Enron, The Natural Gas Provider Essay

In August 2000, Enron, an American energy corporation, stock had reached a high of $90.75 per share. However, by November 2001, the price had plummeted to less than a dollar amidst the collapse of one of analysts’ most highly recommended investments. On December 2, 2001, Enron became the largest American corporate bankruptcy to date. The company was deceptive, even fooling Fortune Magazine into naming it “America’s Most Innovative Company” for six consecutive years. The leadership styles of the executive staff fostered a cutthroat and unethical business subculture for the climate which inevitably led to Enron’s demise.

The company Enron was formed in 1985 after two natural gas companies, Houston Natural Gas and InterNorth merged together. Kenneth Lay, former chief executive officer of Houston Natural Gas was named CEO of Enron and a year later, Lay was assigned to the chairman of Enron. A few years later, Enron launched a website to allow customers to buy stock for Enron, making it the largest business site in the world. The growth of Enron was rapid; it was even named seventh largest company on the Fortune 500 list; however things began to fall apart in 2001. (News, 2006). In the third quarter of that same year, Enron posted an enormous loss of over $600 million in four years. This is one of the reasons why one of the top executive resigned even though he had only after six months on the job. The stock prices of Enron fell dramatically.

Enron used this loop hole and began to take many assets and liabilities off its balance sheet and into that of SPE’s, so as to be able to access more capital and significantly reduce its risks. It specifically used these SPE’s to borrow funds directly from outside lenders by supplying its own credit and using its high stock prices as guarantees. Enron took full advantage of accounting limitations in managing its earnings and balance sheet to portray a rosy picture of its performance.

According to the movie, Enron: The Smartest Guys in the Room, Kenneth Lay was no stranger to corporate scandal. In 1987 the president of the Valhalla office in New York, Louis Borget, was found out to be making risking trades, destroying trade documents, and keeping two sets of accounting books. He was not fired by Lay after Lay was informed of the wrongdoing, but later convicted and sent to jail. Jeff Skilling was hired in 1990, and decided to change Enron’s accounting method to mark-to-market accounting. This allowed them to book assets and liabilities at their fair value based on the current market price. This method was approved by the Securities and Exchange Commission and signed off on by Arthur Anderson, Enron’s accounting firm. This practice allowed Enron to report items at whatever they felt fair value was, which was often

Enron was created from the joining of gas pipeline companies in 1985 and was responsible for natural gas, electricity, and communication products and services (Ferrell, et al, p.318). During the 1990’s,

In 1985, InterNorth, a large energy and natural gas pipeline company acquired Kenneth Lay’s company, Houston Natural Gas, in an attempt to thwart a takeover. The newly converged company would later be named Enron. Kenneth Lay was named chairman and CEO very early on post-merger and is considered to be the founder of Enron. Enron’s troubles began very earlier on. Need to bring this paragraph to an end but can use this to add length to the paper if needed.

Enron’s greatest tool for concealing their debt and in the end was their ultimate demise was called “mark to market accounting” (oppel). “Mark to Market Accounting” is not totally illegal if it is done correctly which is acknowledging future sales and revenue with a new operation or business venture. What the Enron executives did was when a new natural gas plant was still in production they would predict that their new plant will generate them one hundred million dollars over the next ten years. However instead of just using this number as a future goal they would register this as revenue for that year. This would greatly increase their numbers and allow their stock to rise and profits to be divided among the top executives. To the outside world Enron appeared to be very successful and a great investment when in fact they were digging their own graves.

Enron was founded in 1985 as a result of a merger between Houston Natural Gas and InnerNorth of Omaha. During this time period there was a series of deregulations in the utilities industry which was highly regulated at the time. Enron original business was selling natural gas. Jeff Skilling developed the idea of a “gas bank” which was the middlemen for consumers and suppliers.

Expanding its business by utilizing its energy-trading model, Enron’s top executives fooled major financial institutions and accounting firms by hiding its losses from these new ventures within its financial statements. In the beginning, Enron was revolutionary in the gas pipeline industry, because it took advantage of the deregulated environment. As a result, Enron could ensure their customers, gas suppliers, consistent gas prices through hedging (Healy and Palepu 2). Enron’s success with this energy-trading model built its trustworthiness in the energy industry and beyond. Obviously, Enron proved its ability to successfully turn a profit with earnings of $979 million in 2000, which further instilled cognitive-based trust within its stakeholders (Healy and Palepu 1). Establishing itself as a progressive corporation, Enron sought to unload its heavy assets, such as pipelines, for lighter assets in the realm of the digital age. Furthermore, Enron management attracted the best employees to work for them by offering extremely generous salaries and bonuses. Another benefit of being an Enron employee was that Enron maintained a non-bureaucratic environment through committee-based employee performance evaluations (Healy and Palepu 4). Overall, Enron’s financial strength, cutting-edge ideas, and high-performing workforce established cognitive-based trust within its stakeholders.

