Enron Scandal 2001 Analysis

Analysis of Enron Scandal (2001)
Background of the Company
All through the course of the late 90s, Enron Corporation was widely acknowledged as one among the pioneering firms in the nation. The new-economy individualist seemed to ditch the mildewed, outdated factories with bulky physical assets, instead favoring e-commerce. While it constantly operated gas lines and constructed power plants, its popularity was owing to its distinctive trading businesses. In addition to the purchase and sale of electricity and gas futures, the organization developed entirely novel markets for peculiar "commodities" like Internet bandwidth, advertising broadcast time, and weather futures (Li, 2010).
Established in the year 1985, Enron featured among the top electricity, pulp and paper, natural gas, and communications corporations worldwide prior to declaring bankruptcy in the latter half of 2001. The company’s yearly revenues increased from roughly nine billion dollars in the year 1995 to more than one-hundred billion dollars five years later. However, in end-2001, the world witnessed a shocking revelation: the company’s supposed financial condition had, to a very great extent, been sustained by systematic, longstanding, innovative accounting fraud. Thomas (2002) claims that the dip in the firm’s stock price from the mid-2000 figure of ninety dollars per share to not even one dollar for a share during the close of the next year resulted in shareholders losing as much as eleven billion dollars. Further, the company reviewed its 5-year financial statement and reported losses worth 586 million dollars. Ultimately, it declared bankruptcy on 2nd December, 2001 (Li, 2010).
Summary of the Scandal
Among the nation’s most infamous commercial scandals, Enron’s scandal is informally regarded by both economists and historians as the case study blueprint when it comes to white collar crimes (i.e., non-violent offenses that are financially-based and mostly perpetrated by highly-educated offenders holding a prestigious post in the organization). In 2000, after the detection of Enron’s crimes, the company declared a critical situation in California concerning natural gas supply. As the organization was well-respected at that time, the American public wasn’t overly concerned about such an announcement’s validity (Laws, 2017).
An ex post facto analysis leads several economists and historians to believe that the corporation’s managers created the aforementioned crisis to prepare for the detection and exposure of their crime; while its managers were partaking of investors’ money, the organization itself was nearly bankrupt. Embezzlement – one of the listed crimes the firm’s executives were involved in – is defined as an offense entailing illegal, immoral acquisition of funds by a company’s personnel; generally, embezzled money is meant for corporate utilization and not personal use. Though organizational managers were pocketing investors’ money, the money was being appropriated from the organization, eventually leading to its bankruptcy (Laws, 2017).
Executives’ actions caused the company to go bankrupt. Affected stockholders suffered over seventy billion dollars’ worth of losses. Moreover, they cost staff members as well as trustees over two billion dollars. The above sum supposedly resulted from misappropriated pension funds, investments, savings plans, and stock options. Owing to the firm’s limited liability position and governmental regulations, only a tiny quantity of losses was compensated (Laws, 2017).
Main Players
The shock brought on by the revelation of Enron’s fraud was felt across the globe, with investors everywhere demanding answers. The moment the corporation declared it was bankrupt, Congressional hearings commenced. Of its top executive team, Andrew Fastow, Kenneth Lay, Richard Buy, and Michael Kopper pleaded Amendment V protection against confession, refusing to stand under oath. The next month saw a crime investigation announcement by the federal justice department. In laymen’s terminology, energy provider Enron’s fall involved a large-scale scandal of the 7th-biggest American company, becoming the greatest corporate bankruptcy the nation witnessed. With more facts being revealed each day, shareholders and company staff became increasingly infuriated by the senior management’s behavior and the way banks, auditors, regulators, analysts, and rating firms took not notice of what was transpiring within the company.
Enron’s scandal was of unparalleled proportions. The corporation was characterized by a remarkably risky and complicated organizational model, participating in highly dubious transactions. Its market capitalization had attained remarkable valuations in relation to its realistic capability of generating repeated excess cash flows. Company policies, undiscovered criminal conduct, investment banks and advisors, poor ratings and poor auditing are all, perhaps, to blame for the company’s swift fall. Company executives – Andrew Fastow, Kenneth Lay, and Jeffery Skilling – were all culpable. They organized the large earnings, raising stock prices to derive personal benefit. The exposure of inconsistencies and misstatements before the public caused loss of stakeholder confidence, exacerbating the company’s crisis (Ghosh, 2016).
