The History of Enron Scandal: The Beginning and The End

The Enron Scandal was an accounting scandal involving Enron corporation. Enron corporation was an American energy, commodities, and services company based in Houston, Texas. Enron’s predecessor was the Northern Natural Gas Company, which was formed during 1932, in Omaha, Nebraska. It was reorganized during 1979 as the main subsidiary of a holding company, Inter-North which was a diversified energy and energy related products company. During 1985, it bought the smaller and less diversified Houston Natural Gas company. The company initially named itself ‘HNGInter-North Inc. however was later renamed to Enron. Enron’s Line of Business Enron was originally involved in transmitting and distributing electricity and natural gas throughout the United States. The company developed, built, and operated power plants and pipelines while dealing with rules of law and other infrastructures worldwide. Enron owned a large network of natural gas pipelines, which stretched ocean to ocean and border to border.

What Made it a Scandal?

In 1990’s corporate self regulation in the United States of America had been widely thought to have reached a high plateau of evolutionary success due to proliferating good practices and sophisticated institutional monitoring. As Enron became the largest seller of natural gas in North America by 1992, its trading of gas contracts earned $122 million (before interest and taxes) the second largest contributor to the company’s net income. However, the bankruptcy of Enron shook the entire system.

Some highlights brought about when this scandal had been exposed were:

• $30 million of self dealings by the chief financial officer;
• $700 million of net earnings disappeared;
• $1.2 billion shareholders equity disappeared;
• Over $4 billion in hidden liabilities.

Many of Enron’s recorded assets and profits were inflated or even wholly fraudulent and Nonexistent. Debts and losses were put into entities formed ‘offshore’ that were not included in the company’s financial statements, and other sophisticated and arcane financial transactions between Enron and related companies were used to eliminate unprofitable entities from the company’s books.

By the fall of 2000, Enron was starting to crumble under its own success. CEO Jeffrey Skilling hide the financial losses of the trading business and other operations of the company using mark-to-market accounting. This technique measures the value of a security based on its current market value instead of its book value. Hence, it could be potentially disastrous for businesses that do not trade actual securities. For Enron, these accounting practices help them deceive investors and other stakeholders. The company would create an asset such as a power plant, and straight away claim the expected profit on its books. Hence, even if the project or asset were to become unprofitable, its projected profits would be shown to make it seem successful. Similar fraudulent accounting activities were undertaken by the company to make themselves seem more profitable than they actually were.

The Ending 

By the summer of 2001, Enron was in freefall. CEO Kenneth Lay had retired in February, turning over the position to Jeffrey Skilling. Moreover, in August 2001, Skilling resigned as CEO citing personal reasons. Around the same time, analysts began to downgrade their rating for Enron’s stock, and the stock descended to a 52-week low of $39.95. The SEC started their investigation into the company and found startling results. Enron had losses of $591 million and had $690 million in debt by the end of 2000. Enron filed for bankruptcy after Dynegy backed out of a merger deal in November 2001, with the company filing for bankruptcy in December. Investors would lose $74 billion in the four years leading up to their bankruptcy. Enron’s accounting firm Arthur Anderson LLP was a major player in the scandal. The company helped Enron hide its actual financial performance and showcase profitability to the rest of the world. David B. Duncan was the partner at the accounting firm who oversaw Enron’s accounts and was privy to their accounting practices. Hence, this was surprising considering Anderson was one of the top 5 accounting firms in the US at the time. Moreover, the firm kept on giving the seal of approval to Enron for their accounting practices, knowing very well how disastrous it could be. Hence, the firm was shut down along with Enron. They would face criminal charges which would prove to be their demise.