What the heck is Enron? Let me tell you. Enron formed through a merger in 1985 between two energy companies, yeah that’s what it was by the way, an energy company. It was founded by a man named Kenneth Lay, you might want to remember that name. Enron was a fantastic company and very attractive for investors. In 2000 they were thought of being one of the world’s leaders in business, for example, how we see Apple and Google nowadays. Enron were growing at a rate no one had ever seen before.
Enron’s revenue shot up from $13,289 million in 1996 to $100,789 million in 2000. Their debts showed no worry and suggested they had no chance of going bankrupt. Well guess what, Enron went bankrupt in December 2001, thousands of people lost their jobs, retirement funds and any other money they’d invested into Enron.
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So now you’re asking yourself what happened between this year and the last? As it turns out, all those numbers to do with Enron’s revenue, were all false numbers. Enron used ‘Mark-to-Market’ accounting, its effect is basically being able to recognise revenue when you have no revenue.
In 2000, Enron signed a 20-year contract with Blockbuster, thinking the contract would result in profits in excess of $100 million. This failed after 3 years and blockbuster ended the contract. Here’s the problem, Enron didn’t get $100 million from the deal but still reported it as revenue. So basically, fake revenue to make the company look bigger than it is and increase the stock prices. They did this on many more occasions. All they had to do was project earnings, and BOOM they had earnings. Investors were fooled over a long period of time.
If you know about Accounting, I can hear you already questioning ‘Where’s the Auditor?’. The job of an auditor is to look over all these financial statements to ensure the company’s position is correct. Every public company legally must have their financial statements audited. The primary purpose of an auditor is to prevent things like this happening. Had the auditors done their job properly, they would have seen red flags all over the place. But they weren’t doing their job at all. They were being paid by Enron to look the other way. These auditors were Arthur Andersen. At the time they were part of the Big 5 Accounting Firms. Arthur Andersen didn’t survive this scandal; their reputation was ruined, and their customers switched over to the Big 4
Two greedy fools…I mean two executives from the Enron end are heavily blamed. They are Kenneth Lay and Jeffery Skilling. They were both guilty of conspiracy and fraud. Kenneth Lay died of a heart attack in the time between the verdict and the sentencing in 2006, he was 64 years old. Jeffery Skilling was released in February 2019, following 12 years in prison.
This scandal, along with others like it at the time, promoted a new and much stricter set of accounting rules that dramatically changed the accounting industry. Because it clearly wasn’t working before! I see this as one of the most interesting scandals in the accounting history, based on the scale at which it was carried out, and how it fooled so many people.
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