How it happened?2
Financial Reporting Issues3
Trading Business and Mark to Marketing3
Reporting Issues for Special Purpose Entities3
Other Accounting Problems4
Governance and Intermediation Failures at Enron4
Role of Top Management Compensation4
Role of Audit Committees4
Role of External Auditors4
Role of Fund Managers5
Role of Accounting Regulations5
The Sarbanes Oxley Act5
Did it help?5
Kenneth Lay formed Enron in 1985, when InterNorth acquired Houston Natural Gas. It was once the seventh largest company the United States of America. Enron branched into many non-energy-related fields over the next several years, including such areas as Internet bandwidth, risk management, and weather derivatives (a type of weather insurance for seasonal businesses). Although their core business remained in the transmission and distribution of power, their phenomenal growth was occurring through their other interests. Fortune Magazine selected Enron as "America's most innovative company" for six straight years from 1996 to 2001. Then came the investigations into their complex network of offshore partnerships and accounting practices. The Enron scandal was revealed in October 2001 that eventually led to the bankruptcy of the Enron Corporation and the de facto dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron was attributed as the biggest audit failure. Several years after it inception when, in 1992, Jeffrey Skilling was hired as the President of the company, he developed a staff of executives that, by the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions of dollars in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives not only misled Enron's board of directors and audit committee on high-risk accounting practices, but also pressured Andersen to ignore the issues. From the early 1990s until 1998, the stock prices of Enron rose by 311%, only slightly higher than the rate of growth in the Standard & Poor’s 500. But, after which the stocks shot up. They increased by 56% in 1999 and another 87% in 2000, compared to a 20 percent increase and a 10 percent decline for the index during the same years. As on December 31, 2000, Enron’s stock was priced at $83.13, with market capitalization exceeded $60 billion, that was 70 times earnings and six times book value, an indication of the stock market’s high expectations about its future prospects. Enron was rated the most innovative large company in America in Fortune magazine’s survey of Most Admired Companies. Despite of which within a year, Enron’s image was in tatters and its stock price had tanked nearly to zero.
The Enron Scandal was a legend of document shredding, restatements of earnings, regulatory investigations, an unsuccessful merger and Enron filling for bankruptcy. Notwithstanding an elaborate corporate governance network, Enron was able to magnetize large sums of capital to source a moot business model, masking its actual performance through a series of accounting and financing ploys, and increasing its stock prices to unmaintainable levels. Shareholders lost nearly $11 billion when Enron's stock price plummeted to less than $1 per share, by the end of November 2001, from a high of US$90 per share during mid-2000. As the Securities and Exchange Commission (SEC) initiated an investigation, rival Houston competitor Dynegy bid to purchase the company at a very low price. The deal failed, and on December 2, 2001, Enron filed for bankruptcy, with $63.4 billion in assets made it the largest corporate bankruptcy in U.S. history.
How it happened?
Enron had a rather complicated business model, stretching across many...