Enron and WorldCom
Enron and WorldCom
FIN/486
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).
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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
FIN/486
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
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/