Firm’s Auditor
Arthur Andersen, counted among the “Big 5” audit companies, was Enron’s auditor and, hence, responsible for ensuring the organization’s financial statements fairly reflected its actual situation. One would expect it to detect any instance of cheating or scandal. The company was bombarded with arguments surrounding conflict of interest, as it was Enron’s consultant as well as auditors. It was paid well for serving Enron in both roles. Upon the discovery of the Enron scandal and initiation of investigations by the federal government, David Duncan, Chief Auditor of Arthur Andersen for Enron, commanded the destruction of several thousand compromising documents. The decision was made subsequent to the SEC’s (Securities and Exchange Commission’s) order to look into the matter of Enron. The Chief Auditor claimed his decision was based on company lawyer, Nancy Temple’s email recommendation. However, Temple claimed she never sent such an email. Duncan was subsequently shown the door, and Joseph Berardino, Andersen’s CEO, asserted that the organization acted properly and that it would not have been possible for it to identify the fraud. Acknowledging that the documents were destroyed by mistake, the CEO continued to insist on his organization’s innocence in the whole situation (Ghosh, 2016).
Andersen failed to act responsibly and professionally, as is expected of any audit company. (And Andersen was supposed to be a “Big 5” company!) Despite noticing misstated amounts on the financial statements of Enron, Andersen overlooked them for a large fee from Enron. This caused Andersen to lose confidence with the American masses (Ghosh, 2016).
Penalties
Kenneth Lay. Lay succumbed to myocardial infarction prior to being sentenced; the conviction was vacated.
Jeffrey Skilling. Skilling was sentenced to twenty-four years and four months in prison, besides being fined forty-five million dollars.
Andrew Fastow. Fastow confessed in January of 2004 to a couple of conspiracy charges, accepting the fact that he devised a variety of schemes for concealing the company’s debts and inflating profits whilst simultaneously filling his own pockets. He surrendered almost thirty million dollars in money and property and, on 26th September, was awarded a ten-year prison sentence (AFX News, 2006).
David Duncan. Enron’s chief accountant from Andersen, Duncan was the first to confess in April of 2002 to obstructing justice and taking part in the obliteration of documents relating to Enron. In December of 2005, Melinda Harmon, United States District Judge, granted Duncan’s request, without prosecutor opposition, to take back his plea. The reason cited was that he had no criminal intent whilst entering it. He can be indicted (AFX News, 2006).
Arthur Andersen LLP. The Supreme Court of the United States of America overturned the company’s verdict of obstructing justice by doing away with Enron’s audit documents during the time when regulators had commenced investigations into Enron’s finances. It was unanimously held by the high court that ambiguous jury instructions permit jury convictions without discovering criminal intent for mass destruction of documents (AFX News, 2006).
Consequences
Enron represents America’s biggest corporate scandal. It is recognized as a sign of economic corruption for the entire Western world.
· As many as 4500 workers were suddenly left unemployed.
· Stockholders lost as much as $60 billion in a matter of some days; to many investors, it implied loss of old-age and retirement security.
· Enron workers’ pension fund was wiped out.
· Citizens lost their faith in the nation’s economic system.
· Financial market losses were one of the worst losses in stock value in a no-war era.
· Big 5 audit company, Arthur Anderson, ended up losing its accreditation.
· Banks were also believed to be involved in the scandal.
· Corporate financial reporting regulations were made far more stringent.
· The then-President Bush’s close association with Enron founder, Lay, meant the former was also greatly criticized (Ghosh, 2016).
Facts
The majority of Enron’s top executive team members were brought to court for fraud following its discovery in November of 2001.
1. At one point in corporate history, Enron was the 6th biggest global energy firm.
2. At its zenith, the company’s share value was 90.75 dollars (in August of 2000); this figure plummeted to a mere 0.67 dollars in January of 2002.
3. The top executives of the company cleverly sold their own stock in the company before Enron collapsed.
4. However, lower-level workers couldn’t sell stock on account of 401k restrictions; as a result, a large number of employees ended up losing their life’s savings.
5. The company’s top-level 140 managers were paid as much as 680 million dollars in the year 2001 (with Skilling bagging 41.8 million dollars and Lay acquiring 67.4 million dollars) (Babu, 2017).


References
AFX News. (2006). Key players in Enron scandal. Retrieved from https://www.finanznachrichten.de/nachrichten-2006-08/6810532-key-players-in-enron-scandal-020.htm
Babu, J. (2017). What are some interesting facts about Enron? Retrieved from https://www.quora.com/What-are-some-interesting-facts-about-Enron
Ghosh, T. (2016). Enron Corporation: A case study. Retrieved from https://www.academia.edu/28328128/Enron_Corporation_A_Case_Study
Laws. (2017). Easy guide to understanding Enron scandal summary. Retrieved from https://finance.laws.com/enron-scandal-summary
Li, Y. ( 2010). The case analysis of the scandal of Enron. International Journal of Business and Management, 5(10), 37-41.