Special purpose entity/ vehicle (A separate legal company set up for a single, narrow purpose)

Why did Enron use SPE/SPV

They had high debt, and use of SPE/ SPV meant that they could transfer risk off of Enron’s balance sheet, it also meant that banks ignored the red flags due to lucrative fees and relationships

Reasons For Enron’s collapse

1. Excessive risk taking along with weak regulation 

2. Incentives tied to short term earnings 

3. Toxic corporate culture 

4. Lack of transparency 

5. Greed and conflicts of interest 

6. Board oversight and Auditors failed

Why did investors support Theranos

1. Strong narrative (Holmes compared to Steve Jobs)

2. Secrecy justified

3. Board filed with high profile names

4. FOMO in sillicon valley investing culture

Reasons For the Collapse of Theranos

1. Fraudulent Claims 

2. Lack of scientific validation and transparency 

3. Misleading partnerships 

4. Over-reliance on the image/ charisma of the founder

Lessons from Theranos

Importance of due dilligence, governance, industry expertise on boards, and transparency

Stake holders involved/ harmed (Theranos)

1. Investors (Lost millions)

2. Patients (Inaccurate results)

3. Employees (Pressured, silenced)

4. Regulators/ public trust (undermined)

Similarities between the enron and theranos cases 

1. Charismatic leadership that led to risky culture 

2. Lack of transparency and misleading claims 

3. Boards Failed

4. Auditors and regulators not acting strongly enough 

5. greed and hype over prudence 

6. Huge harm to stakeholders 

Differences between Enron and Theranos Cases

1. Industry

2. Mechanism of fraud (Accounting manipulation vs false claims about tech)

3. Scale of impact (Fortune 500 vs startup)

4. Complicit auditors vs secrecy keeping auditors/ scientists out)

5. Regulatory failure (SEC, FDA)