The rise and fall of Enron: a brief history
Enron was founded in 1985 by merging Omaha’s InterNorth and Houston Natural Gas. The next year saw the appointment of Kenneth Lay, who had been CEO of Houston Natural Gas before (“The Rise and Fall of Enron: A Brief History,” 2006). By Curwen (2021), Enron was the seventh-biggest US company
Apart from pipelines, Enron began to diversify its business directions. 1999 saw the company establish its broadband services branch and introduce Enron Online, a commodities trading website. Fast expanding, Enron Online became the world’s biggest commercial website. The revenue of Enron Online trading made well over 90% of the business.
Expansion at Enron was swift. In 2000, the company brought in around $100 billion a year. It was ranked seventh on the Fortune 500 and sixth among energy companies worldwide. The company’s shares peaked at USD 90.
However, a good deal of flaws started to show around 2001. After six months as CEO of Enron, Jeffrey Skilling announced his resignation in August of that same year. Lay subsequently took over as CEO. The first deficit for Enron in four years was revealed in October 2001 when the business posted a $618 million loss (“The Rise and Fall of Enron: A Brief History,” 2006).
After Andrew Fastow was fired as chief financial officer, the Securities and Exchange Commission opened an inquiry into the investment partnerships he had headed. The investigation later revealed a sophisticated web of partnerships created to conceal Enron’s debt. At the end of November, the company’s stock was worth less than $1 US. Investors suffered large financial losses of billions of dollars.
With its December 2, 2001, bankruptcy petition, Enron became the biggest bankruptcy case in US history. Later, that dubious accomplishment would be eclipsed by WorldCom’s demise. About 5,600 Enron employees lost their jobs, health care benefits, and savings when the company laid them off in 2002 (Workers Lose Jobs, Health Care and Savings at Enron, 2002).
The next month, Ken Lay left his roles as chairman and CEO while the US Justice Department began investigating the company’s operations.
Fastow secured a guilty plea in January 2004 and was given a ten-year jail term. He acknowledged his guilt on one count of securities fraud and wire fraud conspiration. He also pledged to help federal investigators.
Skilling filed a not-guilty plea in February to 40 counts, including insider trading, securities fraud, wire fraud, conspiracy, and making false financial statements.
In July, Lay was indicted on allegations of fraud and fabricating statements. He entered a not-guilty plea to all eleven charges.
The assets of Enron, which went through the biggest bankruptcy ever documented, are $63.4 billion. The company’s failure badly affected the energy sector and greatly disrupted the financial markets. Even if the firm’s top executives came up with dishonest accounting methods, legal and financial experts stressed that outside help would have been necessary for their success. Securities and Exchange Commission (SEC), credit rating agencies, and investment banks participated in Enron’s fraudulent actions.
At first, the US Senate blamed the SEC for its catastrophic and systemic inability to offer sufficient supervision. The Senate investigation claims that if the SEC had looked at any of Enron’s yearly reports after 1997, it would have seen the warning signals and most likely avoided the significant financial losses that investors and employees incurred.
The credit rating agencies bear equal blame for not doing an adequate investigation before designating Enron’s bonds as investment-grade shortly before the company filed for bankruptcy. Investment banks helped Enron get good stock analyst ratings by dishonesty or manipulation. Consequently, the company’s stock value rose, and billion-dollar investments were drawn in. Enron paid investment banks millions for their cooperation by a quid pro quo agreement.
The overall revenue of Enron increased steadily throughout the years, culminating in 2003 at $100.8 billion after hitting $13.2 billion in 1996, $20.3 billion in 1997, $31.2 billion in 1998, and $40.1 billion in 1999.
