STUDENT NAME: PATEL HARSHKUMAR UMESH
ID NO: 605842
COURSE: FIC 4020
COURSE DESCRIPTION: FORENSIC ACCOUNTING AND FRAUD INVESTIGATIONS
TERM PAPER ASSIGNMENT: REPORT ON THE ENRON SCANDAL USA
LECTURER: PAULA MUSUVA
SEMESTER: FALL 2019
Enron Corporation was an American energy, commodities, and services providing company primarily based in Houston, Texas. Before it went bankrupt on December 2, 2001, Enron had employed roughly 20,000 employees and had becomeone of the world’s major electricity, gas, communications, and pulp and paper firms, with claimed revenues of nearly 1 billion throughout 2000.
Fortune, an American business magazine, named Enron “America’s Most Innovative Company” for 6 consecutive years. The story ends with the bankruptcy of one of America’s largest firms. Enron’s collapse affected the lives of thousands of staff, shareholders and different investors. By 2001 end, it had been disclosed that its reported economic condition was because of a smartly coming up with an institutionalized, systematic, and creatively planned accounting fraud, currently best-known now as the Enron scandal. Enron has since become a well known example of willful company fraud and corruption.
The scandal additionally brought into the question of the accounting practices and activities of the many firms within the US and was an element within the enactment of the SarbanesOxley Act of 2002. The scandal additionally affected the larger business world by inflicting the dissolution of the Arthur Andersen firm.
TIMELINE OF ENRON CORPORATIONThe Company Enron started off as Northern Natural Gas Company, organized in Omaha, Nebraska, in 1930 by three other companies namely; North American Light and United Light & Railways Company who each control a thirty five percent stake within the new enterprise, while Lone Star Gas Corporation the third company owned the
remaining 30 percent. The company’s founding came just a few months after the stock market crash of 1922, an inauspicious time to launch a new venture. Several aspects of the great depression really worked in Northern’s favor, however, consumers at first weren’t captivated with gas as a heating fuel, however its low price light-emitting diode to its acceptance throughout robust economic times.
High state brought the new company a prepared offer to make its pipeline system.
In addition, the 24-inch steel pipe, that could transport six times the quantity of gas carried by 12-inch forged iron pipe, had simply been developed. Northern grew rapidly in the 1930s, doubling its system capacity among 2 years of its incorporation and transferral the primary gas supply to the state of Minnesota.
Offering Shares to the Public in the 1940s
Northern’s regulation and ownership were brought about during the 1940s.
In 1941, United light & Railways sold-out its share of Northern to the general public, and in 1942 Lone Star Gas distributed its holdings to its stockholders.
North American Light & Power would hold on to its stake until 1947, when it sold its shares to underwriters who then offered the stock to the public. Northern was listed on the New York stock market that year.
Growth through Major Acquisitions
During the 1970s, Northern continued expanding and also became a principal investor in the development of the Alaskan pipeline. After completion, that pipeline allowed Northern to tap vast natural gas reserves it had acquired in Canada.
In 1980, Northern changed its name and became InterNorth, Inc. Over following few years, company management extended the scope of the companys operations by investing in ventures outside of the natural gas industry, including oil exploration, chemicals, coal mining, and fuel-trading operations.But the companys principal focus remained the gas business.
In 1985, InterNorth purchased Houston Natural Gas Company for $2.3 billion. That acquisition resulted in InterNorth controlling a 40,000-mile network of natural gas pipelines and allowed it to achieve its long-sought goal of becoming the largest natural gas company in the United States.
Rename to Enron
InterNorth went on and changed its name to Enron in the year 1986.
During this year the former Chairman of Houston Natural Gas, Kenneth Lay emerged as the top executive of the new firm that chose Houston, Texas, as its new corporate headquarters.
Lay quickly adopted the aggressive growth strategy that had long dominated the management policies of InterNorth and its precursor. Lay employed Jeffrey Skilling to serve as one among his prime subordinates. During the 1990s, Skilling developed and enforced an idea to remodel Enron from a standard gas provider into an energy-trading company that served as an negotiator between producers of energy merchandise, mainly gas and electricity, and end users of these commodities.
In early 2001, Skilling assumed Lays position as Enrons Chief Executive Officer (CEO), though Lay maintained the title of chairman of the board.
