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What Was Enron?

Understanding enron, the enron scandal.

• Mark-to-Market Accounting

What Happened to Enron

• The Role of Enron's CEO

The Legacy of Enron

The bottom line.

• Company Profiles
• Energy Sector

What Was Enron? What Happened and Who Was Responsible

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Investopedia / Daniel Fishel

Enron was an energy-trading and utility company based in Houston, Texas, that perpetrated one of the biggest accounting frauds in history. Enron's executives employed accounting practices that falsely inflated the company's revenues and, for a time, made it the seventh-largest corporation in the United States. Once the fraud came to light, the company quickly unraveled, filing for Chapter 11 bankruptcy in December 2001.

Key Takeaways

• Enron was an energy company that began to trade extensively in energy derivatives markets.
• The company hid massive trading losses, ultimately leading to one of the largest accounting scandals and bankruptcy in recent history.
• Enron executives used fraudulent accounting practices to inflate the company's revenues and hide debt in its subsidiaries.
• The SEC, credit rating agencies, and investment banks were also accused of negligence—and, in some cases, outright deception—that enabled the fraud.
• As a result of Enron, Congress passed the Sarbanes-Oxley Act to hold corporate executives more accountable for their company's financial statements.

Enron was an energy company formed in 1986 following a merger between Houston Natural Gas Company and Omaha-based InterNorth Incorporated. After the merger, Kenneth Lay, who had been the  chief executive officer  (CEO) of Houston Natural Gas, became Enron's CEO and chair.

Lay quickly rebranded Enron into an energy trader and supplier. Deregulation of the energy markets allowed companies to place bets on future prices. In 1990, Lay created the Enron Finance Corporation and appointed Jeffrey Skilling, whose work as a McKinsey & Company consultant had impressed Lay, to head the new corporation. Skilling was then one of the youngest partners at McKinsey.

Enron provided a variety of energy and utility services around the world. Its company divided operations in several major departments, including:

• Enron Online : In late 1999, Enron built its web-based system to enhance customer functionality and market reach.
• Wholesale Services : Enron offered various energy delivery solutions, with its most robust industry being natural gas. In North America, Enron claimed to deliver almost double the amount of electricity compared to its second tier of competition.
• Energy Services : Enron's retail unit provided energy around the world, including in Europe, where it expanded retail operations in 2001.
• Broadband Services : Enron provided logistical service solutions between content providers and last-mile energy distributors.
• Transportation Services : Enron developed an innovative, efficient pipeline operation to network capabilities and operate pooling points to connect to third parties.

However, by leveraging special purpose vehicles, special purpose entities, mark-to-market accounting, and financial reporting loopholes, Enron became one of the most successful companies in the world. Upon discovery of the fraud, the company subsequently collapsed. Enron shares traded as high as $90.75 before the fraud was discovered but plummeted to around $0.26 in the sell-off after it was revealed.

The former Wall Street darling quickly became a symbol of modern corporate crime. Enron was one of the first big-name accounting scandals, but uncovered frauds at other companies such as WorldCom and Tyco International soon followed.

Before coming to light, Enron was internally fabricating financial records and falsifying the success of its company. Though the entity did achieve operational success during the 1990s, the company's misdeeds were finally exposed in 2001.

Pre-Scandal

Leading up to the turn of the millennium, Enron's business appeared to be thriving. The company became the largest natural gas provider in North America in 1992, and the company launched EnronOnline, its trading website allowing for better contract management just months before 2000. The company also rapidly expanded into international markets, led by the 1998 merger with Wessex Water.

Enron's stock price mostly followed the S&P 500 for most of the 1990's. However, expectations for the company began to soar. In 1999, the company's stock increased 56%. In 2000, it increased an additional 87%. Both returns widely beat broad market returns, and the company soon traded at a 70x price-earnings ratio.

Early Signs of Trouble

In February 2001, Kenneth Lay stepped down as Chief Executive Officer and was replaced by Jeffrey Skilling. A little more than six months later, Skilling stepped down as CEO in August 2001, with Lay taking over the role again.

Around this time, Enron Broadband reported massive losses. Lay revealed in the company's Q2 2001 earnings report that "...in contrast to our extremely strong energy results, this was a difficult quarter in our broadband businesses." In this quarter, the Broadband Services department reported a financial loss of $102 million.

Also, around this time, Lay sold 93,000 shares of Enron stock for roughly $2 million while telling employees via e-mail to continue buying the stock and predicting significantly higher stock prices. In total, Lay was eventually found to have sold over 350,000 Enron shares for total proceeds greater than $20 million.

During this time, Sherron Watkins had expressed concerns regarding Enron's accounting practices. A Vice President for Enron, she wrote an anonymous letter to Lay expressing her concerns. Watkins and Lay eventually met to discuss the matters, in which Watkins delivered a six-page report detailing her concerns. The concerns were presented to an outside law firm in addition to Enron's accounting firm; both agreed there were no issues to be found.

By October 2001, Enron had reported a third quarter loss of $618 million. Enron announced it would need to restate its financial statements from 1997 to 2000 to correct accounting violations.

Enron's $63.4 billion bankruptcy was the biggest on record at the time.

On Nov. 28, 2001, credit rating agencies reduced Enron's credit rating to junk status, effectively solidifying the company's path to bankruptcy. On the same day, Dynegy, a fellow energy company Enron was attempting to merge with, decided to nix all future conversations and opted against any merger agreement. By the end of the day, Enron's stock price had dropped to $0.61.

Enron Europe was the first domino, filing for bankruptcy after close of business on Nov. 30. The rest of Enron followed suit on Dec. 2. Early the following year, Enron dismissed Arthur Andersen as its auditor , citing that the auditor had yielded advice to shred evidence and destroy documents.

