Enron Was Formed In 1986 By Ken Lay (“Enron Case Study”,

Enron is viewed by many as the quintessential corrupt corporate juggernaut. Corporations are nothing more than a collection of people. If a corporation is corrupt than it must be filled with corrupt employs, and led by a front office devoid of moral standards, right? Perhaps this is not entirely true. Certainly an element of corruption was present in the case of Enron, the number of corrupt employees may not have been as encompassing as presumed. When asked to rate their level of honesty, most would respond that they are honest. In actuality, most people are not completely honest, and their level of dishonesty is correlated with their ability to rationalize the dishonesty and preserve their self- image as an honest and admirable person

The Enron was known as one of the energy giants of the United States. It was named as the “America’s Most Innovative Company” by the Fortune. Just before its collapse, its overall rating was AAA+ with the revenues beyond $100 billion. With such impressive reputation, by the start of 21st century, Enron was perceived to be indestructible. There have always been rumors about suspicious accounting activities and involvements of the top management of Enron. However, no evidence could be found about it

Enron was one of the largest energy, commodities, and services company in the world. It was founded in 1985 and based in Huston, Texas. Before its bankruptcy on December 2, 2001, there are more than 20,000 staff and with claimed revenues nearly $101 billion during 2000. Enron was the rank 16 of Fortune 500 in 2000. In 2001 it revealed that Enron’s financial report was planned accounting fraud, known since as the Enron scandal. In the Enron scandal, Enron used fraudulent accounting practices to cover its fraud in reporting Enron’s financial information. Its purpose is to hide the significant liabilities from its financial statement. Enron tried to make its financial report with great revenue to attract more people to invest it. It continued to spread the information that advance its stock price continued to rise. In fact, Enron was with a large amount of liabilities and loss. The key executives of Enron continually spread the fake information of Enron’s financial report and kept encourage the people to buy its stock. They knew the real financial condition of Enron. They knew the outlook of Enron is not good, so they sold their stocks secretly to generate profit before the company bankruptcy. After the people knew that Enron had a large amount of loss, the stock price was drop from 90 dollars per share to just pennies. In addition, the bankrupt of Enron had a great effect in the California energy market. The bankrupt of Enron made California had a shortage of electricity

Enron was formed in 1985 following the merger of Houston Natural Gas Co. and InterNorth Co. The Chairman Kenneth Lay, CEO Jeffrey Skilling, and CFO Andrew Fastow were the backbone of Enron during its growth period. These executives exercised their power and expertise to unethically “increase” Enron’s profits by hiding the company’s debt. The ethical dilemma that Kenneth Lay and Jeffrey Skilling faced was whether to let their stakeholders know how poorly the company was doing, or to hide the debt. They chose to cut corners and falsify information that would later come back to get them in trouble.

Enron was America’s seventh largest corporation. Enron rose to dramatic heights only to face a tremendous collapse. Enron was ‘America’s most innovative Company’ and it shocked the world by the biggest bankruptcy of that time. Enron was formed in 1985 following a merger between Houston Natural Gas Company and InterNorth Inc. of Omaha (Investopedia, 2016). Enron’s collapse affected lives of thousands of employees. When Enron was at lifetime high, it’s share prices were at $ 90.75, but that fell to a low of $ 0.67 in January 2002 following its bankruptcy (BBC News, 2002). It is really a wonder how such a powerful and innovative business disintegrated overnight and managed to dupe the regulators with the help of fake books of records and off the books transactions for such a long period of time. Enron presented the picture that it was a great Company with remarkable revenue however that was actually not the case, a huge part of Enron’s profit was fabricated. This was facilitated by masterfully designed accounting and morally questionable acts. Concealing losses contributed to a huge problem and by late 2001, the company was declared insolvent. There were countless factors which affected Enron’s journey to the top and its abrupt fall. In this case study, we will analyze the related party transactions that the company entered into which were questionable, evaluate the accounting firm’s logic and the errors and proposed rules to avoid any such fraud in future.

The Enron Corporation started in 1985 by Kenneth Lay and was the result of a merger between Houston Natural Gas and InterNorth Corporation (Madsen & Vance, 2009). Enron had the biggest gas transmission system in the U.S which consisted of a network of 38,000 miles of pipeline (Giroux, 2008). After the addition of Jeffrey Skilling, Enron transformed itself from a producer and distributor of natural gas to a trading company (Chandra, 2003). Enron lobbied hard for deregulation and was capable of being able to trade almost anything (Chandra, 2003).This idea required vast amounts of liquidity (Chandra, 2003). Enron’s revenue began to increase at a rapid speed (Chandra, 2003). Skilling developed a workforce that enabled the concealing of billions of dollars through the use of special purpose entities, fraudulent financial reporting, and accounting inadequacies (Giroux, 2008). Enron committed fraud over an extended period of time to manipulate earnings in order to maintain compensation of central executives. Despite the collapse of Enron, many executives were paid millions of dollars while other Enron workers were terminated and lost all of their retirement funds (Giroux, 2008). Enron has went down in history as not only being the biggest bankruptcy in U.S. for that time period, but also the largest audit failure (Giroux, 2008).

