Enron was founded in 1985, it wasthe product of a merger between two small companies. The two companies wereHouston Natural Gas and InterNorth. When Enron came about it looked to be apromising company, one to have a big impact on the economy. This essay willshine light on the facts of the case, theinvestigative methods which were used, the laws that were broken, the courtdecision and the impact of the case.Kenneth Lay, who had been the CEO ofHouston Natural Gas, became Enron’s CEO and chairman. He turned Enron into anenergy trader and supplier.
During this time Enron took the changing times totheir advantage. It was the era when the internet was becoming the next bigthing and companies were using it as a tool to grow and for this instance,stock shares was their main interest. The company really excelled in themarket.
In the late 1990s, the Nasdaq hit 5,000.Which this was completely revolutionary when it came to internet stocks. Andsince it was so new and unheard of, investors simply accepted this as a newnormal and didn’t really question huge spikes in share prices. Enronparticipated in the stock market by creating Enron Online (EOL). To makethemselves seem more desirable to participants, investors and trading partners,would play the buyer or seller and they even offered their reputation to showthat they could be trusted, and vouched that their business was the absolutebest. A decade later Enron was up to nearly $350 billion in trades. When the recession began,Enron would begin to become exposed which resulted that many investors andcreditors found themselves on the losing end.
Enron had a way of hiding thefinancial losses and it was called market to market accounting. It is basicallywhen you measure the item or in this case a company at is current market valueinstead of its actual book value. It only has one benefit and that is alwaysthe main company and it is devastating to others. Inthis case, Enron would build an asset, like a power plant. Even though they hadnot made a profit from the plant that wouldn’t keep them from documenting the projectedprofit in their books.
So, if the revenue from the power plant or whateverillegitimate business were less than the projected amount, Enron would transferthese money to an off-the-books corporation Meaning that if it is off the booksthen they will never have to report all that money. They did this type ofaccounting numerous of times and it didn’t affect their bottom line and itwould make them appear more profitable than they really were. And that was abig thanks to Enron’s CFO, Andrew Fastow. It was his plan that look like Enronwas in good shape even though investors were losing money. When it came to light that there wassomething wrong with Enron’s bookkeeping, it didn’t take long for Securitiesand Exchange Commission to act. October 31, 2001 the inquiry had grown into aformal investigation and on December 2, 2001 Enron filed for bankruptcy.
Enron’sshares drastically dropped from over $90.75 to just a few cents. This not only impactedEnron but its investors, US market and the world. The executives and insidersat Enron were facing many charges that included including fraud, moneylaundering, and conspiracy just to name a few. Many Enron executives sold theirshares just before the collapse. But also during this time, the Enronexecutives were encouraging people to invest more of their money and some wouldbe their life savings into the company.
The day Enron filed for bankruptcythe company’s employees were told to pack up their belongings and leave the premisesand they only had thirty minutes to do so. It is alarming that 90,000 peoplelost their jobs; Enron employees, who had been encouraged to invest theirretirement plans in company stock, lost $2 billion into the bargain. Life savings,college funds and people’s way of life was all gone. Stockholders lost $70billion subsequently to this scandal and even the state of California sued Enronfor $6 billion in energy losses.
The lawsuit accused twenty-nine of theexecutives and directors of insider trading and misleading the public. Chiefexecutive Ken Lay escaped justice, dying of a heart attack before he was sentenced.Skilling, Fastow and another dozen executives went to prison. Enron at first appeared to have thepotential to be a successful and blossoming company. But with their greed, unethicaland illegal decisions it kept them from being a legitimate and successful company.
The Enron scandal has forever left its mark on history. One good thing that camefrom this scandal is the Sarbanes-Oxley Act to prevent another event like thisfrom ever happening again. We can only hope and pray that we all learned somethingfrom this and that every business; big or small will be more ethical and law abiding.