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Enron Corporation is a common metaphor used when referring to massive fraud scenarios. The company operated in the energy industry and was founded in 1985, after the merging of two companies - Houston Natural Gas and InterNoth, leading to the formation of Enron Corporation (Niskanen, 7). Enron Corporation was performing very well in the 1990s, especially after the deregulation of natural gas sales. The move enabled the company to sell energy at very high prices and make massive profits. It became the largest company selling natural gas in the whole of North America in 1992. This achievement drove the company’s quest for growth and led to diversification to other sectors. The good performance was short-lived, since the company’s management engaged in unethical behaviors through manipulation of financial records. Eventually, this led to the downfall of the company in 2001.
Milestones to the Downfall
Although unethical financial practices had been happening, the real downfall began with a simple question from a journalist, who had doubts about the performance of Enron in February, 2001. Bethany Mclean wrote an article in Fortune Magazine, questioning the pricing of Enron’s stocks. This was initiated by a statement made by Enron’s Chief Accounting Officer Ricky Causey. Ricky had informed budget managers that the company had overcome financial problems for the year 2001, and that the year would be one of the best for the company. The article by Mclean questioned the legitimacy of Enron’s stock value, which traded at 55 times its earnings, The abnormally high stock value of Enron resulted from the fact that investors and shareholders did not know how Enron was getting its income. These suspicions made analysts suggest that McLean should view Enron’s financial reports. When she analyzed the financial reports, she found that Enron had big debts and many errors in its cash flow. Moreover, she found very unusual transactions that had no rational explanation. After her findings, she followed the procedure and contacted Skiing, the company’ Chief Executive Officer, to discuss the findings from the report analysis. However, Skiing dismissed her by terming her unethical and accusing her of not doing enough research about the company. This raised more questions about the performance of the company. Andrew Fastow, Enron’s Chief Financial Officer, defended the company for not revealing their source of income. He said that the company had more than 12, 000 accounting books for different commodities, and it did not want to inform everyone where its money was coming from. This convinced the reporter that something was amiss with the company’s performance, and she published the article.
Another confrontation occurred between a Wall Street journalist and Skilling, Enron’s CEO. He actually engaged the reporter in a verbal confrontation, which increased the suspicion. On April 17, 2001, a Wall Street journalist called Skiing to discuss the company’s unusual accounting policies. The journalist wanted to know why Enron Company failed to release its balance sheet together with its earning statements (Joseph et al, 34). The verbal outrage towards the journalist sparked negative reactions from both the media and the public, though Skiing tried to dismiss it as a joke. Many people saw this as a sign of doom for the future of the company. Operational difficulties blurred the vision of the company where losses were incurred.
On August 14th, Skilling resigned from the company, citing personal issues as the reason for his resignation. What struck many shareholders as unusual was the fact that before resigning Skilling had sold many of his shares. This made them panic over the health of the company. After resignation, he accepted that the deteriorating stock prices at Enron were contributing factors to his resignation. Before Skilling’s stepping down as the company’s CEO, Enron faced many challenges. First, the company was plagued with logistical problems in its new broadband communication operations. Moreover, big losses were incurred while the company was constructing a large power project in India. Such difficulties made the CEO resign as he saw no hope of saving the company.
The downfall of Enron Corporation was caused by widespread malpractices among the company’s senior personnel and employees. Enron inflated asset values, reported more income and cash flows and kept liabilities out of records (Sterling, 23). The company was thus viewed as performing excellently by its stakeholders, while that was not the case. The fact that the company did not acknowledge its debts openly meant that it had not devised any mechanism to deal with the problem. As such, the problem deteriorated to the extent when it was known by the company’s publics.
Secondly, accounting practices, such as mark-to-market accounting, were used (Lee, 90). This method allowed the company to record income from assets, even when the income had not been actually received. These meant that shareholders were always misled. Enron created special purpose entities that were used to hide its debts. Using these entities, the company was able to record the costs of projects that had already been cancelled as assets. The effect of this practice was that the company’s size was always viewed as big, even when many projects had failed. This practice actually misled analysts when the visited the company’s offices. The CEO actually moved employees from one department to create the impression that the company’s operations were bigger than they actually were. Employees being moved were instructed to work unusually hard so that the intended impression would be created.
Enron created a bad corporate culture where the focus of many employees was on the price of the stock. Employees were compensated well for cooperating with the management of Enron in its dubious practices. When Enron could no longer conduct it businesses due to debts, it filed for bankruptcy. The corporate culture that led to the collapse of Enron was a system created for many years. Unethical practices went unchecked until they were accepted as the acceptable way of doing things (Sharad et al, 24). Materialism motivated those who encouraged the development of this culture. Employees were made to focus on the presumed healthy value of the stock, since they were beneficiaries. Blinded by this value, they failed to consider the consequences of the bad corporate culture created.