In 1985, Houston Natural Gas and InterNorth, a natural gas pipeline company, merged, and Lay became CEO of both houses. In 1986, after many changes and more growth, the firm changes its name to Enron and relocated to Lay’s hometown of Houston, Texas. At this time Enron was both a natural gas and oil company. The company specialized in the moving of natural gas through its pipelines, extending thousands of miles across the continental United States. As the firm continued to flourish, it reformed its commercial approach by becoming a leading producer and distributer of energy in both the United States and the U.K., as well as becoming more involved in the trading market. Ambition and determination truly carried Enron to new heights, helping it to become one of the most powerful and innovative companies in the United States, even being “voted Most Innovative among FORTUNE'S Most Admired Companies” for “six years running” (Helyar). However, with much success, temptation arose, and good intentions were led astray. Damaging arrogance, risky behavior, and deception ultimately warranted the demise of the mighty Enron.

Enron, based in Houston, Texas, was founded by Kenneth Lay as an energy and pipeline company in 1985 from the merger of two natural gas pipeline companies, Houston Natural Gas and InterNorth. The impetus for Lay to start Enron was the deregulation of the natural gas market in the mid 1980’s, which relaxed the rules on natural gas prices and allowed for more flexible agreements between natural gas producers and pipeline managers. These changes essentially eliminated the practice of using long-term contracts between producers and suppliers in the industry and allowed for prices to fluctuate more freely. The price setting model that resulted is known as “spot pricing”. This was a big advantage for Enron, which at the time owned the largest network of interstate pipeline in the US.

Enron was formed in July 1985 by the merger of InterNorth and Houston Natural Gas (Enron Fast Facts, 2015). Kenneth Lay became chief executive of Enron and he hired Jeffrey Skilling to look after the company’s energy trading operation (The rise and fall of Enron, 2006). Skilling’s plan was to be basically a gas bank where buys gas from suppliers for future years at previously agreed prices and sells the gas to its customers in advance to purchase at specified prices for future years. By doing that, Enron was able to make money just as a bank would (Thomas, 2002). After seeing the successful results, there was a new division managed by Skilling, Enron Finance created in 1990 to begin selling financial instruments. Enron next step was Enron Online divisions and again it was overnight success and handled $335 billion in online commodity trades in 2000 (Thomas, 2002). Enron used a practice known as “mark-to-market” to report for its book and mark-to-market accounting requires to revalue assets on the balance sheet that respond to the increased or decreased market value and reports the difference as profit or loss on the income statement (Thomas, 2002). Taking this as its advantage, Enron recognized profits on its futures that intended to be sold 20 to 30 years later with the price that is impossible to estimate and record the unreliable profits on its income statement.

Enron lead the American energy, commodities, Enron Services was based in Houston, TX. During the turn of the 21st century Enron had an employee base of 20,000 people on payroll. Enron made profits by selling electricity, natural gas, communications, and pulp and paper. Enron’s revenues totaled over $101 billion in 2000. Due to Enron’s earning Fortune named Enron as the America Most Innovative Company. Enron was one of the biggest publicly traded companies and highly trusted by all investors. Enron earnings flourished during the start-up of the computer dotcom era in the 1990s. In November 1999, Enron build and launched EnronOnline site. This was the first ever web-based transaction system allowing buyers and sellers to buy, sell, and trade commodity products around the world. Enron peaked; $6 billion worth of commodities transacted through their EnronOnline website daily. EnronOnline allowed for Enron stocks to transact with participants in world energy markets. On their financial books Enron looked as they were doing extremely well and many investors sought out to buy Enron’s stocks. Enron net worth was about $70 billion, their shares traded for about $90 dollars each. Enron was known on Wall Street as a blue chip stock and was considered to be very stable and trustworthy. Enron was named the fifth largest company by Fortune 500. Enron lead the market in energy production, distribution, and trading.

Ethics in the business world can often times become a second priority behind the gaining of profits and success as a company. This is the controversial issue that led to the Enron scandal and ultimately the fall of this company. Enron Corporation was an energy company, and in the peaks of their success, they were the top supplier of natural gas and electricity throughout America. Enron Corporation came about from a merger between Houston Natural Gas and InterNorth. Houston Natural Gas was a gas providing company formed in Houston during the 1920’s. InterNorth was a company formed in Nebraska during the 1930’s and owned one of America’s largest pipeline networks. In 1985, Sam Segnar, the CEO of InterNorth bought out Houston Natural Gas for $2.4 billion. A year later in 1986, Segnar retired and was replaced by Kenneth Lay, who renamed the company and created Enron. Enron was the owner of the second largest pipeline in America that measured over 36,000 miles. The company was also the creator of the “Gas Bank”, which was a new way to trade and market natural gas and served as an intermediary between buyers and sellers. As the company continued to develop, it became more of a trader rather than a producer of gas. This trading extended into coal, steel, water and many other areas. One of Enron’s largest successes was their creation of a website called, “Enron Online” in 1999, which quickly became one of the top trading cites in the world. By the year 2000 Enron as a company was

Though the numbers looked good, the process behind them was questionable. Unbeknownst to many, Jeff Skilling, a top Enron executive, was able to persuade the SEC and their accounting firm, Arthur Anderson & Company, to approve the use of mark-to-market