Rise and Fall of Enron

Rise and Fall of Enron

Enron grew to become one of United State's largest firms within a relatively short period of time. Having a global reach and employing approximately 25,000 employees at one time, the company was largely considered successful. However, this was not the case. In this text, I concern myself with the rise and fall of Enron. In so doing, I will explain amongst other things the history of Enron, the business it was involved in and the unethical behavior that led to its fall. Further, I will also take into consideration people implicated in the scandal and the legal actions that were taken against them.

Enron: An Overview

In basic terms, the 1985 merger between InterNorth and Huston Natural Gas informed the formation of Enron as we know it (Fernando, 2009). The merger which took place in Omaha, Nebraska was headed by Kenneth Lay who at the time was the CEO of Huston Natural Gas. Soon after the merger, Lay was named Enron's CEO and chairman. As Fernando (2009) notes, the merger in this case led to the integration of a number of "pipeline systems owned by these companies to create an interstate natural gas pipeline system." It is also important to note that since 1994, the company was also involved in the trading of electricity. The company also pursued an extensive expansion and diversification strategy and at one time, it had a portfolio of approximately 800 different products. Some of the company's products included but were not in any way limited to broadband, petrochemicals, power, steel and water. The firm also had an online market platform where it had in place a number of trading platforms including but not limited to transaction and commodity trading. The company also had its wings spread over other risk management services in which case it was involved in capital management, energy information management as well as energy asset management. Generally, the company's portfolio at some point painted a picture of a prosperous firm. As Fernando (2009) notes, "by December 2000, the company reported $15 billion in assets, $100 billion in revenues and 25,000 employees worldwide."

It can be noted that despite Enron's enviable successes in the past, the company's name is today associated with an extensive and deep-seated corporate fraud that caught most by surprise. Though some analysts had in the past raised mild concerns over how things were being done at Enron, visible cracks began to emerge sometimes in 2001 with the departure of Jeffrey Skilling. Skilling at that time was the firm's CEO. Later on that year, the company reported a $618 million loss. A clearer picture of Enron's unethical behavior and debt level began to emerge after investigations were launched by the Securities and Exchange Commission.

The Fall of Enron

According to Sims (2003), "the roots of Enron's fall can be found in its failed leadership and culture." In basic terms, several reasons have been cited as having contributed to the fall of Enron. To being with, it is important to note that Enron embraced what Sims (2003) calls "pseudo-partnerships." According to the author, it is these partnerships that permitted the firm to offer for sale some of its assets in a bid to "manufacture" earnings. Earnings raked in from the sale of these assets greatly distorted Enron's profits by presenting the company as being more profitable than it really was. Hence in basic terms, earnings reported by Enron were largely inflated.

Further, it can be noted that Enron for quite a long period of time managed to keep off debt from its statement of financial position. The company was convinced that with a significantly leveraged statement of financial position, its credit rating would end up being jeopardized. In such an instance, the company's cost of capital would have been rised by its debt to equity ratio. Keen to avert such a situation, the company according to Sims (2003), "parked some of its debt on the balance sheets of its SPVs and kept it hidden from analysts and investors." However, this trick did last long as Enron's debt extent was soon discovered. What followed after this discovery was a reevaluation of Enron's credit rating by lenders. Further, some lenders demanded that all the loans they had advanced to Enron be paid back immediately. Regarding the whole fiasco, Sims (2003) is of the opinion that the same is a perfect example of what follows after a company internalizes cultural ethical erosion.

It is also important to note that Enron's executive compensation could have had a role to play in the eventual collapse of the firm. In a way, stock options were used in the excessive compensation of the firm's executives. It is these awards that led to the creation of rapid growth expectations by the management. The company did not also have sufficient safeguards in place to keep extravagant spending in check. In some cases, expense accounts of executives also appeared to be too large. Also, Arthur Andersen, the audit firm that was responsible for auditing the financial statements of Enron can be seen as having contributed to the eventual failure of Enron. This is more so the case given its application of questionable standards as it sought to audit Enron's financial statements. Its failure to diligently and professionally review the firm's various accounting practices has been blamed on conflict of interest as the audit firm generated a huge chunk of its consulting revenue from its engagement with Enron.

Main Executives Held Accountable for Enron's Fall