The Enron Scandal That Led To Bankruptcy

Enron - a name that has become synonymous with corporate greed and deception

, a name that has been the brunt of many late night show jokes, a label that brought down two billion-dollar corporations and very many high-flying executives, a label that led to the start of novel legislation to avert its recurrence.

The Enron chronicle began in 1985 when Kenneth Lay founded Enron by merging Houston Natural Gas and InterNorth. The second major figure in the scandal, Jeffrey Skilling, joined Enron in 1990 after company chairman Lay had been impressed by the earlier McKinsey consultant during his effort for the company. He experienced speedy development in the company, heading very many subsidiaries and being appointed the Chief Operating Officer reporting to Lay in 1997. Skilling also brought into the company another accused Andrew Fastow, who joined Enron in 1990 and was appointed Chief Financial Officer in 1998.

The triad of Lay, Skilling and Fastow were obsessed with keeping Enrons share prices artificially elevated , and adopted several deceiving practices to complete it. Under their direction , Enron adopted mark to market accounting, in which anticipated future profits from any deal were tabulated as if actual today. Thus, Enron recorded profits on deals that may very well enough turn out loss-making in the future. A complex network of companies was designed that did business solely with Enron, which served the dual end of raising cash and hiding its debts so that the balance sheet showed up debt-free. Although the balance sheet was required to be audited by the respectable firm of Arthur Anderson who effectively turned a blind eye to these malpractices.

despite that , Wall Street analysts began to question Enrons enormous profits. One of the earliest to point fingers was Fortune columnist Bethany McLean who questioned how the stock could trade at 55 times its earnings. Analyst Richard Grubman was verbally attacked by Skilling in April 2001 when he questioned Enrons want of transparency. nevertheless , the stock still continued to trade high-priced and investors were not overly worried, though the prices were on the turn down on news of Enrons problems in India and the California power crisis. In August, Skilling announced his resigning from the post of CEO to which he had been appointed only six months earlier , but Lay continued to utter assurances. In September, the 911 attacks took off some of the media attention on Enron.

On 16 October, Enron announced that its statements for 1997 - 2000 had accounting violations and needed to be restated. The new statements showed decreased earnings by $613 million (or 23% of reported profits during the period), increased liabilities at the end of 2000 by $628 million (6% of reported liabilities and 5.5% of reported equity), and decreased equity at the end of 2000 by $1.2 billion (10% of reported equity). On 22 October, the SECs announcement that it was investigating Enron led to the share amount plummeting by $5.40 to $20.65. On 25 October, even after Fastow had been removed as CFO to push up investor belief , the share was trading at $16.41.

In early November, energy trader Dynegy offered to obtain Enron for $8 billion in stock. Rating agencies Moodys and Standard & Poor downgraded Enrons credit rating to just over junk, badly inhibiting its capacity to adopt funds. In late November, the SEC announced it had filed civil fraud complaints against Andersen, and Dynegy lowered its bid to $4 billion. ultimately , on 28 November, came the two straws that broke the camels back. Dynegy withdrew its bid and Enrons credit rating was downgraded to the lowest possible junk status. The share amount fell to $0.65, a far-away cry from the $90 it had commanded not even two years earlier . in the end , on 2 December, Enron filed for Chapter 11 bankruptcy.

by: Jim Knight

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