The Enron Scandal

The Enron Scandal

Enron was an "American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff and was one of the world's major electricity, natural gas, communications, and pulp and paper companies, with claimed revenues of nearly $101 billion during 2000," states Wikipedia (http://en.wikipedia.org/wiki/Enron ). It bought and sold energy, natural gas, and electricity on the market to cities and states. Enron owned various gas pipe lines, electric plants, water plants, and other services. However, at the company's peak, Kenneth Lay, the CEO of Enron, was discovered robbing the company forcing Enron into bankruptcy.

Kenneth Lay, the CEO of Enron, and Jeffery Skilling, the Chief Operating Officer at Enron, were desperate for success. To ensure financial security, Lay and Skilling created accounting loopholes or "special purpose entities" (a business on the side of a business). The sole purpose for the creation of the SPE's was to transfer any bad transaction from Enron into the artificial company, which caused the SPE to suffer financially, but Enron to financially gain. "In a typical transaction, Enron would transfer its own stock to an SPE in exchange for a note or cash, and also directly or indirectly guarantee the SPE's value. The SPE, in turn, would hedge the value of a particular investment on Enron's balance sheet, using the transferred Enron stock as the principal source of payment," Steven Schwarz, a lawyer who graduated from Duke, explains.(http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=2308&context=faculty_scholarship ) Investors of Enron, were only able to see the good financial statements because the bad financial statements were hidden among the SPE's Enron created. Because they created these SPE's to hold losses, they became wealthy because they drove the value of the company higher with every loss they were able to cover up. The financial statements were used by investors to determine the value of the stock on the stock market. Because the financial statements were inaccurate, people believed that the company was worth a lot more than it actually was. Once stock analysts and journalists discovered the arrangements, investors lost confidence in the company which resulted in the value decrease of their stock, eventually resulting in bankruptcy.

During May 2001, Enron vice chair, Clifford Baxter complained of the inappropriateness of Enron's partnership deals, he was one of three executives to do so. Subsequent to that, he resigned. After Baxter's resignation in August 2001, Sharron who was VP of corporate development, sent an anonymous (later her identity was discovered) letter to Enron's CEO, Kenneth Lay, of accounting irregularities. In the letter, Sharron stated, "I am incredibly nervous that we will implode in a wave of accounting scandals."( http://www.fraud-magazine.com/article.aspx?id=583 ) A week later, Lay sold 93,000 shares of stock, earning 2 million dollars and urged his employees to buy company stock. In October, Enron revealed a 1.2 billion decrease in company value. At this point, the collapse of the Enron company started to begin. "In 2001, in a matter of months, Enron's revenues went from over $100 billion per year, to nearly zero," Preston McAfee, author of The Economists Voice, reports. (http://vita.mcafee.cc/PDF/Enron.pdf page 1). The stock price in mid-2000 was around $90 a share and then plummeted to less than $1.00 by November 2001. People who owned the stock, including hundreds of employees, lost billions of dollars in their investments. Thousands of people and several companies were affected causing those who relied on Enron as a source of money through investment in the company through the loss of billions of dollars. For example, an employee who was due for retirement the year after and had $90,000 worth of stock set up for his 401K, the stock being at $90 a share, and because the company was found cheating, the stock dropped less to $1.00 a share, resulting in $89,000 vanishing out of nowhere and leaving him with only $1,000 in his accounts. This exact situation happened to hundreds of people, including those retired, who now, because their money was gone, had to find another source of income to put money in their banks. Old, retired employees were forced to go back to work, some even at places like McDonalds.

The second major event that occurred as part of this scandal was the fall out at the audit firm, Arther Andersen. An accounting firm is hired by a company to do an audit of their financial statements. These accountants who read over company's financial information gathered in the year and tell the companies what they are doing right or what they are doing wrong and look for any sort of flaw that could be resulting in bad business. Enron created a close relationship with Arther Andersen and in turn, Arther Andersen chose to ignore or "failed to see" these secret dealings and loopholes Enron was hiding. "A closer examination of the facts reveals otherwise; when the Enron scandal was investigated by auditors and law enforcement agencies, it was found that Andersen was negligent at best and at worst completely in conspiracy with Enron to create false earnings reports, thereby hiding huge amounts of debt and artificially inflating stock prices beyond the point of no return," says Edward Raver of Yahoo Voices. (http://voices.yahoo.com/the-enron-scandal-crime-scandal-tragedy-controversy-136695.html ) When discovered, Arther Anderson sent emails out to all their secretaries requesting they immediately shred all the files they had listed for Enron, in hopes to destroy any evidence. "Arthur Andersen fired its partner in charge of auditing the Enron Corporation today, saying he had ordered the destruction of thousands of documents and e-mail messages after learning that the Securities and Exchange Commission had begun an investigation of Enron's accounting," Richard Oppel and Kurt Eichenwald of the New York Times reports. (http://www.nytimes.com/2002/01/16/business/enron-s-collapse-overview-arthur-andersen-fires-executive-for-enron-orders.html?pagewanted=all&src=pm ) The company's efforts were in vain and soon after all the hundreds of offices over the world were shut down, because of this "slip up" in the Texas office, putting thousands of more people out of jobs. "Among the ultimate findings of the investigation into Andersen's role in the whole conspiracy, it was determined that the firm had either directed or personally shredded thousands of documents that showed the true extent of Enron's financial problems. With these documents out of the way, the fraud was able to continue,