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Ken Lay was the CEO/Board of Directors Chair and founder of ENRON. He had a desire to create one of the largest businesses in the world. Enron's headquarters was in Houston, Texas. Enron was in the business of transmitting and distributing electricity and natural gas. Lay tried to make it in the water utility market with a company called Azurix, but this portion of his business was unsuccessful.
Lay grew up poor and wanted to do better in his adult life. He worked hard for his education. Lay earned a PhD in Economics. While developing his career Lay was introduced to people who gave him assistance in finding well paid jobs. Lay learned the importance of listening to people and remembering their names. This skill attracted people to him which helped introduce him to a life style that let him enjoy the good things in life.
In order to keep the company growing Lay knew it was important to appear as a generous person. He made sure to make many charitable donations. In the public eye he would present him self as an up standing person; although in his private live he may not have always lived up to this.
With the help of fellow Enron Executives Jeffery Skilling (CEO) and Andrew Fastow (CFO), Lay was able to realize his goal of creating a successful business. Many of Lay's family members and friends benefited from Enron. They were provided with jobs that paid them well. With the success of the company Lay and his family were able to enjoy a luxurious life style.
With the development of EnronOnline the company became more profitable. Enron was able to do business with energy markets around the world. This also gave the company the ability to expand on other products. These ventures made Lay happy; he and his employees were able to enjoy the benefits of being profitable.
Long term pensions, good benefits, and stock were great incentives for employees. Many of the Enron employees knew if they worked long hours making money for the company they in turn would be rewarded. Salary increases and promotions kept the employees competitive. Employees who were not producing for the company would find them selves out of work.
Enron was able to make a profit from the deregulation of California's energy market. Timothy Beleden (Head of Trading) was able to find ways around the deregulation rules that would create a profit for Enron. Soon the Enron traders were
finding that they could create situations that would make large profits. These deals not only made money for the company but also the employees. This situation became a win-win for the executives and traders.
Fastow and Skilling were able to create situations that would make money for Enron and allow them to hide the company's liabilities. Fastow was good at handling the bankers and accountants who had questions regarding their business deals. Fastow's deals
created profits for the company as well as helping them to avoid paying taxes. This created the appearance of growth for Enron. The continued appearance of profit would create the need to continue these types of transactions.
Skilling developed a plan that would allow Enron to record possible future profits on their books at the present time. Of course there was the possibility that these profits could actually become losses in the future. This type of accounting made Enron look good and helped there stock to become more valuable. With the deals they made and the stock appearing to be strong, Fastow and Skilling were able to attract investors.
Cliff Baxter was a Chief Strategy Officer and Vice Chairman with Enron.
During his time with Enron Baxter developed a lot of deals that made a lot of money for the company. This helped Baxter to promote quickly with in Enron. As time passed at Enron Baxter was not happy with some of the transactions that were taking place. He decided it was time for him to leave, so he retired in May, 2001.
Sherron Watkins was the Vice President of Corporate-development at Enron.
Prior to this position Watkins had been a CPA for Arthur Andersen. She was one of the few women to move up the ranks of the company. While working at Enron Watkins became aware of some of the deals Fastow had developed. Watkins felt these deals were not appropriate. She realized that losses were being hidden. She was concerned that these accounting practices could hurt Enron. Watkins felt she needed to address these transactions with Lay.
Lay addressed the employees of Enron to quell concerns that the company was in financial trouble. He was a convincing speaker and used this to his advantage. Lay convinced everyone that the company was strong and stock prices would again be up. In order to prove his belief in the company Lay continued to buy stock in Enron. He was hoping this would lead others to follow his example and buy more stock. As this was happening Lay was also selling off a lot of his stock. Lay and other executives were making a lot of money selling their stock. The investors and employees did not know of these transactions.
Accounting firm Arthur Andersen not only provided auditing services for Enron but also provided them with consulting services. Andersen was one of the top accounting firms and was employed year round with Enron. Enron was one of Andersen's largest clients and paid the company millions of dollars a year. Andersen allowed it's on site auditors to make the final decisions on the audits over the advice of the professionals in the home office. David Duncan was the auditor in charge of Enron's audit. It appears Duncan may have approved Enron's questionable statements in the interest of making money. Carl Bass, head of the Professional Standards Group at Andersen questioned the financial statements of Enron. Duncan implied to Andersen that Enron executives were not pleased with Bass and requested that he be removed from any review of Enron's
audit papers. It appears that Andersen may not have wanted to loose Enron as a client, so they complied and removed Bass from the Enron account. Duncan also made the decision not inform the Board of Enron of deals that involved internal contracts or those of related party transactions.