In 2006, the company sold its last business, Prisma Energy. The next year, the company changed its name to Enron Creditors Recovery Corporation with the intention of repaying any remaining creditors and open liabilities as part of the bankruptcy process.

Post Bankruptcy/Criminal Charges

After emerging from bankruptcy in 2004, the new board of directors sued 11 financial institutions involved in helping conceal the fraudulent business practices of Enron executives. Enron collected nearly $7.2 billion from these financial institutions as part of legal settlements. The banks included the Royal Bank of Scotland, Deutsche Bank, and Citigroup.

Kenneth Lay pleaded not guilty to eleven criminal charges. He was convicted of six counts of securities and wire fraud and was subject to a maximum of 45 years in prison. However, Lay died on July 5, 2006, before sentencing was to occur.

Jeff Skilling was convicted on 19 of the 28 counts of securities fraud he was charged with, in addition to other charges of insider trading. He was sentenced to 24 years and four months in prison, though the U.S. Department of Justice reached a deal with Skilling in 2013. The deal resulted in 10 years being cut off of his sentence.

Andy Fastow and his wife, Lea, pleaded guilty to charges against them, including money laundering, insider trading, fraud, and conspiracy. Fastow was sentenced to 10 years without parole to testify against other Enron executives. Fastow has since been released from prison.

Causes of the Enron Scandal

Enron went to great lengths to enhance its financial statements, hide its fraudulent activity, and report complex organizational structures to both confuse investors and conceal facts. The causes of the Enron scandal include but are not limited to the factors below.

Special Purpose Vehicles

Enron devised a complex organizational structure leveraging special purpose vehicles (or special purpose entities). These entities would "transact" with Enron, allowing Enron to borrow money without disclosing the funds as debt on their balance sheet.

SPVs provide a legitimate strategy that allows companies to temporarily shield a primary company by having a sponsoring company possess assets. Then, the sponsor company can theoretically secure cheaper debt than the primary company (assuming the primary company may have credit issues). There are also legal protection and taxation benefits to this structure.

The primary issue with Enron was the lack of transparency surrounding the use of SPVs. The company would transfer its own stock to the SPV in exchange for cash or a note receivable. The SPV would then use the stock to hedge an asset against Enron's balance sheet. Once the company's stock started losing its value, it no longer provided sufficient collateral that could be exploited by being carried by an SPV.

Inaccurate Financial Reporting Practices

Enron inaccurately depicted many contracts or relationships with customers. By collaborating with external parties such as its auditing firm, it was able to record transactions incorrectly, not only in accordance with GAAP but also not in accord with agreed-upon contracts.

For example, Enron recorded one-time sales as recurring revenue. In addition, the company would intentionally maintain an expired deal or contract through a specific period to avoid recording a write-off during a given period.

Poorly Constructed Compensation Agreements

Many of Enron's financial incentive agreements with employees were driven by short-term sales and quantities of deals closed (without consideration for the long-term validity of the deal). In addition, many incentives did not factor in the actual cash flow from the sale. Employees also received compensation tied to the success of the company's stock price, while upper management often received large bonuses tied to success in financial markets.

Part of this issue was the rapid rise of Enron's equity success. On Dec. 31, 1999, the stock closed at $44.38. Just three months later, it closed on March 31, 2000 at $74.88. With the stock hitting $90 by the end of 2000, the massive profits some employees received only fueled further interest in obtaining equity positions in the company.

Lack of Independent Oversight

Many external parties learned about Enron's fraudulent practices, but their financial involvement with the company likely caused them not to intervene. Enron's accounting firm, Arthur Andersen, received many jobs and financial compensation in return for their services.

Investment bankers collected fees from Enron's financial deals. Buy-side analysts were often compensated to promote specific ratings in exchange for stronger relationships between Enron and those institutions.

Unrealistic Market Expectations

Both Enron Energy Services and Enron Broadband were poised to be successful due to the emergence of the internet and heightened retail demand. However, Enron's over-optimism resulted in the company over-promising online services and timelines that were simply unrealistic.

Poor Corporate Governance

The ultimate downfall of Enron was the result of overall poor corporate leadership and corporate governance . Former Vice President of Corporate Development Sherron Watkins is noted for speaking out about various financial treatments as they were occurring. However, top management and executives intentionally disregarded and ignored concerns. This tone from the top set the precedent across accounting, finance, sales, and operations.

In the early 1990s, Enron was the largest seller of natural gas in North America. Ten years later, the company no longer existed due to its accounting scandal.

The Role of Mark-to-Market Accounting

One additional cause of the Enron collapse was mark-to-market accounting. Mark-to-market accounting is a method of evaluating a long-term contract using fair market value. At any point, the long-term contract or asset could fluctuate in value; in this case, the reporting company would simply "mark" its financial records up or down to reflect the prevailing market value .

There are two conceptual issues with mark-to-market accounting, both of which Enron took advantage of. First, mark-to-market accounting relies very heavily on management estimation. Consider long-term, complex contracts requiring the international distribution of several forms of energy. Because these contracts were not standardized, it was easy for Enron to artificially inflate the value of the contract because it was difficult to determine the market value appropriately.

Second, mark-to-market accounting requires companies to periodically evaluate the value and likelihood that revenue will be collected. Should companies fail to continually evaluate the value of the contract, it may easily overstate the expected revenue to be collected.

For Enron, mark-to-market accounting allowed the firm to recognize its multi-year contracts upfront and report 100% of income in the year the agreement was signed, not when the service would be provided or cash collected. This form of accounting allowed Enron to report unrealized gains that inflated its income statement, allowing the company to appear much more profitable than it was.

The Enron bankruptcy, at $63.4 billion in assets, was the largest on record at the time. The company's collapse shook the financial markets and nearly crippled the energy industry. While high-level executives at the company concocted the fraudulent accounting schemes, financial and legal experts maintained that they would never have gotten away with it without outside assistance. The Securities and Exchange Commission (SEC), credit rating agencies, and investment banks were all accused of having a role in enabling Enron's fraud.

