Examining the impact of the Enron Corporate Scandal
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Published: Mon, 5 Dec 2016
Enron is an energy-based company in Houston, Texas that deals with the energy trade on international and domestic based. Enron Corp. Is one of the world’s largest energy, commodities and Services Company was created out of merger of two major gas pipe line in 1985.
Enron was created by merge between Houston Natural Gas and Internorth. Houston’s gas’s CEO Kenneth lay headed the merger of the two companies. After that Kenneth lay become the CEO of Enron. Earlier Enron was Enron was solely involved with the distribution and transmission of electricity and gas of United States.
In merger, Enron incurred a large amount of debt, and which resulted deregulation, after this Enron was no longer had the rights of its pipelines. The company had to find a way to generate profits and cash flow. Kenneth lay hired Jeffrey Skilling to work for Enron as an accountant. Skilling suggested the practice of buying gas from a network of suppliers and selling it to it consumers at the fixed price with a contract.
Enron was interested in the expansion, building, and operation of the pipelines, power plants, and other infrastructure. After just a year of operation Enron merged with a company called spectrum seven, a company whose chairman and CEO is the former president of United States, George W. Bush After just a year of operation. In 1999, Enron tried to expand their company by creating the Azurix Corporation, a water utility company. Overall the Azurix Corporation proved unsuccessful financially. The Azurix Corporation, due to their failure to make an entrance into the market, went under.
Enron allegedly became successful, trading over eight hundred different products worldwide. Enron was named “America’s Most Innovative Company” by Fortune magazine from 1996 to 2001. Enron was on Fortune’s “100 Best Companies to work for In America” in 2000. The company’s future appeared to be bright and promising continued success.
Enron faced many accusations of building links to political power. The company’s connection to George W. Bush, and Houston’s local politics has received much attention in recent past. In 1986, Enron was involved with Bush’s company in joint drilling for oil. There are reports that Kenneth Lay and George W. Bush even shared friendship. Kenneth lay has employed politicians who have worked under George W. Bush also signed off on a law that deregulated Texas’s electrical markets, which coincidentally resulted in large profits for Enron.
The company also had political links that reached outside of the United States. Enron created a massive and highly expensive power plant in India, even though many Indian citizens and the World Bank strenuously objected. Allegedly protesters in India were beaten up and arrested. The United States ambassador to India, who opposed the plant eventually, joined the board of Enron oil and gas
The screws came loose in August 2001, when Jeffrey Skilling, the CEO resigned from office for unknown reasons. By October 2001, Enron experienced its first quarter where they did not report a profit. On November 8th, 2001 Enron told the SEC it was restating its earnings since 1997, reducing income by $.
In Enron’s original natural gas business, the accounting had been fairly straightforward in each time period, the company listed actual costs of supplying the gas and actual revenues received from selling it. However, when skilling joined the company, he demanded that the trading business adopt mark- to -market accounting, citing that it would reflect “true economic value”. Enron became the first non-financial company to use the method to account for its complex long- term contracts.
Mark-to-market accounting requires that once a long-term contract was signed, income be estimated as the present value of net future cash flows. Often, the viability of these contracts and their related costs were difficult to judge .Due to large discrepancies of attempting to match profits and cash, investors were typically given false or misleading reports. While using the method, income from projects could be recorded, which increased financial earnings. However, in future years, the profits could not be included, so new and additional income had to be included from more projects to develop additional growth to appease investors. However, Enron later expanded its use to other areas in company to help it meet Wall Street projections.
Here are some detailed frauds in the Enron’s financial statement:
Enron’s auditor applied reckless standards in their audit, which was showing conflict between interests.
Enron financial statement showed the booking costs of cancelled projects as assets, with the rationale that to no official letter had stated that the project was cancelled.
This method was known as “the snowball”, and although it was initially dictated that stay under $90 million, it was later extended to $200 million where all found “strange transactions”. Like “erratic cash flow” and huge debt.
Enron was estimated to have about $23billion in liabilities, both debt outstanding and guaranteed loans. Citigroup and JP Morgan Chase in particular appeared to have significant amounts to lose with Enron’s fall. Additionally, many of Enron’s major assets were pledged to lenders in order to secured loans, throwing into doubt what if anything unsecured creditors and eventually stockholders might receive in bankruptcy proceedings.
The collapse of Enron, the largest bankruptcy in U.S history, which led to thousands of employees losing their jobs and their life saving plans tied to the company’s stock, which was calculated as 401(k). Reputation of Andersen, Enron’s auditing firm, is damaged after company official admitted that thousands of Enron documents were destroyed.
Those events lead to flurry of probes, including a criminal investigation by the U.S justice department of Enron .The SEC and the Labor department – as well as six congressional committees-is also investigating the company’s collapse. Enron officials have donated millions of dollars to Republicans and Democrats alike.
At the heart of Enron’s troubles were numerous outside partnerships, set up to keep debt off its books, which were reviewed by Andersen. In addition, it was revealed that Enron has paid no income taxes in four of the last five years, using almost 900 subsidiaries in tax-haven countries and other techniques.
A major issue brought to light by the scandal is Andersen dual role as Enron’s auditor and consultant, which critic’s claim is a serious conflict of interest. Andersen has been accused of over looking the huge sums of money kept off Enron’s books because Enron represented a potential $100 million -a- year in fees to the auditor. Enron fired Andersen as the feuding corporations both came under growing scrutiny for their roles in the collapse of the world’s largest energy trading company.
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