At the start of 2001, Enron was the blueprint for large corporations,
boasting 30,000 employees and an annual revenue of $100 billion,
But by the end of the year,
the company had garnered the title of biggest bankruptcy of all time
While Arthur Andersen, one of the big 5, suffered a similar fate for their part in the scandal
So how did the energy giant once valued at 70 billion dollars go from winning Fortune’s most
innovative company for 6 years in a row to bankrupt in the space of just a few months.
Here’s a story of fraud, corruption and serious mismanagement.
Here’s How It Happened.
For some background, Enron was founded as a result of a merger between energy
firm InterNorth and utility company Houston Natural Gas back in 1985.
American Ken Lay was appointed CEO and legendary artist Paul Rand, who also made the logos for IBM,
UPS and ABC, designed the now infamous Enron E
The energy market underwent significant deregulation throughout the 80s and 90s,
leading to extremely volatile prices and a belief that anything was possible
as companies rode the bull market that followed 1987’s Black Monday.
Enron opened its own trading subsidiary to maximise profitability,
and Jeffrey Skilling was appointed CEO of Enron Capital & Trade in 1991
Skilling oversaw the introduction of mark-to-market accounting within the corporation,
that is the practice of valuing your assets based on predictions of their future prices,
rather than on historical prices
And in short, it basically gave Enron the right to decide their own profits,
without being held accountable for the accuracy of the valuations.
Based on these optimistic calculations, Enron’s revenue figures began to skyrocket
as the 90s wore on. The firm was named as Fortune’s best company to work for
in 2000, as its stock price peaked at $90 a share and its directors
outlined their expectations of even further profits in the near future.
As Enron invested hundreds of millions more into projects both in the US and overseas,
the company was able to hide these losses behind false estimations of the new asset’s value,
like a power plant in the north east of England.
To cover any reported losses or cashflow issues, Enron would borrow money from its SPV’s,
special purpose vehicles, which were subsidiaries of the corporation capitalised with Enron stock,
making it impossible for the lenders to retrieve their money if the energy company was struggling.
The crashing of the dot com bubble in 2000 hit Enron’s assets hard,
as they had now diversified into industries like video on demand and high speed broadband networks.
Investors were becoming more cautious and increasingly skeptical of the
firm’s complex business model, and by early 2001,
serious questions were being asked of Enron’s financial statements.
Lay stepped down as CEO in February to be replaced by Skilling, with
Enron’s stock price halving to $40 in the six months that followed
Amid widespread speculation about the company’s accounting methods,
Skilling stepped down from his new role in August 2001, as Lay returned to his former position.
Analysts were downgrading Enron’s stock rating
and Lay began selling millions of dollars worth of his shares in the firm
In October, Enron announced its first quarterly loss in 4 years
thanks to taking charges of a billion dollars from its underperforming assets
and the SEC began a formal investigation into its financial statements.
During November, the company revealed it had overstated its profits by
$591 million between 1997 and 2000, meanwhile over 20,000 of its employees’
401k pension plans were locked for 30 days due to a change in administrator.
A merger was agreed with close competitor Dynegy, but was called off
due to concerns that Enron was still lacking transparency in its off-balance-sheet debt,
And on 30th of November, the company’s stock price hit rock bottom,
at just 26 cents a share, down from 80 dollars back in February.
And Enron filed for bankruptcy protection two days later on 2nd of December,
marking less than a year since it became the seventh biggest corporation in the United States.
Thousands of employees lost their jobs and their life savings,
and shareholders eventually sued banks like JP Morgan Chase and Citigroup for conducting deals
with Enron, later winning $7.2 billion that was shared amongst the 1.5 million victims.
Several executives went on trial for a range of charges related to the company’s nefarious
activity, including Lay and Skilling, who were charged with a total of 39 counts of
fraud and conspiracy between them in January 2006, to all of which they pleaded not guilty.
Lay died from a heart attack before the sentencing, but Skilling was sentenced
to 24 years, of which he served 12 before being released in 2019.
Not exempt from punishment were Enron’s auditors,
Arthur Andersen, who were one of the big 5 accounting firms, and
also had their reputation dragged through the mud for their compliance in the fraud.
They were found guilty of destroying documents that were of relevance to the SEC,
which was cause to void their auditing licence and leave the firm with no choice but to close.
Hence their absence from the big 4 that we know today,
although their consultancy branch does still remain in operation as Accenture.
The fiasco saw the United States Senate impose much tighter regulations to prevent a repeat in
future, namely the Sarbanes-Oxley Act which created a board to oversee audit reports
for public companies and strict controls on what services these auditors could provide,
Not to mention the requirement for executives to sign off on all financial reports,
meaning they could no longer plead ignorance of their firm’s wrongdoings.
Undoubtedly the effects of the Enron Scandal are still felt in the finance industry today, even
twenty years later, so let us know your thoughts and what you think the next Enron might be.
And that’s how it happened.
Thanks for watching.