Enron Corporation was founded in 1985 by Kenneth Lay due to the merger of gas companies. Lay who was the Chief Executive Officer and the chairman shifted the company’s headquarter from Omaha to Houston, Texas where lots of the business was consolidated to natural gas. Enron was a company that was ranked among the top ten best companies in the world and the worth of its shares was slightly over ninety dollars before it was declared bankrupt in 2001.
The initial signs of problems for the company were experienced when traders who were gambling with the assets of the company in the marketplace of oil lost ninety million dollars within a span of five days. As a result, the firm lost its reserves and it was its auditors who saved it by miss-reporting the net worth of the company, and became a trend for the auditors to always to issue the company’s stakeholders with the financial reports that did not reflect the exact financial state of the firm (Flood, 2003). The assets of the company were being gambled in the investments that were considered extremely risky so as to realize huge profits. With the revenues of the firm sharply declining, there was a need for the firm to get new life. As such, Lay recruited Jeff Skilling who was a graduate from Harvard Business School. Skilling had lots of ideas regarding the energy business like the natural gas that Enron Corp was producing. His notable brilliant idea was to sell the company’s commodity as a valued asset. He also proposed the adoption of the systems of accounting that were meant to ensure that Enron became successful for the predictable future.
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Skilling had his working conditions for the firm in which he stipulated that Enron was to adopt a new type of accounting known as Mark to Market that was created in the 1980s by traders. Mark to market made it easier for the financial officers to account for the fair value of liabilities and assets based on the price of the market during the valuation process, and thus accountants were restricted from providing the value for the liabilities and the assets as they considered fit. The idea of dealing with the natural gas as a commodity and the idea of the Mark to Market accounting system were new in the firm and they became popular. As a result, Arthur Andersen which was the accounting firm of Enron together with the Securities and Exchange Commission approved the idea for Enron to use Mark to Market accounting system.
Not considering the revenue that Enron was getting, the company could speculate the futures of the natural gas and indicate the speculations in its accounting books as revenues that have been earned. As such, the new accounting system was open to manipulation by the accountants. The firm posted huge revenue earnings when the Mark to Market got approved and the persons who were in the top management of the firm took big bonuses from the earnings that were inflated and were not in existence. Such an act was the start of Enron’s downfall. The executives spent lots of years trying to cover up the financial void that resulted from their accounting malpractices that led to the demise of the corporation.
Being an innovator, Skilling came up with a Darwinian corporate culture that pushed workers close to the point of insanity. He applied the tactics of the survival of the fittest and they were mirrored on his Performance Review Committees that were to rate their colleagues on a scale of one to five (Flood, 2003). The under ten percent of the workers would be laid off every year by the corporation. Skilling’s corporate culture was described as an aggressive one and it helped build the reputation of Enron which was widely admired within the financial world. Enron declined to trade with the agencies that defied its speculations as it was considered the biggest entity in the market. Skilling advocated for the taking of risks. Company retreats were always squandered in taking part in the macho persona and sports and the employees who engaged in such activities got rewards. The Enron’s business floor was occupied by the persons who were willing to put in twelve hours in a day and be at work till late as they conducted research that was meant to get them more bonuses.
The Enron’s corporate culture was supported by media and the public relations campaign so as to push further the company’s successful image. Skilling desired to bolster the confidence of the investors in a manner that would ensure that the stock of the company never declines. He promised ten to fifteen percent returns every year, and thus he targeted various markets as well as various forms of energy so as to continuously increase the price of the company’s stock. The price of the stock played a critical role in driving the company and was significantly shown as a continuous reminder to workers the worth of the company (Flood, 2003). As a result, the management encouraged the workers to invest in the company of which lots of them complied. The company’s PR campaign made the price of the company’s stock to increase, though it was incurring losses. Enron constructed a power plant for its natural gas in India, despite the fact that other companies had ignored India as a market for the commodity. Most of the decisions of the corporation were being affected by Skilling’s ego as well as the culture that proved bullish. Enron lost more than one billion dollars on the Indian project since the locals were incapable of affording the power that the plant was generating.
In the meantime, the company’s executives had earned bonuses regarding the prospective revenues of the power plant. The loss in India led to the company’s next big move as it considered a merger with the Portland General Electric Company that controlled the Pacific Northwest and California. Enron had many employees who were willing to invest in the company, though it continued to cover up its financial performance. It ventured into new markets and created new streams of revenue, though the revenues were investments from its workers.
Analysts of the stock market used the documents that the accounting firm of Enron had certified so as to make recommendations on sell and buy of the company’s stock. Conversely, Enron continuously had a rating for buying the stock, and hence the price continued to rise (Flood, 2003). John Olsen who was the analysts of Merrill Lynch was the first person to realize Enron’s financial anomaly. He got fired because of raising questions concerning the firm’s reporting practices. In return, the executives of Enron gave Merrill Lynch two analyst positions that paid a total of a hundred million dollars so as to silence any analyst who would be suspicious of Enron Corporation’s reporting practices. It is during the same period that Lou Pai who was a hidden Chief Executive Officer of Enron became common in the public spotlight. As the Enron Energy Services C.E.O, he earned approximately one hundred and twenty million dollars before leaving after the discovery of a scandal in his private dealings. He later became the first senior employee of Enron to sell his stock at approximately two hundred and fifty million dollars. He saw the opportunity to leave the firm when it still appeared strong to the public. The PR campaign by the company’s executives continued to portray Enron as a thriving corporation than what was reflected on its earnings. Again, Skilling came up with a new idea that was to continue the growth of the company.