The collapse of Enron had many consequences for all of its stakeholders. Shareholders incurred losses as their investments sunk with the company. According to some analysts, the scandal and overall failure of Enron highlighted the upcoming economic risks, thus encouraging business operators to lock in their profits as much as they could. The main problem was to determine the total amount of market exposure and other practitioners to Enron’s downfall. The first stated figures amounted to $18.7 billion, but this was not the exact amount. The actual amount could not be determined, since the scandal was progressive and it started a long time ago. Several leaders and management personnel were involved in the scandal and this made it difficult to determine who was ultimately responsible. When various people are involved in a fraud, there emerges a blame game where nobody wants to assume responsibility. Moreover, the advisers claimed not to know the people exposed to Enron credit, and, therefore, clients needed to prepare for the worst. The fraud interfered with records and important documents, which could have shown the amount owed to every creditor.
Moreover, thousands of workers lost their jobs, creating social problems of unemployment (Fox, 102). This had a greater impact on the US economy and social setup, as many people became jobless. Immediately, Enron was declared bankrupt, employees were given half an hour to vacate the building with all their belongings. Almost 62% of 15,000 worker’s savings was dependent on Enron stock, which was purchased in 2001 for $83. This was a real tragedy, since employees had to leave empty-handed without any form of compensation. This was the largest bankruptcy to have ever been experienced in the US history. On January 17, 2002, Andersen, who was one of the auditors, was fired, with allegations relating poor accounting and destruction of important documents. He was accused of incompetence and fraud that saw the company incur a huge amount of losses.
Creditors who had extended their services to this company with the hope of reaping percentages of its profits went unrewarded. Enron was projected to hold $23 billion in liabilities, which summed up guaranteed loans and outstanding debts. JP Morgan Chase and Citigroup were the most affected by the scandal, as they incurred huge losses. The assets belonging to Enron were pledged to lenders as a way of securing loans, and this raised doubts as to whether unsecured creditors and stakeholders could receive anything as bankruptcy proceeded. As mentioned earlier, important records as well as documents were destroyed or otherwise interfered with by the then management team. Therefore, it was hard to follow up and identify the amount of investment owned by each creditor.
Fastow, Enron’s Chief Financial Officer, was tried on charges of insider trading and money laundering. He was sentenced to ten years in prison after pleading guilty and on condition that he could testify against Skilling. Lea was charged with six counts of felony, but prosecutors did away with them in favor of misdemeanor tax charge. She was sentenced to one year in prison for assisting her husband to hide government income.
Skilling and Lay (Chairman) were charged with many financial crimes, but pleaded not guilty. These crimes included security fraud, money laundering, wire fraud, false bank statements, insider trading and conspiracy. They told the judge that there was negative publicity concerning the Enron scandal, which could hinder their chances of getting a fair trial. After the judge handed down the guilty verdict, Skilling was sentenced to 24 years and 4 months of imprisonment.
Lay strove to plead not guilty to criminal crimes amounting to eleven. He argued that he was misled by his colleagues, and that Fastow was solely responsible for Enron’s failure. Kenneth Lay was to be sentenced to more than 45 years in jail, but died before the sentence was delivered. His wife had sold $500,000 worth of Enron shares some minutes before the information about its bankruptcy went public. Therefore, she was never charged with anything related to Enron’s bankruptcy. In total, sixteen people pleaded guilty to charges relating to crimes committed at Enron. Arthur Anderson, an auditor at a firm that had been auditing Enron, was found guilty of obstructing justice. The firm had its license revoked following the verdict.
Despite the financial losses that Enron’s shareholders and employees suffered, they were able to receive some compensation from the auctions held by Enron. This was after Enron decided to sell every asset it owned, such as photographs, art, logo signs and pipelines. This refund was important as it ensured that shareholders and employees received some little amount to compensate for their loss. However, it was not enough to compensate for the suffering. This is because the stakeholders experienced pain not only in monetary terms, but also emotionally. It is most probable that some stakeholders were diagnosed with stress, depression and other mental diseases as a result of the scandal.
The US government seemed to have learnt a lesson from the scandal. They formulated rules to prevent reoccurrence of similar situations and imposed fines as well as sentences to offenders. This was done in the interests of citizens who happened to be the victimsof the scandal. The rules were also formulated to offer security to the investors as well as shareholders of any business.
Enron’s fraud is a lesson to many organizations and governments. Organizations that nurture bad cultures of corruption may derive important lessons from this case, too. Governments should put in place good mechanisms to help curb such practices. The presence of external auditors with conflicting interests in the companies being audited can be very disastrous. As demonstrated by Arthur Andersen, the ability of audit firms to conduct their duties ethically is influenced by the stake they may have in the organization they audit. Moreover, loose regulations concerning corporation’s ethics and financial practices can drive the country’s economy into chaos. Employees, shareholders and the entire country are bound to suffer from unethical practices.