Essay on THE FALL OF ENRON

Enron, an energy trading supply company, founded in 1985 was the product of a merger between the Houston Natural Gas Company and InterNorth Incorporated. Enron was able to flourish as a result of the Dotcom Bubble, a rapid rise in equity markets caused by investments in internet-based companies in the 1990s. Hoping to wreak more revenue through additional utilization of internet-based strategies, Enron created EOL, Enron Online, a computerized trading website. By the early 2000s, EOL was generating approximately $350 billion in trades. EOL’s success fueled Enron’s ambitions to create a broadband telecommunication network worth hundreds of millions of dollars. However, unlike EOL, this costly telecommunication network yielded minimal profits. Devastatingly, the financial blow was accentuated by the emergence of the Great Recession.

Enron was a company set up in 1985 by Kennet Lay, an ambitious and visionary man, who saw great potential from government deregulation in the energy market. Lay created Enron, through a merger between two small regional companies, Houston Natural Gas [1] and InterNorth [2]. The company

Lucas and Koerwer (2004) wrote, “every single thing that Enron did had shades of dirty play associated with it”. Ken Lay would say, "I always try to hire the best people for

By August 2001, the financial statement fraud became obvious and by October Enron management announced that the company was worth $1.2 billion less than what was previously recorded. The difference was due to inflated estimates of income and failure to include all the debt in the financial reports that were sent out to investors. The Securities and Exchange Commission (SEC) started investigating Enron. By November 2001 Enron admitted to overstating its past four year earnings by $586 million and admitted to owing over $6 billion in debt. After this admission the price of Enron stock dropped incredibly. Investors and creditors requested immediate repayments from Enron. However, since Enron could not come up with any cash to repay its creditors, it filed for bankruptcy in December of 2001. Thousands of Enron employees and investors lost their savings, their children’s college funds and pension when Enron collapsed due to financial statement misrepresentation by its management. A lawsuit on behalf of a group of Enron’s shareholders was filed against Enron’s executives and directors whereby 29 of them were accused of insider trading and misleading the public.

Enron was the result of a merger of Houston Natural Gas and Internorth. The company benefitted from being the first mover in their market, setting an internal growth strategy at an aggressive increase in revenue of 15% per year. “It became the largest energy trader in the world, with $40 billion in revenue in 1998, $60 billion in 1999, and

While Jeff Skillings’ traders were making a killing for Enron, many of their other projects were disasters. The man who allowed Enron to continue operating despite massive losses from their core operating business was Chief Financial Officer, Andy Fastow.

Enron was the largest company for energy and natural gas made possible through the merging of Houston Natural Gas and InterNorth based in Omaha. The merger made Enron the largest energy trader in the country and the seventh largest in the world. The company advanced into new fields of business by launching a broadband service unit and Enron online, where people can go to trade commodities. Enron rose quickly to become one of America’s most valuable company. It had a peak of $100 billion in revenue and it was taking the market by storm. The company had many major projects and had plans to expand into foreign countries. With the much celebrated success, Enron would have a greater fall than its rise because of mismanagement and poor accounting practices. The company was known for hiring the smartest individuals in the country, but that did not prevent the company from its embarrassing collapse. Enron collapsed with millions of dollars of pension funds and about 5600 people were unemployed. The company that was thought to be performing in the eyes of the public was actually in deep trouble behind the curtains. The big question many people ask is what caused Enron’s collapse? The truth of the matter is that, Enron’s collapse was not caused by just one thing, it was caused by many things such as theft, lies, poor accounting practices, lack of auditing, political factors, and conspiracy. This is what Enron represented about a decade after the merger, this is how the company became

To the outside world, the company seemed prosperous. Stock prices rose dramatically and reported profits exceeded expectations yearly. Fortune magazine even called Enron the “country’s most innovative company.” In reality, it was all an elaborate illusion to hide the fact that Enron was drowning in debt. The chief financial officer, Andy Fastow was tasked with covering up Enron’s financial crisis. Fastow established hundreds of fake limited liability companies to create the illusion that Enron was earning profits by conducting business with these entities. They

Deregulation of the energy market left the big companies in the market of energy to control their operations and allowed them to sway the market in their favor. This influence over the market led Enron to fabricate electricity shortage, with that they were able to increase its demand, and then boost its price to profit more revenues. According to Public Citizen, “Enron and its chief executive officer, Kenneth Lay, have been remarkably successful in lobbying the executive branch, leaders in Congress and various federal regulatory officials to withdraw government monitoring of many corporate activities within domestic energy markets.” Additional, Public Citizen says that in deregulation, the ethics of transparency, accountability, and citizen oversights, which were major causes of downfall for Enron, are ignored, yet, they are crucial factors that ensure the market is operating well (Healy, 2003).

In other words, Enron went from concentrating on the energy market to brokering future energy contracts and exploring other ways to make money.

Enron started out as a pipeline company. Through strategic mergers and acquisitions, they controlled a large share of the infrastructure that moved natural gas from one place to another.

Owing to its expansive trading activities, Enron required to give considerable importance to its credit ratings as it tend to determine its financial costs and the willingness of its counter parties to trade with it. A favorable earnings picture and and the avoidance to excessive leverage on Enron’s balance sheet was perceived by its management as essential to maintain the firms credit ratings. The means used to achieve these objectives involved extraordinary departures from transparency which affected the firm’s relations with investors, creditors, its own Board of Directors and stakeholders of the company (Dembinski et al.,

All these factors lead to figures that were less than what Ken Lay promised, and even started posting losses by the second quarter of 1997. These less than stellar numbers did not discourage company executives, and Enron continued to spend foolishly on advertisement and lobbying for deregulation.

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

The story of Enron begins in 1985, with the merger of two pipeline companies, orchestrated by a man named Kenneth L. Lay (1). In its 15 years of existence, Enron expanded its operations to provide products and services in the areas of electricity, natural gas as well as communications (9). Through its diversification, Enron would become known as a corporate America darling (9) and Fortune Magazine’s most innovative company for 5 years in a row (10). They reported extraordinary profits in a short amount of time. For example, in 1998 Enron shares were valued at a little over $20, while in mid-2000, those same shares were valued at just over $90 (10), the all-time high during the company’s existence (9).