Essay on The Beginning of the End of Enron

One major scandal revealed in 2001 was Enron, a major energy company located in Houston, Texas (Auerbach, 2010, pp. 6). This organization collapsed because of their deceptive accounting practices and mismanagement. In 2001, Enron fraudulent practices became a public scandal, and because of these practices, shareholders lost $74 billion and thousands of employees (pp. 2). Unfortunately, investors lost their retirement accounts and because they lost many employees, it left many people unemployed. Essentially, Enron kept huge debts off their balance sheets. There were so many businesses and investors that were linked to Enron, and its bankruptcy was a major movement in Congress to make a legislative initiative towards the Sarbanes-Oxley Act of 2002.

Enron began as a pipeline company in Houston in 1985. It profited by promising to deliver so many cubic feet to a particular utility or business on a particular day at a market price.

Ray Bowen, a Citigroup banker at the time and now Enron's chief financial officer, once asked Mr. [Andrew Fastow] about a batch of complex equations that filled a whiteboard in the conference room next to the Mr. Fastow's office. "You can't tell me you understand those equations," Mr. Bowen commented to Mr. Fastow. Mr. Fastow replied: "I pulled them out of a book to intimidate people."

In the summer of 2001, questions began to arise about the integrity of Houston energy company Enron’s financial statements. In December, they filed for bankruptcy as their fraud came to light and the United States government froze all of their assets and began prosecuting their executives and their external auditing firm Arthur Anderson (Franzel 2014). Enron was not the only company using accounting loopholes to mislead stockholders though; Global Crossing, Tyco, Aldephia, WorldCom, and Waste Management all underwent investigation for similar

Enron was a publicly traded energy company formed in 1985 by Kenneth Lay when Internorth acquired Houston Natural Gas; the company, based in Houston Texas, Enron (originally entitled “EnterOn”, but was later subjected to abbreviation), worked specifically in power, natural gas, and paper and even ventured into various non-energy-based fields as they expanded, including: Internet bandwidth, risk management, and weather derivatives. Several years after the founding of the company, Enron hired a man by the name of Jeffrey Skilling, a former chemical and energy consultant, who, upon promotion, created a team of high-level administrative employees who, by using special purpose entities, lackluster reporting of finances, and unethical accounting practices, hid billions of dollars of debt from unsuccessful arrangements and ventures from stock holders and the U.S. Securities and Exchange Commission. Enron executives achieved this scheme by using a controversial accounting method entitled “mark-to-market accounting,” which in essence, assigns value to financial commodities based on their projected market values; mark-to-market accounting is the opposite of cost-based accounting which records the price of a commodity at the purchase price. As a result of this new method, Enron’s worth skyrocketed to over $70 billion at one time, only to collapse miserably several years later—ultimately costing thousands upon thousands of people their jobs, pensions, and retirements. Enron’s employees

The fall of the colossal entity called Enron has forever changed the level of trust that the American public holds for large corporations. The wake of devastation caused by this and other recent corporate financial scandals has brought about a web of new reforms and regulations such as the Sarbanes-Oxley Act, which was signed into law on July 30th, 2002. We are forced to ask ourselves if it will happen again. This essay will examine the collapse of Enron and detail the main causes behind this embarrassing stain of American history.

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.

Next came California's rolling blackouts caused by Enron's traders. By turning the power off and on in California, they could control the price of electricity, essentially stealing people's money. Because they could manipulate the price, they made hefty bets on it, and in turn made over $2 billion dollars for Enron. Just before the fall of Enron, the insiders sold off nearly $1 billion dollars prior to the annunciation of the bankruptcy of Enron. What caused so many executives and employees to behave in such a fraudulent way?

Enron was the country’s largest trader and marketer for electric and natural gas energy. Its core business was buying energy at a negotiated price and later, selling the energy when prices increased. As an energy broker, Enron provided a service by allowing producers to negotiate a certain price while Enron took the risk that prices would fall below what it bought energy. Buyers of energy also benefited because Enron could ensure the supply of energy. In 2000 Enron was listed number five on the Fortune 500. What happened to the company which was among the most admired for vision and quality thinking? Enron was the company that held virtual assets and not the real assets, such as power stations, which were capital

Enron was a U.S. based energy-trading company. At its height of operation in the early part of 2001, it was booking revenues of about $140 billion (Enron Ethics). At the end of 2001 it declared bankruptcy. The Enron bankruptcy was the largest corporate economic failure at that time, and still remains an example of how corrupt practices magnify in the long run. What led to Enron’s failure was primarily a lack of ethics, and poor accounting practices. This scandal was one of the reasons that new regulations were passed for financial reporting standards, the Sarbanes-Oxley Act was passed in 2002 as a means of stopping such a collapse in the future.

The Houston based corporation of Enron was once considered a top company, until its demise from a complex accounting scheme. The company that was forced to declare bankruptcy and lay off many employees; also resulted in thousands of others losing a significant portion of their retirement funds that were invested in the company’s stock (Ferrell, Fraedrich, & Ferrell, 2013). Additionally, the perceived scandal propagated concern of accounting practices of corporations and initiated new reporting practices like the Sarbanes-Oxley Act.

1. The Enron debacle created what one public official reported was a “crisis of confidence” on the part of the public in the accounting profession. List the parties who you believe are most responsible for that crisis. Briefly justify each of your choices.

Enron Corporation was an energy company founded in Omaha, Nebraska. The corporation chose Houston, Texas to home its headquarters and staffed about 20,000 people. It was one of the largest natural gas and electricity providers in the United States, and even the world. In the 1990’s, Enron was widely considered a highly innovative, financially booming company, with shares trading at about $90 at their highest points. Little did the public know, the success of the company was a gigantic lie, and possibly the largest example of white-collar crime in the history of business.

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).