ENRON SCANDAL
On July 16, 1985, Kenneth Lay founded the Enron Corporation in Omaha,
Nebraska. The organization was formed through the merger of Houston Natural Gas
and InterNorth, a Nebraska pipeline company. A series of bills approved by Congress in
the early 1990s deregulated the sale of natural gas in the United States of America. In
order for the organization to survive, Jeffrey Skilling, a newly recruited consultant,
devised an innovative business strategy. Enron converted itself into an energy
derivative contract trader, serving as a middleman between natural-gas suppliers and
their clients, and quickly controlled the market for natural-gas contracts, generating
significant profits on its trading. Skilling steadily shifted the company's culture to
prioritize aggressive trading in order to produce cash in the shortest period of time. He
also brought in Andrew Fastow, who swiftly ascended through the ranks to become
Enron's CFO. There were deals to be done everywhere, and the corporation was ready
to establish a market for anything that anyone wanted to trade. Enron Online was
created in 1999, and Enron conducted its first bandwidth trade in the same year. It
traded derivative contracts for a wide range of commodities, including power, coal,
paper, and steel, as well as weather. During the dot-com boom, Enron Online
developed an online trading business, and by 2001, it was completing $2.5 billion in
online deals per day. Enron also invested in the construction of a broadband
telecommunications network to enable high-speed trading. Enron earned Fortune
magazine's 'America's most innovative company' award for an astounding six years
between 1996 and 2001, and the respected Financial Times named Enron the 'energy
company of the year' in 2000.
As the boom years came to an end and the business faced more competition in
the energy trading sector, Enron's revenues decreased rapidly. As a result of
shareholder pressure, corporate leaders began to depend on shady accounting
practices. Enron used the mark-to-market (MTM) accounting method. Enron claimed
that this method of accounting more properly represented the results of its transactions
and contracts portfolio management. The strategy allowed the company to put
unrealized future gains into current income statements, producing the appearance of
higher current earnings while hiding issues. Enron was also a forerunner of the Special
Purpose Entities established by Citigroup and JPMorgan Chase. Because prepaid
commodities agreements allowed Enron to record loans as cash flow from operating
activities, both banks built derivatives contract structures that enabled Enron to record
loans as cash flow from operations. The accounting standards were sufficiently
ambiguous. However, Enron's accounting firm, Arthur Anderson, also conducted
Consulting work for Enron, signed off on the company's problematic accounting
procedures, and minimized complaints about the accounting techniques, stating that
any workers who complained were immediately terminated.
Enron's Jeffrey Skilling took over as CEO in February 2001, with Lay remaining as
chairman of the board of directors. Skilling unexpectedly quit in August 2001, and Lay
took over as CEO. An anonymous note from a vice president had alerted Lay of
impending Enron accounting issues. In mid-2001, a number of experts began to delve
into the intricacies of Enron's publicly issued financial accounts, prompting the
Securities and Exchange Commission (SEC) to launch an investigation. As details of the
accounting irregularities surfaced, Enron's stock plummeted, and Fastow was dismissed.
Some Arthur Andersen employees then began eliminating documents connected to
Enron audits. Enron sought to avert disaster by agreeing to be bought by Dynegy, but
the deal fell through. The disclosure prompted Enron's shares to fall below $1 per
share, wiping out the value of the company's 401(k) pensions.
On December 2, 2001, Enron filed for bankruptcy. On a variety of offenses,
many Enron executives were indicted and sentenced to prison. In 2002, Arthur
Andersen was found guilty of destroying evidence, lost its license to practice public
accounting, and was charged for obstruction of justice, resulting in the layoff of
thousands of employees. Three years later, Andersen's attorneys were successful in
convincing the U.S. Supreme Court to reverse the obstruction of justice decision based
on erroneous jury instructions. But at that time, the business had vanished. In 2006,
Skilling and Lay were convicted of various conspiracy and fraud charges. Skilling was
sentenced to more than 24 years in jail but served just 12 of them. Lay, who faced
more than 45 years in prison, died before his sentence was handed out. Fastow pled
guilty in 2006 and was sentenced to six years in jail; he was freed in 2011.
Enron was one of the largest and fastest-growing corporations in the United
States before the time of its demise. It began with energy trading and has now
extended into industries such as trading on internet capacity and developing power
plants. Who could have imagined that the Enron Firm, which Fortune magazine ranked
as the most inventive corporation in the United States, would experience the most
calamitous collapse in American capitalism's history? No one, for sure, given with the
Company's achievements throughout the years. However, after reading articles about
the scandal, I can say that Enron was never a good corporation; they were not
conducting business in a morally upright manner. They bent the rules in order to
establish credibility, but this finally led to avarice, and they chose expediency rather
than principle. As a result, its demise was predetermined from the start.
The collapse of Enron overwhelmed the business world. The corporation is eager
for money, allowing them to deceive the public, and it promoted innovation but
discouraged anything else other than success. It's particularly upsetting since thousands
of its employees have been laid off, and many investors lost money. This is, in reality,
the story of the demise of an ambitious corporation that rose to the top but did not stay
there for long. With these, I am horrified by Enron's poor and immoral management
and work environment, as well as the company's upper-level leaders. The key players in
the Enron case included Kenneth Lay, Jeffrey Skilling, Andrew Fastow, and an auditing
company that failed to do its responsibility of evaluating and auditing Enron's financial
statements is a disappointment.
One problem that caught my attention the most is the Enron's accounting
method changed from a traditional historical cost accounting method to a mark-tomarket (MTM) accounting method. The fact that the corporation deceived its investors
by enabling losses to be written off without impacting the company's operations is
upsetting. This simply means that, even though the money had not yet been paid or
realized, their accounting already incorporated this projection of future cash flow to the
business. They abandoned the integrity and truthfulness of the company's accounting
and financial information in order for the company to appear more profitable.
Furthermore, I am profoundly dismayed with the higher-ranking executives
implicated in the Enron scandal. As a future accountant, it completely exposed me to a
range of dubious accounting practices and schemes that I may learn from and identify if
I come to contemplate similar activities in the future once I become accountant. It is
critical to retain a professional demeanor. As a result, I am in favor of and support the
new provisions put in place to prevent a recurrence of this situation. The SarbanesOxley Act of 2002 imposes severe penalties for discarding, changing, or falsifying
financial documents. The statute also prohibited auditing firms from performing
consultancy services for the same clientele. This strategy increases corporate morale by
protecting all investors and encourages them to reinvest.
References:
https://www.britannica.com/event/Enron-scandal
https://youtu.be/e5qC1YGRMKI
https://www.investopedia.com/updates/enron-scandal-summary/