Initially, much of the finger-pointing was directed at the SEC, which the U.S. Senate found complicit for its systemic and catastrophic failure of oversight. The Senate's investigation determined that had the SEC reviewed any of Enron's post-1997 annual reports, it would have seen the red flags and possibly prevented the enormous losses suffered by employees and investors.

The credit rating agencies were found to be equally complicit in their failure to conduct proper due diligence before issuing an investment-grade rating on Enron's bonds just before its bankruptcy filing. Meanwhile, the investment banks—through manipulation or outright deception—had helped Enron receive positive reports from stock analysts, which promoted its shares and brought billions of dollars of investment into the company. It was a quid pro quo in which Enron paid the investment banks millions of dollars for their services in return for their backing.

Enron reported total company revenue of:

• $13.2 billion in 1996
• $20.3 billion in 1997
• $31.2 billion in 1998
• $40.1 billion in 1999
• $100.8 billion in 2000

The Role of Enron's CEO

By the time Enron started to collapse, Jeffrey Skilling was the firm's CEO. One of Skilling's key contributions to the scandal was to transition Enron's accounting from a traditional historical cost accounting method to mark-to-market accounting, for which the company received official SEC approval in 1992.

Skilling advised the firm's accountants to transfer debt off Enron's balance sheet to create an artificial distance between the debt and the company that incurred it. Enron continued to use these accounting tricks to keep its debt hidden by transferring it to its  subsidiaries  on paper. Despite this, the company continued to recognize  revenue  earned by these subsidiaries. As such, the general public and, most importantly, shareholders were led to believe that Enron was doing better than it actually was despite the severe violation of GAAP rules.

Skilling abruptly quit in August 2001 after less than a year as chief executive—four months before the Enron scandal unraveled. According to reports, his resignation stunned Wall Street analysts and raised suspicions despite his assurances that his departure had "nothing to do with Enron."

Skilling and Kenneth Lay were tried and found guilty of fraud and conspiracy in 2006. Other executives plead guilty. Lay died shortly after his conviction, and Skilling served twelve years, by far the longest sentence of any of the Enron defendants.

In the wake of the Enron scandal, the term " Enronomics " came to describe creative and often fraudulent accounting techniques that involve a parent company making artificial, paper-only transactions with its subsidiaries to hide losses the parent company has suffered through other business activities.

Parent company Enron had hidden its debt by transferring it (on paper) to wholly-owned subsidiaries —many of which were named after Star Wars characters—but it still recognized revenue from the subsidiaries, giving the impression that Enron was performing much better than it was.

Another term inspired by Enron's demise was "Enroned," slang for having been negatively affected by senior management's inappropriate actions or decisions. Being "Enroned" can happen to any stakeholder, such as employees, shareholders, or suppliers. For example, if someone lost their job because their employer was shut down due to illegal activities they had nothing to do with, they have been "Enroned."

As a result of Enron, lawmakers put several new protective measures in place. One was the Sarbanes-Oxley Act of 2002, which enhances corporate transparency and criminalizes financial manipulation. The Financial Accounting Standards Board (FASB) rules were also strengthened to curtail the use of questionable accounting practices, and corporate boards were required to take on more responsibility as management watchdogs.

What Did Enron Do That Was So Unethical?

Enron used special purpose entities to hide debt and mark-to-market accounting to overstate revenue. In addition, it ignored internal advisement against these practices, knowing that its publicly disclosed financial position was incorrect.

How Big was Enron?

With shares trading for around $90/each, Enron was once worth about $70 billion. Leading up to its bankruptcy, the company employed over 20,000 employees. The company also reported over $100 billion of company-wide net revenue (though this figure has since been determined to be incorrect).

Who Was Responsible for the Collapse of Enron?

Several key executive team members are often noted as being responsible for the fall of Enron. The executives include Kenneth Lay (founder and former Chief Executive Officer), Jeffrey Skilling (former Chief Executive officer replacing Lay), and Andrew Fastow (former Chief Financial Officer).

Does Enron Exist Today?

As a result of its financial scandal, Enron ended its bankruptcy in 2004. The name of the entity officially changed to Enron Creditors Recovery Corp., and the company's assets were liquidated and reorganized as part of the bankruptcy plan. Its last business, Prisma Energy, was sold in 2006.

At the time, Enron's collapse was the biggest  corporate bankruptcy  ever to hit the financial world (since then, the failures of WorldCom, Lehman Brothers, and Washington Mutual have surpassed it). The Enron scandal drew attention to accounting and corporate fraud. Its shareholders lost tens of billions of dollars in the years leading up to its bankruptcy, and its employees lost billions more in pension benefits. Increased regulation and oversight have been enacted to help prevent corporate scandals of Enron's magnitude.

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Page 56.

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Pages 59-63.

University of Chicago. " Enron Annual Report 2000 ."

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Pages 77 and 84.

Wall Street Journal. " Enron Announces Acquisition of Wessex Water for $2.2 Billion ."

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University of North Carolina. " Enron Whistleblower Shares Lessons on Corporate Integrity ."

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The New York Times. " Jeffrey Skilling, Former Enron Chief, Released After 12 Years in Prison ."

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Page 72.

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Twenty Years Later: The Lasting Lessons of Enron

Michael Peregrine  is partner at McDermott Will & Emery LLP, and  Charles Elson  is professor of corporate governance at the University of Delaware Alfred Lerner College of Business and Economics.

This spring marks the 20th anniversary of the beginning of the dramatic and cataclysmic demise of Enron Corp. A scandal of exceptional scope and impact, it was (at the time) the largest bankruptcy in American history. The alleged business practices of its executives led to numerous individual criminal convictions. It was also a principal impetus for the enactment of the Sarbanes-Oxley Act and the evolution of the concept of corporate responsibility. As such, it is one of the most consequential corporate governance developments in history.

