Enron Fraud Scandal
University: Stanford University
Question :
Enron fraud scandal is one of the leading scandal in the history which have shaken the economy of the United States. This affected not only thousands of employees but also the shareholders and investors. This scandal awake the people and the shareholders to bring the transparency in the accounting so that fraudulent activities can be prohibited. The scandal have placed huge impact on the corporate sector which resulted in bankruptcy of Enron Corporation and dissolution of the Arthur Andersen LLP.
- How the Enron fraud scandal was highlighted and came into limelight?
- What was the decision of the criminal proceedings against the Enron corporation?
- What was the aftermath of the Enron Scandal?
Answer :
The Enron Corporation was formed in the year 1985 after merger of the two companies Houston natural Gas and InterNorth. It was formed by Kenneth Lay. The headquarter of the company was in Houston, Texas. It deals in energy commodities and services and was a major natural gas, electricity, communication, natural gas and pulp and paper company. Before the scandal, the corporation have around 29000 employees and was also named as the America's innovative company for six continuous years. Over the years, it expanded its business plan so that it can increase its profitability. Kenneth Lay was the CEO of the company and Jeffrey Skilling was appointed as Chairman where he was responsible to engage the company in partnerships so that debts of the company can be easily concealed. Arthur Anderson was responsible for accounts and audits of the company.
Timeline for downfall
When the corporation was formed, the natural gas and energies were under the monopoly of state. But after few time, this was de regularised and the companies were given freedom to operate freely and Enron Corporation took advantage of it and formed its trading website and began the online energy trading.
After this, the company began investing in the trading ventures which was converted into the contracts so that this can be sold to investors. The person behind this idea was Jeffrey Skilling. The company started to invest in this venture and as the result the stock price took the hike and the Company was named as the most innovative company of America from 1996- 2001. simultaneously, the debts were grown inside the company but the management of the corporate were successful in hiding the same by setting multiple partnerships (special purpose entity) so that they can hide the losses and reflect the imaginary revenue.
The Executives also misrepresented the balance sheet in order to hide the losses so that the investors are not able to find out the actual soundness of the company. The executives were successful in showing the fraudulent earnings to investors so that they can invest more and more into the company.
The Enron Corporation played the plank card where it created the artificial energy crisis where the power supplies can be manipulated and the company charge excessive price to earn more profits. This helped in rising the stock prices and the company's capitalisation of the market exceeded 60 million dollars.
Highlighting the scandal
In the year 2001, February, Kenneth Lay declared that he is resigning from the office of President but will retain the position of Chairman and the President of the company shall be Jeffrey Skilling. Months passed by, Jeffrey Skilling also resigned and stated personal reasons behind its resignation. This prompted to question the soundness of the company and simultaneously the stock prices also began to decline.
All executives along with Kenneth Lay started to sell their shares as the price was declining and price went from $80 to $1. Kenneth again joined the office as the Chief Executive Officer and a meeting was called to question the resignation of Jeffrey. The new Vice president Sherron Watkins altered Kenneth regarding the irregularities in the accounting system to which Kenneth assured to take the matter into consideration. As a result, he appointed Arthur Anderson to review the case.
Externally, The securities and exchange commission began with the formal investigation to review the transactions which took place between the company and the partnerships which were headed by Andrew Fastow. During the investigation, the management confessed that decline of stock price to $1 is due to creation of partnerships and also they admitted that the corporation have over estimated its profit to attract investors. With this, the investigation also extended to Arthur Anderson and the Enron Corporation filed for the bankruptcy in 2001. in 2002, January, the criminal proceedings were also initiated.
Decision of court
Arthur Anderson confessed that they have destroyed the documents of Enron and it was charged with shredding the audit related documents. Jeffrey Skilling, the master mind of the scandal was charged with insider trading, fraud and many other crime but he agreed to become the informant so that he can get reduced punishment. Kenneth Lay was charged for conspiracy and fraud and before the sentence could be passed, he died with heart attack. Andrew Fastow was charged with conspiracy, fraud and money laundering and as a result, he was imprisoned for 6 years.
The Arthur Anderson was dissolved and the Enron Corporation was filed for bankruptcy.
Aftermath of Scandal
The Enron scandal is a massive failure of corporate governance. It is the central and the dynamic aspect of the business. It is a set of rules which depicts how the companies must be controlled and directed by the top management. The wave of the Enron scandal have attributed the deficiencies of the corporate governance. This scandal urged to make improvements in the corporate governance. After the Enron scandal the concept of corporates governance got its relevance which increases to bring accountability and transparency in the accounting and audits of the business.
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Moreover, when the corporate failures were at peak, the United States enacted the law, namely Sarbanes Oxley Act of 2002 which states to bring transparency in the accounting system and protects the interest of the shareholders and the investors. It is focused on consequences which the business personnels may face when destroying, altering and fabricating the financial records.
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