Enron-Scandal PDF

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Case Analysis 1: ENRON CORPORATION Background of the Company Enron Corporation, a US-based energy trader and supplier, was formed in 1985 through the merger of two gas companies, Houston Natural Gas Company and InterNorth Incorporated. Kenneth Lay, who was the former Chief Executive Officer (CEO) of Houston Natural Gas, became Enron’s own Chief Executive Officer. In 1990, Lay hired Jeffrey Skilling as a consultant of the corporation’s new division – Enron Finance Corp. Skilling was then made president and chief operating officer of Enron in 1997. Through his leadership, Enron dominated the market for natural-gas contracts, and began to generate huge profits. In 1995, the business was recognized as the most innovative business by the Fortune, and made its successful run for the next six years. Likewise, Enron Corporation used to be the 7th largest corporation in the US due to the “Bull Market” of the 1990’s which fueled the ambitions of the corporation that resulted to its rapid growth where they traded derivative contracts for a number of commodities like electricity, coal, paper, and steel. Enron also invested in building a broadband telecommunications network to facilitate high-speed trading. During the period of 2000, the shares of the said company traded at the price levels of $90.75. However, as competition increased in the industry, Enron began to feel pressured pushing them to do some extreme measures which will later be the cause of their swift downfall.

Fraud The fraud of Enron Corporation started when they hired Jeffrey Skilling as the new Chief Executive Officer (CEO) of the company. When Skilling arrived at Enron, he started moving the company in a new direction. Skilling introduced a new accounting technique called mark-tomarket accounting which was approved by the Security and Exchange Commission (SEC). This technique allowed the company to adjust the value of its balance sheet’s assets from historical cost to the fair market value and record the difference as a gain or revenue. Furthermore, ENRON would recognize revenue for the cash flows it expects to generate in the future even if it was not yet earned, or it would still write millions of profits in its books even if business deals failed. Next deceit was the manipulation of their books. Around the world, Enron was losing billions on natural gas projects especially when they poured billions of dollars into a plant in India and only realize that people there couldn’t afford to buy the electricity. The plants were eventually ruined but Enron continued to write billions of profits in its books. The losses and debts they incurred were transferred to off record corporations so that the company could maintain the reputation of being profitable. They even used Special Purpose Vehicles as an independent entity to borrow money in behalf of Enron. Enron then would cut ties with its SPV when the said vehicles face bankruptcy. In addition, Arthur Andersen, the accounting firm of Enron, was seen as complementing the company’s financial fraudulent activity by allowing maximized profits that were unethically constructed. As a result, both parties expressed undesirable threats to independence that led to an incorrect audit opinion within the audit report. The third is the manipulation of the market. Enron merged with the Pacific Gas and Electric Company which gave them access to the Californian grid. In the newly deregulated electricity market of California, rolling blackouts became common. It turned out that the traders of Enron manipulated the market. They moved out electricity out of state to increase demand and when the price got high enough, they would move it back in. This led Enron to generate high levels of revenue within a short period of time because of its knowledge that no regulation, such as price ceiling, was imposed at that time.

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