Before Enrons Collapse
In Enrons annual report of the year 2000 it discussed the companys four principal lines of business. Energy Wholesale Services stratified as the companys largest revenue producer. That divisions 60 % increase in transaction volume throughout 2000 was fueled by the fast development of EnronOnline which was an electronic marketplace. During financial 2000 alone, On the opposite hand Lays position as the chief executive of the nations seventh-largest firm gave him direct access to key political and governmental officers.
In June 2001, Skilling was mentioned as the number one CEO within the entire country, while Enron was hailed as Americas most innovative company.
Enrons Chief Financial Officer (CFO) Andrew Fastow was recognized for making the monetary infrastructure for one among the nations largest and most advanced firms.
In 1999, CFO Magazine bestowed Fastow the Excellence Award for Capital Structure Management for his pioneering work on distinctive finance techniques.
In may 2001, Enrons executive Clifford Baxter left the corporate, apparently in uncontroversial circumstances. It was reported that Baxter, who later committed suicide, had clashed with Jeff Skilling (Enrons CEO), over the morality of Enrons partnership transactions.
On 14th August 2001, Jeff Skilling had resigned as the Chief Executive Officer, citing personal reasons and led Kenneth Lay in becoming the Chief Executive Officer.
Skillings departure was prompted by issues over Enron’s botched accounting and unhealthy management.
In mid August 2001, Sherron Watkins, who was Enrons Corporate Development Executive, later referred to as the whistleblower in the Enron scandal, ended up witting a letter to Kenneth Lay warning him of accounting irregularities that might cause a threat to the corporate. This development shocked investors who suddenly panicked.
The lack of transparency sent a commercialism wave within the market. Investors sold-out numerous shares, knocking almost $ 4 off the price to less than $40 over the course of the third week of August 2001. In spite of the drop in value, management still insisted all was well. Despite the air of imminent doom, Kenneth Lay found two banks willing to extend credit. But the worst of revelations were to come yet.On 8th November 2001, the company took the highly unusual move of restating its profits for the past four years. Enron effectively admitted that it had inflated its profits by concealing debts in its sophisticated partnership arrangements (Special Purpose Entities).
On 9th November 2001, the humiliation of Enron appeared complete because it entered negotiations to be seized by its much smaller rival, Dynegy.
Enron filed for bankruptcy in December 2001 and filed a suit against Dynegy for pulling out of the planned merger.
Enrons share value collapsed from around $ 95 to below $ 1. Enrons workers lost their savings also as their jobs. Mr.Kenneth Lay, the once celebrated visionary chairman of the firm, resigned in January 2002.
It seems currently that the exceptional success of Enron was a daydream and it appears to have sunk into a monetary plight that’s for the most part of its own creation. In just sixteen years, Enron grew into one among America’s largest companies; but, its success was supported by artificial means inflated profits, questionable accounting practices and fraud. Several of the companys businesses were losing operations; a fact that was concealed from investors using off balance sheet vehicles or structured finance vehicles.
Why Enron Fell and what measures should have been taken.
In the case of Enron, the forced ranking distribution scheme created negativity among its employees as they became more and more greedy. Traders no longer worked in the interest of the company but worked for personal benefits.
To stop this sort of worker behavior is by having a basic methodology which at micro and macro level will be simply to not implement this scheme.Even if this scheme is implemented, company should see that whether or not this scheme is completely motivating the workers to perform better.
A few firms that successfully use this scheme are Microsoft and GE.
There have been large problems with the manner that the organization did their auditing and accounting work.There was no transparency in their work.
Also they failed to prepare true and truthful balance sheets and income statements.
Enron sponsored a retirement program a 401(k) for its workers to that they can contribute some of their pay on a tax-deferred basis. As of December 31, 2000, 62 of the assets held within the corporations 401(k) retirement program consisted of Enron stock. Many individual Enron workers held even larger percentages of Enron stock in their 401(k) accounts. Shares of Enron, which in January 2001 traded for more than $80/share, were worth less than 70 cents in January 2002. Consequently, the companys bankruptcy has substantially reduced the value of its employees retirement accounts. The losses suffered by participants of the 401(k) plan have prompted questions on the laws and laws that govern these plans.