Yet a new generation of corporate leaders has assumed their positions since then; for others, their recollection of the colossal scandal may have faded with the years. And a general awareness of corporate responsibility principles is no substitute for familiarity with the governance failings that reenergized, in a lasting manner, the focus on effective and responsible governance. A basic appreciation of the Enron debacle and its governance implications is essential to director engagement.

Enron was formed as a natural gas pipeline company and ultimately transformed itself, through diversification, into a trading enterprise engaged in various forms of highly complex transactions. Among these were a series of unconventional and complicated related-party transactions (remember the strangely named Raptor, Jedi and Chewco ventures) in which members of Enron’s financial leadership held lucrative financial interests. Notably, the management team was experienced, and both its board and its audit committee were composed of a diverse group of seasoned, skilled, and prominent individuals.

The company’s rapid financial growth crested in March 2001, with media reports questioning how it could maintain its high stock value (trading at 55 times its earnings). Famous among these was the Fortune article by Bethany McLean, and its identification of potential financial reporting problems at Enron. [1] In a dizzying series of events over the next few months, the company’s stock price collapsed, its CEO resigned, a bailout merger failed, its credit was downgraded, the SEC began an investigation of its dealings with related parties, and it ultimately declared bankruptcy. Multiple regulatory investigations followed, several criminal convictions were obtained and Sarbanes-Oxley was ultimately enacted to curb the perceived abuses arising from Enron and several similar accounting scandals. [2]

There remain multiple important, stand-alone governance lessons from Enron controversy of which all directors would benefit:

1. The Smartest Guys in the Room . The type of aggressive executive conduct that contributed heavily to the fall of Enron was not unique to the company, the industry or the times. In the absence of an embedded culture of corporate ethics and compliance, there is always the potential for some executives to pursue “edge of the envelope” business practices, especially when those practices produce meaningful near term financial or other operational results. That attitude, combined with weak board oversight practices, can be a disastrous combination for a company.

Even though commerce has made great progress since then on internal controls, corporate responsibility ultimately depends upon the integrity of management, and the skill and persistence of board oversight. [3]

2. The Critical Importance of Board Oversight . As the company began to implode, Enron’s board commissioned a special committee to investigate the implicated transactions, directed by William C. Powers Jr., then dean of the University of Texas School of Law. The Powers Report, as it came to be known, outlined in staggering detail a litany of board oversight failures that contributed to the company’s collapse. [4]

These included inadequate and poorly implemented internal controls; the failure to exercise sufficient vigilance; an additional failure to respond adequately when issues arose that required a prompt and serious response; cursory review of critical matters by the audit and compliance committee; the failure to insist on a proper information flow; and an inability to fully appreciate the significance of some of the information with which the board was provided. [5]

3. Spotting Red Flags . Amongst the most damaging of the governance breakdowns was the failure to question the legitimacy of the related-party transactions for which so many internal controls were required. These deficiencies served to bring a once significant company and its officers to their collective knees and offer many lasting governance lessons. As the Powers Report concluded with brutal clarity, a major portion of the company’s business plan—related-party transactions—was flawed. [6]

These transactions were replete with risky conflicts of interest involving management. There was a significant “forest for the trees” concern—an inability to recognize that conflicts of such magnitude that required so many board-approved internal controls and procedures should never have been authorized in the first place. All this, despite the fact that the individual Enron directors were people of accomplishment and capability who had been recognized by the media as a well-functioning board. [7]

Yet, they lacked the actual necessary independence to recognize the red flags waving before them. Their varied relationships with company leadership made them all-too-comfortable with what they were being told about the company. [8] This connection made it difficult for them to recognize the dangers associated with the warning signals that the conflicted transactions projected. Indeed it was the revelation of these conflicts that attracted media attention and ultimately “brought the house down”. [9]

4. It Can Still Happen . The 2020 scandal encompassing the German financial services company Wirecard offers one of the latest high profile (international) examples of how alleged aggressive business practices, lax internal and auditor oversight, accounting irregularities and limited regulatory supervision can combine into a spectacular corporate collapse that prompted numerous government fraud investigations. It is for no small reason that the Wirecard scandal is referred to as the “German Enron”. [10]

5. A Significant Legacy . Yet the Enron controversy remains fundamentally relevant as the spark behind the corporate responsibility environment that has reshaped attitudes about corporate governance for the last 20 years. It’s where it all began—the seismic recalibration of corporate direction from the executive suite back to the boardroom, where it belongs. It birthed the fiduciary guidelines, principles, and “best practices” that serve as the corridors of modern corporate governance, developed in direct response to the types of conduct so criticized in the Powers Report. [11]

And that’s important for today’s board members to know. [12] Because over the years, the message may have lost its sizzle. The once-key oversight themes incorporated within “plain old” corporate responsibility seem to be yielding the boardroom field to the more politically popular themes of corporate social responsibility. And, while still important, corporate compliance seems to have had its “fifteen years of fame” in the minds of some executives; the organizational initiative has turned elsewhere.

But the pendulum may be swinging back. There is a renewed recognition that compliance programs can atrophy from lack of support. The new regulatory administration in Washington may return to an emphasis on organizational accountability. As Delaware decisions suggest, shareholders may be growing increasingly intolerant of costly corporate compliance and accounting lapses. And there’s a renewed emphasis on the role of the whistleblower, and the board’s role in assuring the support and protection of that role.

So it may be useful on this auspicious anniversary to engage the board on the Enron experience, in a couple of different ways. First, include an overview as part of formal director “onboarding” efforts. Second, have a board level conversation about expectations of oversight, and spotting operational and ethical warning signs. And third, reconsider the Enron board’s critical and self-admitted failures, in the context of today’s boardroom culture. [13]

Such a conversation would be a powerful demonstration of a board’s good-faith commitment to effective governance, corporate responsibility and leadership ethics.

