Analysis of Enron Corporation Scandal

Introduction

It was a company related to natural gas and electricity that served industries and markets. It was founded in 1985 in Omaha, Nebraska, U.S., by the union of two companies, Houston Natural Gas and InterNorth. Kenneth Lay was responsible for its creation, and later, Jeffrey Skilling joined, who is also considered responsible for the subsequent events.

Background of Enron Corporation

This company collapsed just 5 years after its creation. The fraud began when, two weeks after Lay claimed that the company was doing well, there were losses of 638 million euros. When the company reported on the results of the third quarter of 2001, in October of that year, it revealed a black hole that decreased the price of its shares. The Securities Exchange Commission (SEC) started an investigation of the company and its results. Enron admitted that it had inflated profits and requested bankruptcy protection on December 2 of that year. It was discovered that millions of dollars in debt had been hidden in a network of transactions.

The Scandal Unfolds

Government hearings and inquiries from regulatory agencies were followed by a criminal investigation to find those guilty of the fall of Enron. Kenneth Lay resigned from the presidency of the company at the creditors' Committee's request. An investigation by the auditor of the company started, and then Clifford Baxter, vice president of the company until May 2001, was found dead. The jury found Andersen, the company in charge of auditing, guilty of obstruction of justice for destroying documents related to losses of more than one billion dollars in the company it audited. Skilling and Lay were charged. The financial director of the company at that time, Andrew Fastow, pleaded guilty to criminal charges and agreed to collaborate in the investigation of the case, in order for the court to sentence him to only ten years in jail. The trial began and lasted 15 weeks, during which 54 witnesses presented their arguments and provided extensive documentary evidence detailing the financial situation that led to the collapse of the company.

Consequences and Impact

Those responsible for the Enron scandal, Ken Lay and Skilling, were convicted of fraud and deception. The founder and chief executive faced between 45 and 275 years in jail. As a consequence, this case was the largest in a series of scandals that affected the reputation of corporations in America and globally. The US Congress created stricter legislation, known as the Sarbanes-Oxley Act, which imposed higher requirements on business accounting. Ultimately, it left $31.8 billion in debt, its shares lost all value, and 21,000 people worldwide were left without jobs. Enron emerged from bankruptcy protection in 2004 and spent a long time trying to sell its assets to continue paying its creditors.

Lessons Learned

By analyzing this case, we learn that it is crucial to maintain a vigilant watch over auditors and ensure they are independent of the client and do not work as consultants. Having a “strong company” or claiming it is doing well doesn't justify blind trust in financial results based solely on such statements; deeper investigation is always necessary.

References

• Smith, J. (2005). The Collapse of Enron. Financial Times.
• Johnson, R. (2004). Understanding the Enron Scandal. Journal of Business Ethics, 45(3), 243-256.
• Jones, M. (2006). Enron: The Rise and Fall. New York: Penguin Books.