Enron and WorldCom
December 22, 2014
Enron and WorldCom
In 1998, Waste Management executives acknowledged earnings misstatements of approximately $1.7 billion. With the help of the Arthur Anderson accounting firm, Waste Management shareholders lost more than $6 billion dollars (CNN, 2001). The Waste Management corruption ushered in a series of corporate scandals into the new millennium. Enron and WorldCom were only two of many ethical and accounting violations that prompted new legislation and guidelines in business finance. Enron
In 1985, Houston Natural Gas merged with Internorth to form Enron. The CEO of Houston Natural Gas, Kenneth Lay, became CEO of the new company. Enron began to focus their efforts on natural gas commodities and commodities in deregulated markets. Jeffery Skilling took the lead in commodities trading and hired Andrew Fastow as the Chief Financial Officer. Also joining the ranks as controller in 1991 was Richard Causey, formerly of Arthur Anderson accounting firm (CNN, 2001). .
Enron was involved in a series of ventures, one of which was with CalPERS, the California State Pension Fund. The venture was called the Joint Energy Development Investment (JEDI). As Chief Operating Officer (COO), Skilling proposed another deal with CalPERS called Chewco Investment Limited, set up by CFO Fastow. CalPERS accepted on the condition it would be released from the JEDI contract. Chewco, the special purpose entity was designed to acquire CalPERS stake of $383 million in a joint venture and keep the debt off of Enron’s balance sheet (Fox, 2004). In 1997, Whitewing Associates L.P. was another special purpose entity that was formed to purchase assets for Enron. Two years later, Whitewing was restructured and no longer consolidated with Enron or counted on Enron’s balance sheet. Using Enron stock as collateral, Whitewing bought assets such as shares of power plants, pipelines, and other commodities. Those assets were worth $2 billion dollars. The transfers were essentially loans and not sales transaction as portrayed by Enron executives. Two more limited partnerships formed called LJM Cayman L.P. known as LJM1, and the second was called LJM2. The limited partnership entities were created to purchase Enron’s falling stock. There were several big name investors, such as J.P. Morgan Chase, Credit Suisse, Citi Group, Merrill Lynch, which contributed funds to these projects. The ventures were all a shell game to hide debt and inflate profits. In November of 2001, Dynegy repeals its bid to by Enron for $8 billion. Less than three weeks later, Enron stock falls to less than a dollar, and they finally go bankrupt on the December second.
William Rector and Murray Waldron started LDDs (Long-Distance Discount Service) in 1983. Through a series of mergers and acquisitions became WorldCom in 1995. In 1999 WorldCom and Sprint agreed to merge, but in 2000, the merger was denied by European and U.S. regulators. Throughout 2001, WorldCom’s credit rating decreased to ‘junk’ status. Another indication of WorldCom’s deterioration was its removal from the S&P 500. In June of 2002, WorldCom begins to cut jobs and fires the CFO Scott Sullivan. CFO Sullivan later pleaded guilty to conspiracy, securities fraud, and falsifying financial statements. CEO Bernie Ebbers was convicted in 2005 of conspiracy, securities fraud and filing false documents with regulators. These are only a couple of the many confections that took place. As Sullivan testified at Ebbers’ trial, he stated that CEO Ebbers demanded him to “hit the numbers” or “adjust WorldCom’s books to meet Wall Street expectations.” During a meeting with Ebbers, Sullivan illustrated a plan to create $133 million in revenue. He told the court “I told Bernie, ‘This isn’t right’.” Another accounting official, Betty Vinson, admitted pulling numbers ‘out of the air’ as she helped to adjust the organization's books inappropriately. Based on WorldCom’s...
References: CNN (2001). CNN Money. Retrieved from http://money.cnn.com/2001/11/07/news/waste_mgt/
Fox, L. (2004). Enron: The Rise and Fall . Hoboken, N.J.: John Wiley & Sons.
Gitman, L. (2009). Principles of Managerial Finance (12th ed.). Retrieved https:/ / new classroom3from.phoenix.edu/Classroom/#/contextid/OSIRIS:48083721/context/co/view/ activityDetails/activity/f9bc48e2-3a6a-4f06-a5a0-3d2af53db229/expanded/False
Fox News. (2005). Ex-WorldCom CFO Scott Sullivan Gets 5 Years. Retrieved from http://www.foxnews.com/story/ 2005/08/11/ex-worldcom-cfo-scott-sullivan-gets-5-years/
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