1 Bethany McLean, “Is Enron Overpriced?” Fortune, March 5. 2001. https://archive.fortune.com/magazines/fortune/fortune_archive/2001/03/05/297833/index.htm. (go back)

2 See , Michael W. Peregrine, Corporate BoardMember , Second Quarter 2016 (henceforth “Corporate BoardMember”). (go back)

3 See , e.g., Elson and Gyves, In Re Caremark : Good Intentions, Unintended Consequences, 39 Wake Forest Law Review, 691 (2004). (go back)

4 Report of the Special Investigation Committee of the Board of Directors of Enron Corporation, February 1, 2002. http://i.cnn.net/cnn/2002/LAW/02/02/enron.report/powers.report.pdf. (go back)

5 See , Michael W. Peregrine, “The Corporate Governance Legacy of the Powers Report” Corporate Counsel , January 23, 2012 Monday. (go back)

6 See , Michael W. Peregrine, “Enron Still Matters, 15 Years After Its Collapse”, The New York Times , December 1, 2016. (go back)

7 F.N. 5, supra . (go back)

8 See , Elson and Gyves, “The Enron Failure and Corporate Governance Reform”, 38 Wake Forest Law Review 855 (2003) and Elson, “Enron and the Necessity of the Objective Proximate Monitor”, 89 Cornell Law Review 496 (2004). (go back)

9 John Emshwiller and Rebecca Smith, “Enron Posts Surprise 3rd-Quarter Loss After Investment, Asset Write-Downs”, The Wall Street Journal , October 17, 2001. https://www.wsj.com/articles/SB1003237924744857040. (go back)

10 Dylan Tokar and Paul J. Davies, “Wirecard Red Flags Should Have Prompted Earlier Response, Former Executive Says” The Wall Street Journal , February 8, 2021. https://www.wsj.com/articles/wirecard-red-flags-should-have-prompted-earlier-response-former-execu tive-says-11612780200. (go back)

11 Corporate BoardMember , supra . (go back)

12 See Peregrine, “Why Enron Remains Relevant”, Harvard Law School Forum on Corporate Governance, December 2, 2016. (go back)

13 Corporate BoardMember , supra. (go back)

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Hello I am writing to request if we can use this article ‘without making change of any description’ for internal training. This will mean we will host the article on our internal CPD (Continuous professional development) platform called LITMOS. This article perfectly suits learnings from a corporate governance perspective and hence we request permission for its unaltered use. Thanks Nikhil Ghate

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How the Enron Scandal Changed American Business Forever

It’s the kind of historic anniversary few people really want to remember.

In early December 2001, innovative energy company Enron Corporation, a darling of Wall Street investors with $63.4 billion in assets, went bust. It was the largest bankruptcy in U.S. history. Some of the corporation’s executives, including the CEO and chief financial officer, went to prison for fraud and other offenses. Shareholders hit the company with a $40 billion lawsuit, and the company’s auditor, Arthur Andersen, ceased doing business after losing many of its clients.

It was also a black mark on the U.S. stock market. At the time, most investors didn’t see the prospect of massive financial fraud as a real risk when buying U.S.-listed stocks. “U.S. markets had long been the gold standard in transparency and compliance,” says Jack Ablin, founding partner at Cresset Capital and a veteran of financial markets. “That was a real one-two punch on credibility. That was a watershed for the U.S. public.”

The company’s collapse sent ripples through the financial system, with the government introducing a set of stringent regulations for auditors, accountants and senior executives, huge requirements for record keeping, and criminal penalties for securities laws violations. In turn, that has led in part to less choice for U.S. stock investors, and lower participation in stock ownership by individuals.

In other words, it was the little guy who suffered over the last two decades.

Americans lost trust in the stock market

The collapse of Enron gave many average Americans pause about investing. After all, if a giant like Enron could collapse, what investments could they trust? A significant number of Americans have foregone participating in the tremendous stock market gains seen over the last two decades. In 2020, a little more than half of the population (55%) owned stocks directly or through savings vehicles such as 401Ks and IRAs. That’s down from 60% in the year 2000, according to the Survey of Consumer Finances from the U.S. Federal Reserve.

That could have had a large financial impact on some folks. For instance, an investment of $1,000 in the S&P 500 at the beginning of 2000 would recently have been worth $4,710, including reinvested dividends. Wealthier people, who often employ professionals to handle their investments, were more likely to stick with their stocks, while middle class and poorer people couldn’t take the risk. Without doubt this drop in stock market participation has contributed to the growing levels of wealth inequality across the U.S.

It became harder for companies to IPO

While lack of trust in the market is a direct consequence of Enron’s mega fraud, the indirect consequences of government actions also seem to have hurt Main Street USA.

Immediately following the bankruptcy, Congress worked on the Sarbanes-Oxley legislation, which was meant to hold senior executives responsible for listed company financial statements. CEOs and CFOs are now held personally accountable for the truth of what goes on the income statement and balance sheet. The bill passed in 2002 and has been with us since. But it has also drawn harsh criticisms.

“The most important political response was Sarbanes-Oxley,” says Steve Hanke, professor of applied economics at Johns Hopkins University. “It was unnecessary, and it was harmful.”

In many ways, the legislation wasn’t needed because the Justice Department and the Securities Exchange Commission already had the powers to prosecute executives who cooked the financial books or at a minimum were less than transparent with the truth, Hanke says.

The direct result of the legislation was that public companies got dumped with a load of bureaucratic form-filling, and executives would be less likely to take on entrepreneurial risks, Hanke says. There is also much ambiguity in the law about what is or what isn’t allowed and what are the ultimate consequences of non-compliance. “You don’t know what you are facing in terms of penalties, so you back off of everything risky,” he says.