The board of administrators had a significant role to play within the companys destruction. They promoted unfair practices which were used to fill their pockets, instead of stopping them initially. This promoted corruption in the organization.
Security analysts that were employed by the investment banks offer analysis and create buy, sell, or hold recommendations for the use of their respective sales staffs as well as their investor clients. Analyst support was crucial to Enron because it required constant infusions of funding from the financial markets.
On November 29, 2001, after Enrons stock had fallen 99% from its high, and after rating agencies had downgraded its debt to junk bond status, only 2 of 11 major firm analysts rated its stock a sell.
Banking companies, notably Citigroup and J.P.Morgan Chase, were involved in each the investment banking and also the commercial banking businesses with Enron.
These firms suffered a great deal because of Enrons fall. They wanted to earn as much as possible. They completely disregarded the very fact that there was no transparency within the business.
These problems could have been simply prevented at both, micro and macro levels.
At a micro level, the businesses will have people that are committed to the company and wish to work with transparency and sincerity.
The governing boards should promote fair practices in the organization at the macro levels. They should design policies which will build the organization more clear and less liable to scrutiny.
A measure of the honest worth of accounts that may change over time, such as assets and liabilities. Mark to promote aims to produce a practical appraisal of an institution’s or company’s current monetary scenario.
Preventing the incorrect use of such schemes is absolutely vital therefore as to present a realistic image of the corporate. At a micro level, the board of administrators ought to have forced the CFO, Andrew Fastow, to resign.
At a Macro level, the govt. ought to have created new policies therefore as to stop firms from misusing the mark to promote accounting technique.
Examine ethical climate and place safeguards in place. Don’t just print, post and pray.
Build a strong ethics infrastructure that’s self- sustaining. Publicly commit to being an ethical organization. Separate auditing from consulting functions.
Talk with employees at all levels often. Build ethical conduct into corporate systems.
Establish an ethics panel to perpetually keep the organization targeted on the seven main provisions of the Federal Sentencing pointers of 1991 in mind.
Live your corporate values. Keep the lines of communications open.
The accounting act of recording the worth of a security, portfolio or account to reflect its current market value rather than its book value. When net asset value (NAV) of a mutual fund is valued based on the foremost current market valuation.
Enron used this scheme to appreciate their share price. They showed profits that were solely an assumption and never existed truly. This way they were able to window dress their share price. They exploited the scheme.
The consequences of Enron Collapse
Enron stands for the greatest company scandal within the history of the United States economy and has become an emblem of corruption for the entire Western financial system.
4500 employees lost their jobs.
Investors lost about 60 billion dollars worth of shares in monetary value within a number of days; which for several staff it meant losing their old age security or pension.
The pension fund for the company’s staff was blotted out.
Citizens trust within the American financial system was destroyed.
Losses on the monetary market amounted to the worst stock value loss in peaceful times.
Banks were suspected of collusion.
The auditing firm known as Arthur Anderson ended up losing its accreditation.
The principles for company monetary coverage were drastically sharpened: by enforcing the Sarbanes-Oxley Act (2002).
The close ties of the company’s founder, Kenneth Lay, to United States President St. George W.Bush Lay was a very important financial supporter of Bush came under sharp criticism.
The problem dealt with in this paper are advanced and making an attempt to resolve these issues cause an even greater challenge. But before real effective change is achieved, we should first be ready to target the foundation of the matter. Complex problems tend to involve complex solutions. The band-aid of legislation, more steering, or clearer guidance if you may, can quite seemingly lead to nothing more than the tug and pull between standard-setters and issuers to continue along this move, counter move approach that has gotten us to where we are today. Until we are able to focus more narrowly on the matter and handle it from that more directed approach, well in all probability be seeing a lot of of the same.
HYPERLINK ” “Enron Corporation – Company Profile, Information, Business Description, History, Background Information on Enron Corporation”. referenceforbusiness.com.
Friedberg Mercantile Group. 1997. HYPERLINK ” The Collapse Of Wall Street And The Lessons Of History, Toronto, Canada.
Frontain, Michael (June 12, 2010). HYPERLINK ” “Enron Corporation”. Texas State Historical Association.
H.R. 3763 (107th): Sarbanes-Oxley Act of 2002
Watkins, Thayer. HYPERLINK ” “The Rise and Fall of Enron”. San Jose State University.