Jeffrey Skilling was the Chief Executive Officer at Enron at its downfall. The disaster was largely caused by Skilling’s choice to switch from standard historical cost accounting to mark-to-market accounting, formally approved by the SEC in 1992. Skilling persuaded the Enron accountants to move debt off the balance sheet, artificially separating the debt from the company responsible for it. Enron regularly used comparable accounting techniques to conceal its debt by moving it to its subsidiaries on paper. The company continued, meanwhile, to recognize the money these groups brought in.232 Though there were serious violations of GAAP (Generally Accepted Accounting Principles) norms, the public and stockholders believed Enron produced greater results than it did.
In August 2001, less than a year after becoming CEO and four months after the Enron scandal, Skilling abruptly resigned. Wall Street financial analysts were taken aback and voiced worries even though he insisted his resignation had nothing to do with Enron.
Following a 2006 trial, Skilling and Kenneth Lay were found guilty of planning and participating in fraud. More CEOs have admitted their guilt. Of all the Enron defendants, Skilling served the longest term—twelve years. Conversely, Lay passed away not long after his conviction.
The Enron affair gave rise to the term “Enronomics,” which characterizes dishonest accounting methods employed by a parent company to conceal losses from its subsidiaries through false transactions.
The parent corporation, Enron, formally transferred its debt to fully owned subsidiaries, some of which bore Star Wars character names. However, the disclosure of the declining income of the subsidiaries created the false impression that Enron was doing far better than it was.
A further phrase that originated with Enron’s collapse is “Enroned,” which refers to being negatively impacted by the misbehavior or choices of top executives. Employees, suppliers, and stockholders are among the groups whose members may experience being “Enroned.” Employees are regarded as “Enroned” if their employer shuts down due to criminal activity in which they were not involved.
In reaction to the Enron scandal, the government enacted additional procedures to maintain security and prevent similar occurrences from recurring. The Sarbanes-Oxley Act of 2002 is an example of legislation strengthening company openness and making financial manipulation a criminal offense. The Financial Accounting Regulations Board (FASB) developed stronger regulations that barred the use of dubious accounting practices while allowing corporate boards additional power to regulate management (Hayes, 2024).
Enron established special-purpose businesses to disguise its debt and adopted mark-to-market accounting to artificially raise its sales figures. Furthermore, it disregarded internal recommendations against deploying these tactics despite being aware of the necessity to modify its publicly disclosed financial status.
Enron’s failure is usually linked to the conduct of multiple senior executives (Hayes, 2024). The executives comprise Kenneth Lay, the former CEO and founder; Jeffrey Skilling, the former CEO; and Andrew Fastow, the former CFO.
Hayes (2024) believes that the banking sector has never seen a corporate bankruptcy of the magnitude of Enron’s. The Enron scandal brought more exposure to accounting and corporate malfeasance. The company’s owners faced a loss of tens of billions of dollars before filing for bankruptcy, while its workers suffered much bigger financial losses in pension liabilities. Additional monitoring and regulatory measures have been put in place to prevent the possibility of business catastrophes akin to the Enron scandal.
The necessity for many internal controls developed due to a severe governance failure where the validity of related-party transactions was not verified. Peregrine (2016) claims that these deficiencies not only resulted in the downfall of a formerly powerful corporation and its leaders but also offered enduring insights into the field of governance. The Powers Report discovered that a large element of the company’s business model, notably the related-party transactions, was shown to be fraudulent.
References
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Curwen, B. L. (2021, August 3). The collapse of Enron and the dark side of business. BBC News. https://www.bbc.co.uk/news/business-58026162
Workers lose jobs, health care, and savings at Enron. (2002, January 14). World Socialist Web Site. https://www.wsws.org/en/articles/2002/01/enro-j14.html
The rise and fall of Enron: a brief history. (2006, May 25). CBC. https://www.cbc.ca/news/business/the-rise-and-fall-of-enron-a-brief-history-1.591559
Hayes, A. (2024, March 1). What was Enron? What happened, and who was responsible? Investopedia. https://www.investopedia.com/terms/e/enron.asp
Peregrine, M. W. (2016). Enron still matters, 15 years after its collapse: The New York Times, 1.