Quickly, that meant the stock market underwent two significant changes. First, fewer companies are listed now than since the 1970s. In 1996, during the dot-com bubble, there were 8,090 companies listed on stock exchanges in the U.S., according to data from the World Bank. That figure had fallen to 4,266 by 2019.

That drop was partially a reflection of the regulatory burden of companies wishing to go public, experts say. “It costs a lot of money to employ the securities attorneys needed for Sarbanes-Oxley,” says Robert Wright, a senior fellow at the American Institute of Economic Research and an economic historian. “Clearly, fewer companies can afford to meet all these requirements.”

Companies now wait under they are far larger before going public than they did before the Sarbanes-Oxley rules were introduced. Yahoo! went public with a market capitalization of $848 million in April 1996, and in 1995 Netscape got a valuation of $2.9 billion. Compare that to the $82 billion IPO valuation for ride share company Uber in 2019, or Facebook $104 billion IPO value in 2012.

Now, companies grow through investments that don’t require a public market listing and that don’t involve heavy bureaucratic costs. Instead, startups go to venture capital firms or private equity. The recent rise in the use of Special Acquisition Corporations (SPACs) is seen by some as a relatively easy way to skirt some of the burdensome regulations of listing stocks. However, SPACs do nothing to reduce ongoing costs or burden of complying with the Sarbanes-Oxley rules.

But when companies stay private longer, they spend more time without the public accountability required of listed companies. Former blood testing company Theranos famously remained private in a move some theorized was to avoid publicizing internal data. Because of the high barriers Sarbanes-Oxley placed on going public, the business world is now littered with large, private companies that don’t have to reveal their inner workings.

Delaying going public also affects Main Street because most individual investors cannot buy shares in companies that aren’t public. They haven’t been able to share in the profits from the speedy early-stage corporate growth that is typically seen in companies like Facebook and Uber.

Put simply, the Sarbanes-Oxley regulations have chased away some investing opportunities from the public market to the private ones. And in doing so have excluded small investors from participating—and gaining.

“Now smaller investors are shut out and all the big economic profits go to venture capitalists and the like,” Wright says. That, in many ways, is the legacy of Enron.

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Enron Scandal Causes and Outcomes Essay

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The Enron scandal that shook the world in October 2001, was probably the most resonant event of the kind in the whole history of the United States. Enron, one of the largest energy suppliers in the world, was accused of unfair and illegal financial policies, and the highest officials of the company were subsequently indicted. The very point about the Enron scandal was that the newly hired manager Jeffrey Skilling created an illegal system, using which several additionally hired auditors and accountants used poor financial reporting practices to hide billions of Enron debts and make it look like a profitable company to the investors (Dharan, 2004, pp. 1 – 2).

As the closer analysis of the situation reveals, the major role in the scandal, apart from the Enron CEO, Jeffrey Skilling, and their colleagues, should be attributed to the auditors that supervised the company’s work and the investment banks that did nothing to at least monitor the performance of the company or reveal that its financial records do not conform to the actual conditions of Enron’s banking accounts. The movie The Smartest Guys in the Room also illustrates this point, serving as a detailed documentary account of the whole context in which the Enron scandal became possible (The Smartest Guys in the Room, 2005). Moreover, the movie shows that the alleged power of the U.S. antitrust regulations is, or was in 2001, only an illusion of power, as they did not provide actual protection for investors from such large-scale illegal activities as the Enron scandal.

In more detail, the Enron scandal was the cause of the huge loss, over $11 billion, that the company’s investors experienced after putting their money into Enron. They obtained the reports about the exclusively positive character of the company’s business and we’re sure that investing in Enron would enlarge their capital (Dharan, 2004, p. 4). As one can see, the U. S. antitrust regulations did not manage to protect investors and other, even minor stakeholders of Enron. To provide more adequate legal support to the potential victims of similar illegal activities, the U.S. Congress adopted the so-called Sarbanes – Oxley Act (Dharan, 2004, p. 11).

More specifically, the Sarbanes – Oxley Act was the legal document adopted on July 30, 2002, and named after its two major promoters, Paul Sarbanes and Michael Oxley (Dharan, 2004, p. 11). The major goal of this legal action was to protect society from economic and financial crimes like the one observed during the Enron scandal. The main drawback of the Sarbanes – Oxley Act is its applicability to state-run companies only, while the private companies cannot be regulated or investigated on this act’s basis (Sarbanes – Oxley Act, 2002).

In more detail, the Sarbanes – Oxley Act consists of 11 major sections, or titles, that regulate the financial activities within the framework of the U.S. legislation. Seemingly, the most important of those titles rule that the auditing of any company should be carried out by independent agencies, while the company’s highest officials must quarterly report all results of their financial activities (Sarbanes – Oxley Act, 2002). But even though the Sarbanes – Oxley Act was a huge step towards the legal protection of investors, it still has numerous drawbacks. Among other points, it is not stipulated how the independence of the auditing agency can be ensured, how the accountability of CEOs can be monitored, and where the guarantee is that their reports will reflect actual figures. These are the points that allow doubting the effectiveness of the Sarbanes – Oxley Act in preventing such cases of large-scale fraud as the Enron scandal.

Works Cited

Dharan, Bala. Enron: Corporate Fiascos and Their Implications. NY: Foundation Press, 2004. Print.

Sarbanes – Oxley Act. Publ L. 107 – 204. 2002.

The Smartest Guys in the Room. Dir. Alex Gibney. Perf. Andrew Fastow, Peter Coyote. Magnolia Pictures, 2005.