This scandal began with CFO, Andrew Fastow understating the company’s liabilities, and overstating incoming revenue which is why this company made it to the Fortune 500. Soon after this accounting scandal began, Jeffrey Skilling resigned as CEO in 2001, and Kenneth Lay became CEO once again (he was previously CEO when the company was founded). Just a few months after this change, Enron released an announcement that they had a third quarter loss of $618 million dollars. After this huge loss, business investigators began to question the company’s practices within the company. And soon after Enron’s third quarter loss, the SEC (Securities and Exchange Commission)

Most of the top executives overstated Enron’s earnings by several million dollars (Niskanen, 2005) causing the company’s stockholders to lose millions of dollars. Kenneth Lay who joined InterNorth, later renamed Enron, in 1985 became the CEO the following year. In 1990, Kenneth Lay hired Jeff Skilling to work in the operations department. Jeff Skilling would eventually take over Enron in 2001 as there Chief Executive Officer, replacing Kenneth Lay (Zimmerli, Richter, & Holzinger, 2007, p. 131).

Most of the world has heard of Enron, the American, mega-energy company that “cooked” their books (Gupta, Weirich & Turner, 2013) and cost their investors billions of dollars in lost earnings and retirement funds. While much of the controversy surrounding the Enron scandal focused on the losses of investors, unethical practices of executives and questionable accounting tactics, there were many others within close proximity to the turmoil. It begs the question- who was really at fault and what has been done to prevent it from happening again?

Enron was founded in 1985 by Kenneth Lay and by the mid 90s under the tutelage of Jeff Skilling, it was being touted as a revolutionary company that was destined to change the face of business and the energy industry. However, by 2001 it became clear that Enron’s astronomical growth and sustained profitability was built upon fraudulent grounds. The company was stashing debt but continued to report profits. Employees were taking huge risk and gambling exorbitant amounts and many were outright stealing from the company for their own personal gains. By the end of 2001, Enron’s downfall resulted in the largest corporate bankruptcy in United States history at the time, and more than 20,000 employees were laid off. The company’s fall from grace wasn’t a result of incompetence, instead it was the inevitable consequence of the toxic culture which was incubated and disseminated by Enron’s top management to all other aspects of the company. Enron’s strong culture became a liability because culture defines what is important to the organization and informs employees about how things are meant to be done. As I will demonstrate through various examples of Enron’s questionable business tactics, its potent corporate culture was low on attention to detail while being high on aggressiveness, risk taking and outcome orientation. This combination of factors created the climate for unethical behavior to become a deep-rooted norm within the organization.

After Enron collapsed, shareholders lost about 80 billion dollars and many people lost their jobs and lost their life savings that they had invested in Enron’s shares. Soon after Enron collapsed, Arthur Andersen, a well respected accounting firm that was also one of the big five accounting firms at the time, was found guilty of obstruction of justice after David Duncan, the lead partner of Enron audit engagement, agreed to testify against his former employer, Arthur Andersen.

After a surge of growth in the early 1990s, the company ran into difficulties. The magnitude of Enron's losses was hidden from stockholders. The company folded after a failed merger deal with Dynegy Inc. in 2001 brought to light massive financial finagling. The company had ranked number seven on the Fortune 500, and its failure was the biggest bankruptcy in American history.

As competition increased and the economy started to plunge in the early 2000s, Enron struggled to maintain their profit margins. Executives determined that in order to keep their debt ratio low, they would need to transfer debt from their balance sheet. “Reducing hard assets while earning increasing paper profits served to increase Enron’s return on assets (ROA) and reduce its debt-to-total-assets ratio, making the company more attractive to credit rating agencies and investors” (Thomas, 2002). Executives developed Structured Financing and Special Purpose Entities (SPE), which they used to transfer the majority of Enron’s debt to the SPEs. Enron also failed to appropriately disclose information regarding the related party transactions in the notes to the financial statements.Andersen performed audit work for Enron and rendered an unqualified opinion of their financial statements while this activity occurred. The seriousness and amount of misstatement has led some to believe that Andersen must have known what was going on inside Enron, but decided to overlook it. Assets and equities were overstated by over $1.2 billion, which can clearly be considered a material amount (Cunningham & Harris, 2006). These are a few of several practices that spiraled out of control in an effort to meet forecasted quarterly earnings. As competition grew against the energy giant and their

Most of the world has heard of Enron, the American, mega-energy company that “cooked their books” ( ) and cost their investors billions of dollars in lost earnings and retirement funds. While much of the controversy surrounding the Enron scandal focused on the losses of investors, unethical practices of executives and questionable accounting tactics, there were many others within close proximity to the turmoil. It begs the question- who was really at fault and what has been done to prevent it from happening again?

To make matters worse, when Andersen found problems in the financial statements, they didn’t make corrections due to a conflict of interest. The concern was that if Andersen brought these problems to light, Enron would walk away and cost Andersen millions of dollars in the long run. Andersen contemplated dropping Enron as a client, but did not follow through with it. Because the audit and consulting was done at the same firm, it clouded Andersen’s judgment. Andersen employees in Houston began shredding documents and therefore brought obstruction of justice charges that destroyed the firm.