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American Corporate Fraud
This new century began with great expectations. However, just as the door of the 21st century opened, September 11th shocked the world and bruised the economy. Then, followed the bankruptcy and corporate scandals of some of America's major corporations. One such Fortune 500 company that fell at the new century's threshold was Enron, one of the world's leading energy companies. Once hailed as the most promising corporation in the United States, Enron is now in bankruptcy and under federal investigation for fraudulent accounting practices. The depths of its unethical practices and the aftermath of its collapse are still unfolding day by day.
Founded in 1985, Enron began as an energy company, shipping natural gas through pipelines. In 1989, Enron expanded into the natural gas commodities market, basically betting on future gas prices. By 1994, Enron was trading electricity contracts, eventually becoming the largest electricity trader in the United States and by the late 1990's it was trading coal, paper, and even telecom bandwidths. Most of Enron's revenue was coming from trading by the close of the century. Then, in October 2001, Enron made an announcement that it was actually worth $1.2 billion less than it had claimed. This was due largely to "debts and losses the company had attributed to separate investment partnerships it had created in the late 1990's and kept off the company's books."
On December 2, Enron declared bankruptcy, the largest bankruptcy in U.S. history. By December 3, thousands of Enron employees in Houston were emptying their desk drawers into boxes, packing up pictures and other personal items from their offices and heading home. Telecommuters across the country sat at computers in their basements, dens and spare rooms converted into offices trying to log into their Enron email accounts. None received access. Jim Olcott, who worked for over two years from his home in Syracuse, New York, for Enron Energy Services said he had been given a list of phone numbers from corporate for officials handling the layoffs. Olcott said, "I dialed it and got answering machines. It was useless." Not only had jobs been lost, leaving thousands unemployed, many had lost their retirement accounts. Now, not only were they unemployed, their life savings had literally vanished, nest eggs empty. Roger Boyce, who had worked for Enron for almost 30 years, had put all of his 401(k) funds into company stock. As part of a stock option plan, Boyce had purchased shares in Enron stock over the years. He had also received as an outright gift from the company about 15,000 shares in Enron stock, plus matched company contributions to his 401(k) plan. The 67-year-old retired Enron employee owned 26,000 shares of Enron stock that at the end of 2000 was worth roughly $2 million. By early December 2001, Boyce's entire stock was valued under $10,000. Like Boyce, many Enron employees had over sixty percent of their retirement savings invested in company stock.
What happened? How could the darling of Wall Street, the seventh largest company in the U.S., a shining diamond in the world of finance, become just a lump of coal? It is a story that is still unraveling the details. However, there are a few key points that have revealed. Enron's greatest strength was its stock, which appeared to be such a great investment due to overstated financial statements. Moreover, Enron executives touted its successes with such flare that few doubted or even questioned the reality of the company's holdings. Furthermore, Wall Street analysts and accountants helped enable the company to create and finance more than 3,000 outside partnerships. Only when Enron's stock dropped 99% from its all-time high was the truth revealed. Enron was essentially a "financial house of cards." Partnerships, with names like Yellowknife, Whitewing, and Miss Kitty, "allowed Enron to move its debts off its financial statements and out of public scrutiny, effectively creating the mirage that Enron was a financially vibrant company." Although, some of the partnerships may have had legitimate purposes, many were simply used to hide the billions of dollars of debt created from failed ventures to expand outside the core energy businesses. Not only had it made markets and traded in oil and gas, but also things like water, Internet traffic, and even weather. All of this made Enron look more profitable to investors and low risk to lenders.
Enron employees felt they had landed over the rainbow and found the pot of gold. The company had recruited the best from the financial world, academia, and government. Working at Enron was the top of the world. With the best and brightest employees, how then, did no one catch on that things were not quite as they seemed? The majority of Enron's employees had no clue regarding the details of partnerships such as Chewbacca, or Chewco, named after the Star Wars character. One reason Enron was able to keep its employees in the dark, was its practice of constantly moving workers between departments and divisions as its use of partnerships grew. Most employees were moved at least twice a year. Changes were so frequent that workers had their own 'Top 10' list. Number 7 on the list was "Because the basic business model is to keep the outside investment analysts so confused that they will not be able to figure out that we do not know what we are doing." And the Number 1 reason for the constant shuffling, "Forget all the hype about being Fortune's #1 - congratulations to Enron for having broken a Guinness book of world record with 942 reorganizations in one year!"
One senior administrative assistant explained, "There were no reins. You didn't have to justify why you needed $50 million to start a new company. And if it failed, there was no accountability." Enron's collapse not only destroyed the lives of thousands of its employees, it brought down one of the world's top accounting firms, Arthur Andersen. Andersen's attempt to cover-up Enron's financial accounting by shredding documents has made its name forever synonymous with 'shredder.'
According to a new Brookings Institution study, the Enron and WorldCom scandals alone will cost the United stated roughly half a billion dollars to its Gross Domestic Product in the first year. "At least half of the drop in the stock market's value since March can be attributed to the Enron crisis" claims the report. Based on conservative estimates, the study's authors believe that the Enron bankruptcy "symbolized the opening of a 'deep and dark Pandora's box' of blue chip companies that have been discovered to have fraudulent corporate management and accounting practices...that high volatility in U.S. securities markets has resulted because blue chips are involved, and because the scandals may reach the highest levels of political office." Moreover, the study highlights other negative consequences, such as unemployment, inflation, and direct foreign investment in the American economy. "The trade weighted value of the dollar has declined by 5.2% due to the decline in foreign investment resulting from the scandals." According to the report, the loss of confidence due to the scandals makes it difficult to attract the $500 billion a year the American economy needs from oversees sources. Enron and WorldCom caused a drastic fall on the stock markets. According to the United States Conference Board, "U.S. stock investors had lost a total of eight trillion U.S. dollars since March 2001." Enron is one of many large corporations that have fallen in the last few years. Economist, Hans Schenk from Tilburg University in the Netherlands, claims that of the "total of $9 trillion in U.S. And European merger deals between 1996 and 2000, about $5.8 trillion either failed to create or actually destroyed economic wealth. Most mergers are an economic waste."
Enron is thought to be the largest computer forensics case in history. It literally dwarfs all other financial probes. "Investigators will pore through 10,000 computer backup tapes, 20 million sheets of paper and more than 400 computers and handheld devices, according to legal papers. The electronic data is up to 10 times the size of the Library of Congress." Prosecutors are questioning why top CEO's were quietly unloading their company stock while at the same time urging employees to buy more.
The government's widening prosecution of Enron is reaching down to the lower levels of management, hoping that without company-paid legal counsel, the pressure to cooperate with the government will increase.
ABC News. http://abcnews.go.com/sections/business/DailyNews/Enron.(accessed 01-19-2003).
Elkind, Peter; McLean, Bethany. "Feds Move Up Enron Food Chain." Fortune.
December 30, 2002; pp 43.
Iwata, Edward. "Enron case could be largest corporate forensic investigation."
USA Today. February 19, 2002; pp 06B.
Kalita, Miltra S. "Piece by Piece: Once-mighty Enron has fallen. Now those caught in its wide net stretches to New York." Newsday. December 15, 2001; pp F08.
Krantz, Matt. "Peeling back the layers of Enron's breakdown." USA Today. January 22
2002; pp 01B.
Miller, Karen Lowry. "The Giants Stumble." Newsweek International. July 08, 2002; pp
Report Totals Costs of Corporate Scandals." United Press International.…[continue]
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