Enron corporation was a very successful American energy, commodities and services company. Founded in 1985 and Headquartered in Houston, Texas. It was a merger between Houston Natural Gas and InterNorth, which were both small regional companies. The company used to sell and trade in more than 30 different products, but when it first got started it mainly produced natural gas and electricity. But then Enron wanted to Introduce new ways of doing business by integrating the laws of supply and demand into the energy business. It had a large staff of 29,000 employees. Enron was also named “America’s Most Innovative Company” six years in a row in 2000. Enron had many key players, like the company’s founder Kenneth L. Lay, who also was the chairman and served as CEO. Jeffrey Skilling also had a big role in the company when he was elected as CEO in the beginning of 2001 instead of Kenneth L. Lay. But later that same year Jeffrey resigned after a lot of time on the payroll for what he called personal reasons, which then led to Kenneth L. Lay being re-elected to be once again the CEO of Enron. There also was Mark Frevert, who was the company’s vice Chairman, Jeffrey Mcmahon who was the chief financial officer. And Lawrence Greg Whalley, the president and chief operating officer. But suddenly everything went south when the famous Enron Scandal took place in 2001 which later led to the company’s bankruptcy.
The Enron scandal happened due to the company and its CEO at the time, Jeffrey Skilling, hiding the financial losses of Enron’s trading business. And also hiding billions of dollars in debt from failed projects. They did that by coming up with ways and plans to make the company look profitable more than it really was by setting up partnerships to bury the losses and generating imaginary revenues. Andrew Fastow, who was just promoted to chief financial officer back in 1998, came up with a tight plan to show as if the company was in good financial shape. Although, many of the company’s subsidiaries were actually losing. What Enron would do was they would fabricate a benefit, for example, a force plant, and quickly guarantee the anticipated benefit on its books, despite the fact that the organization had not made one dime from the advantage. In the event that the income from the force plant was not exactly the anticipated sum, rather than assuming the misfortune, the organization would then exchange the resource for an under the table enterprise where the misfortune would go unreported.
All the parties involved in the fraud had a scheme to use special purpose vehicles (SPVs) which are also known as special purpose entities (SPEs), and they used these to cover up it the enormous amount of debt and toxic assets from the investors and creditors. How this worked was that Enron transfers some of its rising stock to SPV in exchange for cash, then the SPV uses the stock to evade an asset listed on the balance sheet for Enron. Then, Enron would guarantee the SPVs value to reduce evident counterparty jeopardy. The main goal of these SPVs wasn’t to hide operating results as much as it was for hiding the accounting realities. In spite of the fact that their point was to conceal bookkeeping real factors, the SPVs were not unlawful. In any case, they were not quite the same as standard obligation securitization in a few huge and possibly tragic ways. One significant distinction was that the SPVs were promoted completely with Enron stock. This affected the ability of the SPVs to avoid fall of share prices in case of Enron’s share prices falling. Similarly, as hazardous as the second critical contrast: Enron’s inability to uncover irreconcilable situations. Enron uncovered the SPVs’ presence to the contributing open despite the fact that all things considered, not many individuals comprehended them it neglected to satisfactorily reveal the non-arm’s-length bargains between the organization and the SPVs. Enron accepted that their stock cost would keep on acknowledging—a conviction like that encapsulated by Long-Term Capital Management, a huge multifaceted investment, before its breakdown in 1998. In the long run, Enron’s stock declined. The estimations of the SPVs additionally fell, compelling Enron’s certifications to produce results.
Another major player in the Enron scandal was one of the biggest accounting firms in the world, Arthur Andersen and partner David B. Duncan, who managed Enron’s books. Arthur Andersen LLP was founded in 1913 by Arthur E. Andersen, and used to provide tax, accounting and auditing services, before it was defunct nearly 17 years ago for being involved in the Enron scandal. Because the scandal and the relationships between the companies was so complex, a lot of people are not familiar or sure about the details of Arthur Andersen’s involvement with Enron or its role in the scandal. Although Arthur Andersen was not associated directly in helping Enron in cooking its books and hiding the debts, the company was found to be tragically careless and negligent of its role of regulating, inspecting and auditing Enron’s financials. But in spite of Enron’s mediocre accounting practices, Arthur Andersen was approving corporate reports for quite a long time and offering its stamp of approval. That’s why by April 2001 numerous investigators began to suspect Enron’s profits and its transparency.
So, the auditing company didn’t have a huge role in the scandal, but it still was involved with the fraud where it was found guilty of obstruction of justice because it shredded multiple documents concerning its audits for Enron. The entire industry and even the world were stunned when the scandal became public because not only could a fortune 500 company pull off such an enormous fraud, but also one of the largest accounting firms looked the other way during these horrible crimes. That’s why when the truth was revealed, this shameful scandal made the news all around the world and people were shocked and talking about it everywhere. Around the time of the scandal, analysts started to reduce their rating for Enron’s stock, and the stock slipped to a 52-week low of $39.95. In October of 2001 Enron stated its first quarterly loss since the company’s founding, which led to it closing its ‘Raptor’ SPV so it would not need to allocate 58 million shares of stock, which will lead to their income decreasing even more. That act seized the attention of the SEC. Soon after that the SEC declared it was investigating Enron and its SPVs. The last blow happened when Dynegy (NYSE: DYN), a company that announced earlier on that its merging with Enron, backed out of the deal on November 28. Enron would go on to file for bankruptcy at the end of 2001. And the shareholders of the company lost an astounding 74 Billion dollars in the four years leading up to Enron’s bankruptcy. Enron was using accounting techniques like Mark-to-Market accounting method that the SEC approved in 1992, Mark-to-Market is calculation of fair value of accounts that may change over time like; Assets, liabilities. Its goal is to deliver an accurate and realistic assessment of a company’s present financial position. But the method can also sometimes be manipulated because it’s not based on “actual” cost but on “fair value” which may be harder to pin down, and it can cause a huge problem because it lets the company record estimated profits instead of actual profits.
So, in conclusion, Enron failed miserably as a corporation due to the complexity of the accounting methods and ways to keep track of profit that they used. Also, the substantial amount of greed and collusion of all the parties that were involved, and maybe if it did not want to hog and control the entirety of the capital market it would have survived. To avoid scandals like this a company needs to have a straightforward code of ethics to inspire that ethical business decisions be a priority. Also, to focus on core values that guide the most useful principles, companies should also have a broad understanding of assets, tools and resources which can be very helpful for managers and leadership to find creative solutions for each problem encountered.