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IvyPanda. (2021, December 12). Enron Scandal Causes and Outcomes. https://ivypanda.com/essays/enron-scandal-causes-and-outcomes/

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The Enron Scandal, Research Paper Example

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Introduction

The ENRON was the 7 th largest U.S. Company in the year 2001 that was filed for bankruptcy leaving its investors and retirees with worthless stock. It was charged with securities fraud for fraudulent manipulation of publicly reported financial results and giving false information’s to the Securities and Exchange Commission (SEC), Tesfatsion (2011). The company was established in 1985 by merger based in Houston dealing with natural gas pipeline. By the year 2001 the company had risen to be ranked the 7 th largest U.S. Company of natural gas and electricity. The ENRON Company was greatly concerned with energy brokering, electronic energy trading, optional trading and global commodity by then.

Corporate governance practices uniron were associated with the financial statements that were not accountable and transparent as much as the legal requirement is concerned. The practices of corporate governance were also marked with complex and dubious models of business operations on top of the unethical practices that resulted to the adoption to accounting limitations in an attempt to misrepresenting the earnings together with the modification of the balance sheet aimed at portraying performance depictions in a favorable way.

The Enron scandal is attributed to the steady accumulation of the values, habits as well as actions that came out control. The board of directors of the Enron Company looked at the loopholes of the already established regulation in their line of buying and selling natural gas and chooses to use that advantage in benefiting themselves, the fact that was illegal. It was geared to getting a steady income, inflating the assets values with off booking liabilities. Most of the problems were perpetuated by the executives of the company.

The compensation structure that was set in Enron together with the system of performance management was designed in a manner that could attract and retain the employees who were quite resourceful to the company. However the system setup also played a significant role in the dysfunctioning of the corporate culture in the organization. The setup had been infatuated with a short term focus of earnings for the purpose of maximizing on bonuses. The employees perceived at deals of high start volume while they disregarded the cash flow and profits quality for the purpose of coming at higher rating in the course of performance overview. Further to this there was an immediate recording of accounting results so that to be at par with the stock prices of the company. The intention of this practice was to cover the deal makers together with the executives who were given significantly huge cash bonuses in addition to stock options (Bryce, 2008).

The corporation had employed thousands of people who had affiliations right up to and including the White House itself. The financials chaos caused by the Enron scandal destroyed the life of many people and its reputation lefts its wake, questions everywhere concerning how the catastrophe happened, and who were behind it.

How the scandal was discovered

The scandal was discovered on October 22, 2001, by the Securities and Exchange Commission when a huge loss had been announced by the Enron expressing a major public sign of trouble. Enron filed for bankruptcy on the month of December 2001 after the commission started inquiring into the company’s accounting practices.

Need for the legislation

Enron Company was found to be using complex dubious schemes for energy trading. For instance, the “Death Star” energy trading strategy took advantage of the loopholes in the marketing rules dealing with the trade of energy in California. It was also found that the company was scheduling electric power transmission on congested lines in the opposite directions to demand creating a mean to collect a “congestion reduction” fee for seemingly relieving congestion on this line. The company would use routing scheme that enabled them to buy or sell energy in net terms. This was done between 1993 and 2001 when the scandal was revealed.

The company was also found to be using complex and dubious accounting schemes that would enable it to reduce the tax payments by a great margin and inflate its income and get abnormal profits. This scheme also enabled Enron to inflate its stock price and credit rating into the U.S. and it was able to hide the losses in off-balance-sheet subsidiaries. The off-balance-sheet scheme channeled a lot of money to their personal accounts, friends and families and fraudulently gave a misleading financial report to the public.

Internal controls and risk management in any organization are important features in any organization and they contribute significantly to the corporate governance of the institution. They also enhance the structure of internal control, the analysis of risk management and the process of financial reporting. The contributions of the editors in most organizations are to provide the services of consultancy together with assurance to the managers such that their companies are able to comply with the existing regulations. The resources of internal audit have in the past undergone expansion for the purpose of giving satisfaction to the high level of demand for the services in an attempt of assisting in the process of executive certifications with regard to internal controls together with financial reports (Collins, 2006).

Those involved in the scandal and how they were punished

Enron Company created over 3000 partnerships starting 1993 when it merged with Calpers (California PublicRretirement System) to create JEDI (Joint Energy Development Investments) fund. Enron thought that these partnerships were temporal solutions for temporal cash flow problems. It later used SPE (Special Purpose Entities) that could borrow from outside investors who could not be consolidated with the Enron’s balance sheet. The partnership maintained 3% rule which enabled it to hide bad bets that had been made on speculative assists. In November 1997, Enron created another partnership with the Chewco which was to buy out calpers’ stake in Jedi. It loaned chewco to allow Chewco be able to buy out Calprer’s stake and maintain 3% rule.

The following are blame for Enron:

• Lax accounting that was directedly Arthur Anderson (AA) Company.
• “Rogue” AA auditor David Duncan who was dismissed on January 15, 2002.
• Enron’s senior management which was involved in hiding losses in complex and dubious off balance sheet in the partnerships.
• CFO Andrew Fastow who was responsible in setting up these partnerships was committed to jail for six years on the September 26, 2004.
• Timothy Belden was sentenced to serve 2 years probation for trading the schemes on 2007.
• Jeff Skilling who was the chief executive officer helped Enron to rise very fast through his knowledge in banking and finance. He was involved in trading of energy electrical contracts and he was imprisonment for 24 years on October 23, 2006.
• Chief Executive Officer Kenneth Lay who had enlisted the assistance of Jeff Skilling a young, sharp banking and finance consultant, died on July 23, 2006 before the care could be completed.
• The media was also involved for its exaggeration and being frenzy for Enron operations.
• Stock analysts kept pushing the Ernon Company’s stock.

From the final analysis, the conspiracy of Lay, Skilling and others led to the collapse of the company due to fraud, false reporting of revenue, shoddy accounting practices and general disregard for virtually every tenet of business ethics (Collins, 2006).

