The fall of Enron is not hidden from anyone and it is still labeled as one of the most famous corporate fraud cases. The scandal caused Enron Corporation to fall, and Arthur Andersen LLP, one of the biggest accounting firms at that time, had to be dissolved. It shook the financial world, caused billions in losses, and led to significant reforms in corporate governance.
The Rise of Enron
The collaboration of Houston Natural Gas Corporation and InterNorth, Inc. resulted in the development of Enron was set up in 1985. The company was renamed Enron in 1986. The deregulation of the natural gas industry in the United States during the 1990s paved the way for Enron’s transformation.
The derivative contracts allowed producers to hedge risk and stabilize prices, earning income for Enron. When Skilling took the reins, Enron came to dominate the energy market.
Skilling fostered a culture of high pressure and aggression within Enron. He hired talented, young people from MBA programs that became highly competitive. Some of such talent included Andrew Fastow, who was taken as chief financial officer of Enron and was in large part central to the company’s complicated financial operations.
The company expanded its trading portfolio to include commodities such as electricity, coal, steel, and even weather. It also launched Enron Online, an online trading platform that handled billions in daily trades.
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The Fall of Enron
Enron’s meteor rise soon proved short-lived. With more rival firms entering the fray and profits dropping, Enron resorted to dubious accounting practices to cover up such misfortunes. There was “mark-to-market accounting,” which enabled Enron to credit projected future profits as income currently earned. This created a false high profitability.
To cover losses, Enron used special purpose entities. Often managed by Fastow, these partnerships were a shadow account storage for the firm’s failing assets. In turn, it made Enron’s health appear to be better than it was.
In February 2001, Skilling was promoted to CEO, with Kenneth Lay remaining as chairman. Within August 2001, Skilling suddenly resigned, sparking fears among investors. Almost at the same time, Sherron Watkins, Enron vice president, penned a letter to Lay questioning possible accounting scandals connected with Fastow’s partnerships.
Enron was taken by shock when they reported that during the third quarter, they booked a $638 million loss. The disclosure did not go without investigation from the Securities and Exchange Commission.
As investigations deepened, Enron’s stock price crashed. The employees lost their 401(k) pensions, which were heavily tied to Enron stock.
Enron tried to merge with Dynegy as a way of survival but could not succeed due to the deal falling apart. It attracted many eyeballs and was labeled as one of the largest bankruptcy cases at the time because it had over $60 billion in assets.
Aftermath and Consequences
The Enron scandal had wide-reaching effects. Most top executives were indicted and had to serve prison sentences.
- Jeffrey Skilling was convicted of conspiracy and fraud. He got 24 years but served for 12 years.
- Kenneth Lay was convicted and died before he could receive his sentence.
Another major accusation was against Arthur Andersen, Enron’s auditor. Andersen was convicted in 2002 and had its accounting license revoked, but several years later, the conviction was overturned.
Some have been successful, but most investors and employees who lost out hardly recovered part of their funds.
Legislative and Financial Changes
These scandals worked as an eye-opener for corporate governance and financial reporting and they brought attention to the need for immediate policy changes. The Sarbanes-Oxley Act of 2002 was passed. As legislation, it stiffened standards for public companies; among other provisions, it instituted:
- Severe penalties for switching or hiding the existence of financial documents.
- Increased inspection practice control.
- Banning consulting from audit firms to clients.
- These were reforms that aimed at restoring investors’ confidence and averting the recurrence of the scandal.
Cultural Significance
The Enron scandal represented corporate greed and corruption.
- Anatomy of Greed: The Unshredded Truth from an Enron Insider (2002) by Brian Cruver, which was later made into a TV movie.
- Enron: The Smartest Guys in the Room (2005) is one of the most demanded documentaries because it highlights the famous story of how Enron rose and fell.
These books dealt with the ethical failure that brought Enron to its knees. They were examples of the generations that followed.
The Enron scandal was more than a corporate failure; it actually opened the eyes of the financial world to the fact that unchecked ambition, bad bookkeeping practices, and abdicated oversight are evils. Outside of causing terrible devastation to employees’ lives and investors’ pockets, Enron triggered long-lasting repercussions in terms of corporate governance.
Conclusion
All in all, The Enron story remains valuable today as a reminder of transparency, and accountability, and it highlights the ethical practice in business.