Enron's financial trouble became public in October, 2001, when it announced it would have a loss in their third quarter and a large loss in shareholder equity. This announcement caused the Securities and Exchange Commission to launch an investigation of Enron and Andersen. In light of the investigation Andersen's lawyer, Nancy Temple contacted the auditors. She wanted to make sure that they had kept up the firms policies on the maintenance of paper work. When Duncan received his reminder from Temple, he encouraged the auditing staff at Enron to destroy paper work. This created a massive shredding of documents that lasted for a couple of weeks. The shredding of documents came to a halt when Andersen was served with a subpoena and told to retain all documents.
Loyal Enron employees were left out in the cold. When they realized the company they worked so hard for was in trouble it was too late for them. The fall of Enron happened quickly. While the company's stock was quickly falling the employees were unable to sell their shares. In December, 2001 Enron filed for bankruptcy. To add insult to injury the employees were out of a job and were only given a short amount of time to remove their personal items and leave the building. These hard working people lost more than their jobs. Their retirement funds were connected to Enron's stock.
Many of the employees lost a majority of their pension funds. Enron had invested a large portion of the retirement funds into the stock. Because of their belief in the company many of the employees bought a lot of stock. Now out of a job and no retirement fund, the former employees would have to fight to try and recoup as much of their loss as possible. It will be a long legal battle to be fought in the courts.
Arthur Andersen was found guilty of obstructing justice due to the shredding of Enron documents. Because of the Securities and Exchange Commission investigation, Andersen gave up its CPA license in the Unites States. Andersen also had its license to practice in the state of Texas revoked. Andersen's conviction was eventually overturned.
Thousands of people had been employed with Andersen. The company now only has a staff of a couple of hundred. Due to the scandal Andersen's reputation has been damaged. They are now viewed as an unreliable business and have lost their clients. They are now dealing with lawsuits relating to the accounting services they provided for several businesses. The staffs focus is to now deal with the lawsuits and the closure of the company.
Lay was convicted of fraud. He suffered a heart attack and died before he could be sentenced. Due to his death, his conviction was canceled. Cliff Baxter was found dead the night before he was going to testify in front of congress. His death was considered a suicide. Some people believe that Baxter may have been murdered, but there has not been any definite proof. Skilling's conviction resulted in him getting a 24 year sentence. There will be a review of his case in 2010.
After the Enron fraud and Andersen's role in the fraud, The Securities and Exchange Commission developed some new guidelines. One of the new changes to occur was the penalties for fraud. Public companies will also have to take more responsibility for their financial statements and their internal controls. Auditors of these companies are responsible for reporting on the fairness and presentation of these statements. The auditors will have to report if these statements are or are not compliant with the governing rules. The auditor will also have to review the internal controls effectiveness of the public company and provide a report on their findings.
Had the board of directors of Enron reviewed and questioned the deals and financial statements of the company they may have stopped the fraud that was taking place. Their lack of oversight hurt not only themselves but the company, the investors, and the employees. Arthur Andersen also failed to follow through with basic accounting guidelines. If the company would have been more diligent in following up on the audit work being done at Enron they could have stopped the fraud. One of Andersen's major flaws was allowing the auditors at Enron to have final approval of the financial statements over the experts in the home office. There were employees at Enron who could see that things were not being done properly. If these employees would have spoken up they also could have prevented the fraud.
Why did so many people stand by and let this happen? It seems that they may all have had the same motive to not act. In letting the fraud continue everyone benefited financially. The executives made millions of dollars. Arthur Andersen and its auditors made millions of dollars. The Enron employees made good salaries, had good benefits and thought they were building large pension funds. In the end they all lost. Jobs were lost, careers destroyed, lives ended, and some even went to prison.
Other companies who also had their employees retirement connected to Enron stock were affected. Some of these people had long careers in their companies and were looking forward to retirement. When the fraud and down fall of Enron happened many of these people had to make changes in their lives. They gave up on retirement plans. There were retirees who had to look for work again.
Hopefully with tighter regulations frauds can be curbed. I don't believe that fraud can be completely stopped. The level of government involvement needed is hard to identify. No matter how many regulations you can come up with there are always people who will find a way around the rules. As long as people are controlled by greed and the appearance of having power there will be a need for government regulation. The best we can hope for is to catch them in a timely manner.
I am bewildered that such a large group of people would be involved in this scheme. How do these types of people find each other? We all at some point in our lives tell little white lies. But to be able to create so much deception and enjoy the life style that comes from this is beyond my realm of thinking. I am a believer in that karma will get you in the end. We may not always see it but I believe there is a punishment, whether it is physical or mental.
I truly feel for those innocent people that were hurt by this fraud. I have always been leery of deals that sound too good to be true. This is how I see Enron. They rose too quickly in business making unbelievable profits. They provided their employees with
opportunities to make large salaries and build big pensions. I will continue to question big businesses because I feel they are usually interested in what makes them money over everything else. I see it as my responsibility to learn as much as I can to make a choice that is best for me.