Enron Essay

Only available on StudyMode
  • Download(s) : 189
  • Published : February 6, 2008
Open Document
Text Preview
As Bethany McLean and Peter Elkind portray in The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron, there was a chain-reaction of events and a hole that dug deeper with time in the life-span of, at one time the world's 7th largest corporation, Enron. The events were formulated by an equation with many factors: arbitrary accounting practices, Wall Street's evolving nature and Enron's lack of successful business plans combined with, what Jeff Skilling, CEO of Enron, believed was the most natural of human characteristics, greed. This formula resulted in fraud, deceit, and ultimately the rise and fall of Enron. Kenneth Lay created Enron in 1985 as a result of the merger of Houston Natural Gas and Internorth. Within a short time, Enron incurred massive debt and lost exclusive rights to its pipelines. Enron's core business was losing money, so they hired consultant Jeffery Skilling, who would soon create a stock market for natural gas – transforming energy into financial instruments that could be traded like stocks and bonds. They moved to trading derivatives – in 2000, Enron's derivatives-related assets increased from $2.2 billion to $12 billion. They had deals in areas such as weather derivatives, water services, metal trading, broadband supply and power plant. Soon enough, Enron had more contracts than any of its competitors and could predict future prices with great accuracy. Enron seemed to always have steady, high profits. Behind the scenes, however, there was much more to it. Starting with the Vahalla scandal, the board learned that Louis Borget and Tom Mastroeni were gambling beyond their limits, destroying trading reports, keeping two sets of books and manipulating accounting in order to give the appearance that Vahalla was earning steady profits. The board did not fire the Vahalla executives, instead, the message to Borget and Mastroeni was "please keep making us millions," (20). Borget and Mastreoni later ended up on the wrong side of an immense trade, totaling $1 billion in losses. Although Enron executive Mike Muckelroy reduced this loss to $140 million, Enron needed a new source of income – this is where Skilling came in with his idea for trading energy. To run this energy market, Skilling wanted more than conventional accounting – "under conventional accounting, you book the revenues and profits that flow from the contract as they come through the door," (39). He wanted to use mark-to-market accounting, where "[they] can book the entire estimated value for all ten years on the day you sign the contract," (39). The SEC approved this accounting style, also known as hypothetical future value accounting, without fully predicting the implications. Under this accounting standard, no matter how much cash came in the door, Enron's profits could be whatever they wanted them to be. This left the door open to unethical behavior, and this is where greed and dishonesty started to come into play. Skilling believed that human nature is steered by greed and competition; it is no wonder why this accounting standard was taken advantage of. Enron had gas operations all over the world that had cost billions to build, and most were performing terribly. However, as soon as they decided on an operation, they could record the future profits of the completed operation in the current time. For example, in India, Enron invested $900 million to building power plants. The problem ended up being that consumers in India were poor, and didn't have money to pay for Enron's services. Despite Enron's loss, they still paid out millions to executives – "the project team split $20 million," (83). To make up for these phony profits, they had to find other sources of income – this is where they bought out PGE. They now had control of electricity on the California, which would later lead to even more unethical behavior. Enron then teamed up with Blockbuster for video on demand, and used mark-to-market accounting to show $53...
tracking img