Enron Scandal

Logo of ENRON

  The story of Enron Corp. is the story of a company that reached dramatic heights, only to face a dizzying fall. Its collapse affected thousands of employees and shook Wall Street to its core. At Enron's peak, its shares were worth $90.75; when it declared bankruptcy on December 2, 2001, they were trading at $0.26. To this day, many wonder how such a powerful business, at the time one of the largest companies in the U.S, disintegrated almost overnight and how it managed to fool the regulators with fake holdings and off-the-books accounting for so long.

"America's Most Innovative Company", named by Fortune Mazagine.

  Enron was formed in 1985, following a merger between Houston Natural Gas Co. and Omaha-based InterNorth Inc. Following the merger, Kenneth Lay, who had been the chief executive officer (CEO) of Houston Natural Gas, became Enron's CEO and chairman and quickly rebranded Enron into an energy trader and supplier. Deregulation of the energy markets allowed companies to place bets on future prices, and Enron was poised to take advantage.

  The era's regulatory environment also allowed Enron to flourish. At the end of the 1990s, the dot-com bubble was in full swing, and the Nasdaq hit 5,000. Revolutionary internet stocks were being valued at preposterous levels and consequently, most investors and regulators simply accepted spiking share prices as the new normal.

  Enron participated by creating Enron Online (EOL) in October 1999, an electronic trading website that focused on commodities. Enron was the counterparty to every transaction on EOL; it was either the buyer or the seller. To entice participants and trading partners, Enron offered up its reputation, credit, and expertise in the energy sector. Enron was praised for its expansions and ambitious projects, and named "America's Most Innovative Company" by Fortune for six consecutive years between 1996 and 2001.

  By mid-2000, EOL was executing nearly $350 billion in trades. When the dot-com bubble began to burst, Enron decided to build high-speed broadband telecom networks. Hundreds of millions of dollars were spent on this project, but the company ended up realizing almost no return.

When the recession hit in 2000, Enron had significant exposure to the most volatile parts of the market. As a result, many trusting investors and creditors found themselves on the losing end of a vanishing market cap.

The Collapse of a Wall Street Darling
  By the fall of 2000, Enron was starting to crumble under its own weight. CEO Jeffrey Skilling had a way of hiding the financial losses of the trading business and other operations of the company; it was called mark-to-market accounting. This is a technique used where you measure the value of a security based on its current market value, instead of its book value. This can work well when trading securities, but it can be disastrous for actual businesses.

  In Enron's case, the company would build an asset, such as a power plant, and immediately claim the projected profit on its books, even though it hadn't made one dime from it. If the revenue from the power plant was less than the projected amount, instead of taking the loss, the company would then transfer the asset to an off-the-books corporation, where the loss would go unreported. This type of accounting enabled Enron to write off unnprofitable activities without hurting its bottom line.

  The mark-to-market practice led to schemes that were designed to hide the losses and make the company appear to be more profitable than it really was. To cope with the mounting liabilities, Andrew Fastow, a rising star who was promoted to CFO in 1998, came up with a deliberate plan to make the company appear to be in sound financial shape, despite the fact that many of its subsidiaries were losing money.

Kenneth Lay, founder of Enron

The Timeline of Enron Scandal

Published by Hau Rui Xian

Reference Link :

"Top 5 biggest financial scandals of all time", by Barclay Ballard, 12 April 2018
https://www.worldfinance.com/markets/top-5-biggest-financial-scandals-of-all-time

"Enron Scandal", by Wikipedia
https://en.wikipedia.org/wiki/Enron_scandal