Enron publicized its plan to deal in bandwidth in 2000 since it had created an energy market and Skilling thought that the technology revolution would make the business thrive. The company signed a deal with Blockbuster to issue videos through the Internet to the clients by the use of idle bandwidth, alleging to have created the technology and putting itself as the new leaders in the industry (Flood, 2003). The PR campaign of Enron was very efficient at this juncture that the price of its stock increased to a higher level, though the deal of the Blockbuster did not go well. It turned out later that the corporation did not create the technology to relay videos, and its idea of dealing in bandwidth was just a move to hoodwink its clients into buying its stock. Though the company did not earn revenues from its deal with the Blockbuster, it posted fifty-three million dollars as the revenue that was generated based on protrusions from the deal. The executives earned their bonuses based on the fifty-three million dollars, and albeit the loss, the price of the company’s stock continued to increase.
It is also notable that the majority of the company’s top managers began selling off large amounts of their stock when they realized that the Blockbuster deal had failed. The company’s image in the eyes of the public continued to get better as the managers sold close to one billion dollars in personal stock. Skilling and Lay led the charge by selling approximately two hundred million dollars and three hundred million dollars of their shares respectively. In august 2000, Enron came up with a new scheme of penetrating into new markets as it announced that it would speculate and trade on weather reports. The company’s stock was selling at ninety dollars per share, though the recent ploy was a desperate move.
Jim Chanos who was an analyst was one of the first people to realize the deception and he contacted a Fortune Magazine’s writer Bethany McLean. Mclean closely examined the financial statements of Enron and started writing an article about the company. It became difficult for McLean to detect fraud though he felt that something was a miss (McLean, 2001). There was no clarity in the manner in which Enron was making money. McLean brought up the financial issues of the company when he was interviewing Skilling. However, she did not get the appropriate information she wanted for the article since Skilling responded that she needed to contact the accountant of the company since he was not an accountant to provide her with the company’s financial reports. When McLean threatened to print the article without the company’s input, Andrew Fastow who was one of the company’s executives agreed to meet with her so as to provide her with exhaustive accounts of the businesses of the company that the C.E.O could not give. Fastow even provided McLean with the financial reports of the partnerships that he participated in and whose obligations were to trade with Enron. He instructed McLean not to write an article that would make him look bad.
The responsibility bestowed on Fastow was to fabricate the earnings of the company and hide the tracks of the company’s decline. He kept on posting the annual gains of Enron while the loss that was registered by the firm was thirty billion dollars. He started creating shadow agencies that were used to siphon off the debts of the company. As a result, the shadow companies’ liabilities increased steadily whereas Enron posted quarterly gains. Eventually his idea resulted in the formation of a shadow company by the name LJM that was to sell the assets of Enron to major banking institutions. Fastow managed to make the numbers in the accounting books of Enron look accurate by momentarily getting rid of certain assets from the books of record. As key partner in the LJM Company, he was capable of securing huge bonuses and profits for himself. Moreover, he sold such an idea to the banks through insuring the company’s assets with the stock. Many banks overlooked the legality of the idea and invested over two billion dollars in the project. The banks’ intention was to make mega profits before the scandal was exposed, and they all jumped ship when the scandal was exposed and all claimed to be ignorant of the scheme behind the project.
A Vice President of the company by the name Sherron Watkins became the whistle blower when she was given asset accounts to be within her control when she relocated to the department of Fastow. She discovered the intricate web of assets that Fastow had created and that the assets belonged to banks and were guaranteed by the stock of Enron. She disclosed her discoveries to Lay through a letter in which she did not mention herself. As a result, SEC started its investigations into the fraud.
The 2002 Sarbanes Oxley Act was signed into law after the Enron scandal so as to promote trust in the public companies. The Act stipulated some of the reforms that promote corporate responsibility among the public companies, enhance the disclosure of finances, and combat accounting and corporate fraud (U.S. Securities and Exchange Commission, 2012). It also developed the Public Accounting Oversight Board (PCAOB) that looks into the auditing profession’s activities. PCAOB is also meant to stop any scandal like the Enron’s from taking place in future. The Sarbanes Oxley Act was also to restore confidence in the investors and make the financial systems of America to spiral again. The Act has policies that demand proper regulation of oversight firms that provide accounting audits as well as accurate principles of accounting.
To conclude with, the absence of critical ethical values and the executives’ greed drove a once very successful company into its demise. The executives of Enron failed to instill values into the culture of the company that could have reflected their dealings with the company and the dealings with other individuals in a manner that brings light to business ethics ethical and also value driven. Business operations that consider ethical values could have saved the company from collapsing thereby, saving lots of jobs. It is also evident that greed by employees like Fastow and Pai can make the greatest company in the world to collapse. Millions of dollars were skimmed off by the executives of Enron when they decided to concurrently run other corporations that were meant to siphon money from Enron. The fraud also adversely affected the employees and other Americans who were tricked by manipulation of the financial statements of the company by the accountants to believe that the company was doing well. Such employees and the invested almost all that they had into the company only to be defrauded by the greedy executives. Americans hope that the Public Accounting Oversight Board (PCAOB) will ensure that a scandal like the Enron’s does not occur again.
References
Flood, M. (September 10, 2003). Ex-Enron Executive going to Prison: Glisan Plea may Speed Cases. Houston Chronicle. Retrieved from http://www.chron.com/cs/CDA/story.hts/special/enron/2090943
McLean, B. (December 9, 2001). Why Enron went bust. Fortune. Retrieved from http://www.fortune.com
U.S. Securities and Exchange Commission. (2012). The Laws that Govern the Securities Industry. Retrieved from http://www.sec.gov/about/laws.shtml#sox2002
