The Collapse Of Enron And Enron

Greg Whalley, (former Enron President and Chief Operation Officer) had six to eight conversations last fall with the Treasury’s Department Peter Fisher, including one in which he asked Fisher to call Enron’s lenders as they decided whether to extend credit to the company.

The story of Enron is truly remarkable. As a company it merely controlled the electricity, natural gas and communications sectors of the world. It reported (key word, reported) revenues over one hundred billion US dollars and was presented America’s Most Innovative Company by Fortune magazine for six sequential years. But, with power comes greed and Enron from its inception employed people who set their eyes upon money, prestige, power or a combination of the three. The gluttony took over sectors which the company could not operate proficiently nor successfully.

In the early 1990s, a young company named Enron was quickly moving up Fortune magazine’s chart of “America’s Most Innovative Company.” As the corporate world began to herald Enron as the next global leader in business, a dark secret loomed on the horizon of this great energy company. Aggressive entrepreneurs eager to push the company’s stock price higher and a series of fraudulent accounting procedures involving special purpose entities were about to be exposed. In early 2002, the United States Justice Department announced its intent to pursue a criminal investigation into the once mighty company, Enron.

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 first important factor in the Enron case advanced interests on share price. The second factor how the company was liberalized over the past 20 years along with the reduction of legal responsibility of investment banks and accounting firms. The third factor, which is the most important, was the immediate alteration of pay packages given to investment bankers, executives, and accountants (Barreveld, 2002). In this case, the factors mentioned above was a result of the culture implemented by the executive leaders whom were influenced by unethical behaviors they engaged in. One could agree that Enron was definitely reaping the bad seeds that the

Power Failure: The Inside Story of the Collapse of Enron, Mimi Swartz and Sherron Watkins, 432 pages, March 25, 2003, Crown Publishing Group, ISBN: 978-0-767-91368-3

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.

In light of the recent scandals that rose around big multinationals such as Enron and WorldCom, it has become evident that reform in the traditional corporate operations and objectives was to be encompassed in the organisations corporate strategies. Indeed throughout the years, companies main objectives were defined primarily as being economic objectives, Multinationals developed with sight of profit maximisations regardless to the other incentives, Friedman considered that to be the foundation for a well-managed company, it was further considered that the financing of any other sort of social corporate activities rather unnecessary. The expenses were regarded as expenditures for the owners and investors; this was a time where shareholders rights were regarded as conflicting with other constituents namely the employees, creditors, customers or the community in general. However this interpretation is seen as rather inadequate due to the nature of the amalgamated relation between both constituents. Stakeholders in modern corporate doctrine are considered as a core apparatus for the well functioning of a business. It is however often argued that the only way for a corporation to achieve better results and maximise its profits is to include other people in the process, individuals or organisations with direct or indirect interest in the well performance of the company, that is the reason why modern regulations and codes include a number of stakeholders other than the

Several parties were responsible for Enron crisis, including independent auditor, key executive officers, internal auditors, SEC and FASB. The hypocrisy, dishonorable actions and unethical behavior of Kenney Lay, Jeffrey Skilling, Andrew Fastow led to bankruptcy. This and many other problems, such as loss in transactions involving the swaps stocks, SPE related issues and est., finally contributed to crisis. As Enron executives, all of their concerns should have been focused on Enron’s profits, but seems that many of them only cared about their wealth. When financial problem surfaced, they did not attempt to fix it, but made efforts to maintain their own benefits and ignored the whole company’s and

Enron became the largest seller of natural gas in America. In August 2000 Enron stocks reach almost $91 a share. As reported by Li, its annual revenues rose from about $9 billion in 1995 to over $100 billion in 2000 (2010, p.37). It has been more than a decade ago since the Enron scandal in Houston, TX. Enron was also known for one of the largest fraud scandals in American history. After so many years of power and successful deals and contracts, the company suffered a collapse and the company suffered rapidly. Both Lay and Skilling were

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.

“When a company ascends to the number seven spot on the Fortune 500 and then collapses in weeks into a smoking ruin, its stock worth pennies, its CEO, a confidante of presidents, more or less evaporated, there must be lessons in there somewhere.”

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

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).

The case of Enron Corporation and Andersen, LLP can be noted as one of the most infamous fraud scandals in US history. Investors lost millions of dollars and ruined the public’s trust. Enron was once the seventh largest public company in the United States and Andersen LLP was the world’s largest and most respected business organizations. Enron’s stock prices soared to approximately $100 to less than $10 in 2001. How did these two big giants fall into oblivion and what could have been done to avoid the disaster of these companies?