Enron

Nowadays, Enron is the synonym for a large corporate crime, but earlier it was an American company, which specialized in commodities, energy and service. The headquarters was located in Houston, Texas. It’s world-widely known for the greatest accounting frauds throughout history. The fact is that the Enron’s employees with the highest managerial positions were responsible for implementation and further use of accounting practices, which couldn’t be legal since they reported the false company’s revenue, making it look bigger than it actually was. Thus, for a short period of time, Enron was considered the seventh-largest American company.

Interesting fact that Enron shares’ price had potential to reach the level of one hundred dollars (the highest price was around ninety-one dollar), however, right after the fraud was revealed to the public the price drastically dropped to the level of the quarter dollar in the sell-off.

Enron’s History

The Enron Corporation was founded at the end of the 20th century in 1986. The foundation was a consequence of the Houston Natural Gas Company and Omaha-based InterNorth Incorporated merger. Thus, Kenneth Lay was appointed as the chief executive officer (CEO). He was a former CEO of Houston Natural Gas.

It didn’t take long for Kenneth Lay to create a name for the new company and turn it not only into an energy trader, but into an energy supplier as well. The company aimed to make a profit out of future energy prices thanks to the deregulation of the energy markets.

1990 was the key year for Enron, which determined its destiny. It was the year of the Jeffrey Skilling appointment. Previously, he was a consultant in McKinsey & Company. His consulting work was amazing enough to assure Lay that choosing Skilling as a chief executive officer of the Enron Finance Corporation, which was also created in 1990 is the right decision. That time, Skilling was famous among the McKinsey for being one of the youngest partners.

The following decade is known for the minimal regulatory environment, thus, Enron had great conditions to thrive and prosper. Skilling chose the right time to become an Enron’s part. The end of the 1990s was marked by the incredible Nasdaq index, it hit 5000. However, that time is also widely known for the ludicrous levels of internet stocks, for this reason neither investors nor regulators didn’t consider it as something abnormal.

Enron scandal

In the end of 2001 Enron was declared defunct. Thus, not only the financial market became unstable, but the whole energy industry was affected as well. It was recognized that the employees with the highest managerial positions were fudging the fraudulent accounting schemes. However, it was recognized by the financial experts as well that the Securities and Exchange Commission (SEC), investment banks and credit rating agencies connivance let these schemes flourish. All the organizations involved were lately accused of helping the fraud to occur.

At first the SEC was acknowledged as the main culprit, the U.S. Senate assessed its work as a catastrophic failure. In case the SEC had reviewed Enron reports thoroughly and meticulously, the fraud wouldn’t have happened. Thus, numerous investors’ and employees’ losses might have been prevented.

The investment banks were acknowledged complicit as well. They became famous for their manipulative behavior in this scandal. There were no barriers for them to provide positive reports for Enron’s shares. That made stock analysts promote the securities, thus, providing large investments into Enron. Enron paid the banks, banks covered the real Enron reports up.

The last culprit, which are credit rating agencies, was also acknowledged guilty. They issued an investment-grade rating on Enron’s bonds right before the company was declared defunct. Such an indirect assistance was recognized as an oversight failure.

The CEO’s factor in the collapse

In 2001 Jeffrey Skilling was named CEO of Enron, he succeeded Kenneth Lay. However, his contribution to the scandal was made a long time ago. The reason why Skilling may be called the key person of the scandal is that thanks to him the accounting method was changed. Before Skilling the method was a traditional historical cost accounting, but it was replaced with the mark-to-market (MTM) method. The use of the method was officially supported by the SEC in 1992.

The new method implied an asset price regulation to the current market conditions. Thus, Enron didn’t reflect the real price, it reflected the amount of money that it would get in case it sold the asset at that particular time.

Many experts are convinced that MTM implementation was the event that ruined Enron, or at least the key point that started this process. It was exceedingly easy for Enron to be tempted by the possibility to present an estimated profit as the actual one. Thus, the environment for the crime was being prepared.

There were several actions that were taken by Skilling in order to hide the company's real debt. For example, he recommended moving this debt out of the balance sheet, thus, accountants artificially eliminated Enron's debt and Enron’s daughter company (it’s also known as a creation of a special purpose vehicle) got it. In other words, Enron formalized the accounting scheme, which they have been using for quite a long period of time.

The company carried on with using the schemes. It moved its debt to the daughter firms, pretending not to have the debt itself. However, it wasn’t enough for Enron, thus, it reported its own revenue as well as the subsidiaries’ revenue without deducting the debt. It misled its shareholders and made them to believe that Enron was on a way to thrive, when in reality it violated GAAP rules.

In the middle of 2001 Skilling quit. By that time he had been holding the post for eight months. He assured the public that him leaving the post had “nothing to do with Enron.” However, the resignation brought about a big surprise, especially for the Wall Street analysts. That time it left four months before the revelation of the Enron scandal.

The Skilling resignation had to do with Enron, especially with the accounting schemes that both Skilling and Lay were eventually unsuccessfully attempting to hide. Both of them were convicted of fraud less than five years after the revelation. Executives also confessed. Kenneth Lay passed the same year he was sentenced, Skilling was released a little more than twelve years after in 2019.

What Enron left

Enron’s legacy includes not only countless numbers of unemployed, but also language enrichment. For example, the definition “Enronomics” quickly came into use, it portrays the technique that was highly popular among Enron’s executives. The technique implied use of subsidiaries by parent companies in order to hide something. Another word that appeared in the language thanks to the Enron scandal is "enroned." "Enroned" is a slang form, which is used to express the disadvantageous consequences, which people incur due to the negligence of the top-level management. For instance, if a person loses his or her job because a company fails, but the person himself or herself isn’t involved in this, then it means that the person was "enroned."

Also, the Enron scandal brought into the world several acts that provide safety for different groups of people. For example, the Sarbanes-Oxley Act, which was enacted in 2002 protects investors and provides a safe investment environment for them through increasing corporate transparency. Moreover, the Financial Accounting Standards Board (FASB) became tougher, and now they don’t allow accounting methods, which may seem controversial.