Implications of this situation

This situation has brought about many lessons including showing hoe companies actually make their money and if the business is sustainable and legal. Enron has also demonstrated that there is need for significant reform in the accounting and corporate governance in the United States. It implies that the government regulations have a lot of limitations and its capacity to collect the problem.

There is need for comprehensive reforms of accounting procedures for publicly owned companies for the promotion and improvement of the quality and transparency of financial reporting by both internal and external auditors. Companies are now required to list and track performance of their material risks and associated control procedures. The chief executive officers are supposed to vouch for the financial statements of their companies for clear accountability and transparency. The audit committees must indecently of the company senior management audit the board of directors. Companies can no more offer loans to the directors of the company.

Those affected by the scandal

The collapse of the Enron company affected greatly the lives of the employees who were subjected to a hail of legal problems, pointing of fingers by many people including the politicians, and even alleged crimes. Most obvious the Enron employee who were highly skilled and well paid loss their jobs. They were forced to look for vacancies elsewhere after the uprupt collapse of Enron. On top of it many of these employees had their life savings totally invested in the Enron stock that virtually turned worthless overnight.

The United States was affected in several ways by the Enron scandal apart from the induvial employees. The scandal itself brought to light the signicance of integrity in accounting and business in general. It also led to the creation of safeguards to control such things not to happen again or not to such extent.

From the ethical point of view, the Enron scandal unveiled the most significant part of legislation that is associated with the oversight of corporate ethics. It provides guidelines and requirements for Accounting, financial disclosure, the ethical behavior of corporations and the like (McCrie, 2001).

Having looked at the Enron company scandal from the retrospective point of view, the scandal changed the life of very many people in the United States and elsewherew in the world. The scandal forced every organization and individuals to look at themselves and have fully realization about the impacts andconsequences of reckless greed and the breakage of laws on the idea. It is now the responsibility of every person to be vigilant enough in whichever field involved avoiding being affected by the similar if not being a victim.

Bryce, R., 2008, Pipe Dreams: Greed, Ego, and the Death of Enron. Public Affairs.

Collins, D., 2006, Behaving Badly: Ethical Lessons from Enron. Dog Ear Publishing, LLC.

Cruver, B., 2003, Anatomy of Greed: Telling the Unshredded Truth from InsideEnron. Basic Books.

Dharan, B. & William R. B., 2004, Enron: Corporate Fiascos and Their Implications . Foundation Press.

Cable News Network. (2002, January 20). Andersen CEO admits to mistakes with Enron. http://archives.cnn.com/2002/US/01/20/enron.ceo/index.html

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Home — Essay Samples — Business — Enron — Enron Scandal and the Ethical Question It Raised

Enron Scandal and The Ethical Question It Raised

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Enron Scandals and the Lack of Ethics Involved

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Trump Verdict Gets Little Reaction From the White House

“We respect the rule of law,” a spokesman for the White House Counsel’s Office said after former President Donald J. Trump’s conviction in the hush-money case.

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By Zolan Kanno-Youngs

Reporting from Rehoboth Beach, Del.

White House officials said little on Thursday after former President Donald J. Trump was convicted of falsifying records to cover up a scandal with a porn actress, becoming America’s first ex-president to be declared a felon.

“We respect the rule of law,” said Ian Sams, a spokesman for the White House Counsel’s Office, “and have no additional comment.”

The White House declined to respond to additional questions about Mr. Biden’s reaction to the verdict or how he learned about it.

The succinct statement came as President Biden spent time with his family in Rehoboth Beach on the ninth anniversary of the death of his son Beau Biden, of brain cancer. On the same day that Mr. Trump was convicted of 34 counts of falsifying business records by a jury of 12 New Yorkers, Mr. Biden attended a morning service at a church in Delaware where his son is buried, before flying to Rehoboth Beach for the rest of the day. He had no public events for most of Thursday.

Mr. Biden has generally avoided talking at length about any of Mr. Trump’s other legal troubles, out of concern about fueling his false claims that the president had directed prosecutors to investigate Mr. Trump. The Biden campaign took the rare step earlier this week of dispatching a surrogate , the actor Robert De Niro, to comment on the proceedings outside the Manhattan courthouse where Mr. Trump’s trial was being held.

But for the most part, Mr. Biden has directed officials to avoid discussing Mr. Trump’s various criminal charges. The president’s aides have rather tried to draw the contrast with Mr. Trump by having Mr. Biden promote his domestic agenda while the former president was forced to attend hearings in the Manhattan courtroom.

While White House officials kept their initial reaction muted, the Biden campaign stressed to voters that a conviction was not enough to keep Mr. Trump out of the White House.

“There is still only one way to keep Donald Trump out of the Oval Office: at the ballot box,” Michael Tyler, a spokesman for the Biden campaign, said in a statement. “Convicted felon or not, Trump will be the Republican nominee for president.”

Zolan Kanno-Youngs is a White House correspondent, covering President Biden and his administration. More about Zolan Kanno-Youngs

Our Coverage of the Trump Hush-Money Trial

Guilty Verdict : Donald Trump was convicted on all 34 counts  of falsifying records to cover up a sex scandal that threatened his bid for the White House in 2016, making him the first American president to be declared a felon .

What Happens Next: Trump’s sentencing hearing on July 11 will trigger a long and winding appeals process , though he has few ways to overturn the decision .

Reactions: Trump’s conviction reverberated quickly across the country  and around the world . Here’s what voters , New Yorkers , Republicans , Trump supporters  and President Biden  had to say.

The Presidential Race : The political fallout of Trump’s conviction is far from certain , but the verdict will test America’s traditions, legal institutions and ability to hold an election under historic partisan tension .

Making the Case: Over six weeks and the testimony of 20 witnesses, the Manhattan district attorney’s office wove a sprawling story  of election interference and falsified business records.

Legal Luck Runs Out: The four criminal cases that threatened Trump’s freedom had been stumbling along, pleasing his advisers. Then his good fortune expired .