The Enron Scandal

Topics: Enron, Enron scandal, Financial statements Pages: 6 (2112 words) Published: February 4, 2014
Executive Summary
In this investigative report, it will show how Enron was involved in improper accounting practices that led to over $70 billion of losses and also Enron’s method that was used to able them in covering their losses. Enron’s fall and bankruptcy had affected not only the employees, but also the shareholders, U.S Citizens and also the impact that it had on other countries that Enron was affiliated with.

The focus of this paper is on the creation of Enron’s business model that resulted in the fall of Enron. Also, how the SPEs and the Raptors come to play in assisting Enron. After the Enron scandal broke out, a new legislation was introduced and passed to prevent similar scandals from erupting again. In investigating Enron on their deregulatory schemes, it will help other companies in realising the consequences that can result from such accounting manipulation.

An overview of the company
In 2000, Enron was listed as number 7 on the Fortune’s Magazine “Most Innovative” in the United States for being the largest marketer of natural gas and electricity. The company’s pipeline stretched over 36,000 miles from United States to north of Canada. Enron was formed in 1985 from the merger between Houston Natural Gas (HNG) and InterNorth. Initially, Houston Natural Gas was a retail gas business but sold the business to concentrate on gas exploration and production and other businesses. InterNorth was one of the nation’s premier pipelines (Frontain, 2002). The merger of two well-established companies had provided Enron to be the largest marketer of natural gas and electricity. In 1989, Enron created a new market of natural gas called the Gas Bank that served as an arbitrator between buyers and sellers of gas. The company began to view itself as mainly a trader and a market manufacturer in electric power, coal, steel, paper and pulp, water and broadband fiber optic capacity. When Enron entered the broadband fiber optic market, it created Enron Online which became the largest e-commerce site in the world. Enron had other business of expansions but were unsuccessful. The company was using SPEs which are mainly funded by independent equity investors and debt financing to hedge funds to capitalize with their own stocks that allowed them to hide losses. Enron also received large amounts of loans from Overseas Private Investment Corporation (OPIC) to fund projects ranging from power plants to gas pipelines to gas extraction plants (Frontain, 2002). Ultimately in 2001, concerns were raising from Enron’s financial reports. Suspicions were also raised from their major personnel changes and reported operating cash flows that lead to inspections. The inspections revealed manipulation of financial reports. At the end of the year, Enron filed for bankruptcy and became the largest filing in the United States history (Frontain, 2002). A summary of the scandal

In December 2001, Enron, the United States seventh largest corporation had collapsed resulting in the largest bankruptcy in American history at the time. Enron had overstated its profits and was able to hide billions in debt from failed projects by using accounting loopholes, Special Purpose Entities (SPEs), Raptors, and manipulation of financial reporting. The Chief Financial Officer, Andrew Fastow, and other executives and auditors were able to mislead Enron’s investors with their scheming methods (Thomas, 2002). Enron was engaged in a repeated pattern of unethical and illegal practices.

Enron wanted to grow fast, increase its profits and push up its share price so the Enron executives formed a series of partnerships between various Enron directors and outsiders, nominally independent but effectively controlled by them. These SPEs which were of doubtfully legal, served a number of purposes. It provided ‘off-balance-sheet’ as far as Enron was concerned, and allowed huge debts arising from rapid investment to be concealed. Through creative accounting, they allowed...
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