Assignment 3. Enron scandal
Rise of the company
Enron was an American energy company based in Houston, Texas. It was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. In 1985, Kenneth Lay merged the natural gas pipeline companies of Houston Natural Gas and InterNorth to form Enron. In the early 1990s, he helped to initiate the selling of electricity at market prices and, soon after, the United States Congress passed legislation deregulating the sale of natural gas. The resulting markets made it possible for traders such as Enron to sell energy at higher prices, thereby significantly increasing its revenue. After producers and local governments decried the resultant price volatility and pushed for increased regulation, strong lobbying on the part of Enron and others was able to keep the free market system in place. In just 15 years, Enron grew from nowhere to be America's seventh largest company, employing 21,000 staff in more than 40 countries. In an attempt to achieve further growth, Enron pursued a diversification strategy. The company owned and operated a variety of assets including gas pipelines, electricity plants, pulp and paper plants, water plants, and broadband services across the globe. The corporation also gained additional revenue by trading contracts for the same array of products and services it was involved in. As a result, Enron's stock rose from the start of the 1990s until year-end 1998 by 311% percent. By December 31, 2000, Enron’s stock was priced at $83.13 and its market capitalization exceeded $60 billion.
Demise of the company
But the firm's success turned out to have involved an elaborate scam. Enron lied about its profits and stands accused of a range of shady dealings, including concealing debts so they didn't show up in the company's accounts. As the depth of the deception unfolded, investors and creditors retreated, forcing the firm into Chapter 11 bankruptcy in December. The problems started when Jeffrey Skilling was hired. He developed a staff of executives that, through the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions 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 (the auditor) to ignore the issues.
The main CEOs involved in the scandal
Kenneth Lee "Ken" Lay was an American businessman, best known for his role in the widely reported corruption scandal that led to the downfall of Enron Corporation. Lay and Enron became synonymous with corporate abuse and accounting fraud when the scandal broke in 2001. Lay was the CEO and chairman of Enron from 1985 until his resignation on January 23, 2002. He took a regional natural gas pipeline business and turned it into a energy conglomerate with a market capitalization of $70 billion, betting the future on unregulated energy markets. Jeffrey Skilling was hired by Lay in 1990 as chairman and chief executive officer of Enron Finance Corp. In 1991, he became the chairman of Enron Gas Services Co., which was a result of the merger of Enron Gas Marketing and Enron Finance Corp. Skilling was named CEO and managing director of Enron Capital & Trade Resources, which was the subsidiary responsible for energy trading and marketing. Andrew Fastow was one of the key figures behind the complex web of off-balance-sheet special purpose entities (limited partnerships which Enron controlled) used to conceal their massive losses.
The causes of the downfall
As already been said, Enron scandal was caused by financial misconducts, unethical practices, misrepresenting information and so on. Finally it spiraled out of control and ended up with the bankruptcy of the company. No I suggest going deep into details of Enron’s fraudulence. 1. Wrong revenue recognition....
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