Enron Scandal as a Learning Lesson

Enron was a company that transported natural gas through pipelines and distributing electricity to the northwest of the United States. Having the natural gas and electricity come from 93% of the revenues, 4% of the energy wholesome income, and 3% of exploration and services (Ferrell and Thorne, pg. 512).

Built off of two major pipeline companies in 1985, Enron was built by their CEO Jeffery Skilling, CFO Andrew Fastow and Chairmen Ken Lay. Combining both a gas and electricity company into a multi-billion-dollar corporation, $150 million to be exact.

Becoming the “seventh largest company in the Fortune 500 (Ferrell and Thorne, pg. 512), growing their revenues from $31 billion to $100 billion in 2 years (1998-2000) and $10 billion to $100 billion in less than ten years. Which makes it even more as a ‘Wow’ factor is how much the shares were in 2001, $90 per share. Thus, making their capital in the market at $66 billion dollars (Tran, 2001). Not only did Enron handle the money with gas and electricity companies, but they managed energy to industrial and commercial customers. Wanting to make ‘ethical’ decisions for their customers and tried to set a “positive and upbeat environment, but really the company was doing all but that at Enron. As the years went on, the lies became worse, claiming to earn $3 billion dollars in cash flow on their sheets. But in reality, their cash flows ended up as a negative $154 million. But their cash flows weren’t the only problem, in the year 2000 they only earned $42 million dollars in net income, but they claimed a whole other number not even close to what they truly had, $979 million. Getting caught was really their first endeavor for a long list of consequences come their way.

When the company, Enron, got caught for their counts of fraud, money laundering and inaccurate book-keeping, so did their bankers, auditors, and attorneys. While trying to manipulate Enron’s financial records to make them look “clean and look financially better to the shareholders and investors, many banks were caught helping Enron doing so. Taking millions of dollars that was meant to be for their employee’s. But with the help of their attorney’s, they made sure that all their transactions were legal. Meaning, the attorneys had to know what they were doing without a question. Knowing all the illegal activity that was going on when finalizing their transactions and forming SPE’s (Special Purpose Entities). But again, no one thought it was “illegal activity and all thought it was “approved beforehand. Making everyone claim their “innocent but pleading guilty for a better sentence, seems like someone is lying.

Just as you thought the Enron scandal was confusing enough, lets talk about JEDI (Joint Energy Investment Limited Partnership) and Chewco. In 1997, the CalPERS (California Public Employee’s Retirement System) and Enron were partners in a joint energy investment off-balance sheet (JEDI). In order for CalPERS to cash out (leave the partnership), Enron had to create a SPE (special purpose entity) which developed into Chewco. Thus, making CalPERS by the interest in JEDI and allowing the off-balance sheet entity to continue for JEDI’s accounting. Secretly controlling Chewco behind closed doors, so it wouldn’t disturb the disclosure for Enron, Fastow hired Michael Kropper who became the face of the general partner role. Fastow did so and was advised not to be “apart and “involved in Chewco so he did not look suspicions. Kropper of course, as a general partner of Chewco, took all the perks of being involved and received a good share of profits as being the head of the partnership. Fastow, of course, did nothing of his ethical sense and transferred money that he used as Enron’s CFO to Chewco for the better benefit of himself. With how they worked the system and kept Chewco away from Fastow secretly, “Chewco was improperly kept off Enron’s balance sheet because it did not have the third party equity at risk required by the applicable accounting rules (SEC Charges Fastow, Former Enron CFO with Fraud, 2002).

Enron’s Corporate culture was one like any other, forcing people to become employee’s they never thought they could be. A psychologist, Justin Schultz, written in an article by Ken Silverstein, stated that “Just as character matters in people, it matters in organizations (Silverstein, 2013). That for fact did not show in the company of Enron, no ethical behavior or any integrity. Enron had built a system called the ‘Rank and Yank’ system, forcing employees to compete against each other for a job in the company. Every six months, the employees were ranked out of the whole company. If you fell within the bottom 20% of the company, you were forced out of your job and asked to leave. As to many, it was thought to be very unethical and not necessary, but to Lay it was complete opposite for him. Lay saying that, “it was one of the great successes at Enron. Creating a corporate culture where people could reach their full potential (Ferrell and Thorne, pg. 513). But really, forcing out the weak links in their company and rewarding the one’s that stood out as unique and innovative. Forcing the employees to embody the workspace and what the “top percent wanted out of their employee’s. Making many employee’s go to unnecessary heights to get what they want, keeping their job at any risk. Which means they also could have done illegal actions in order to become more successful within the company and not fall within the bottom 20%.

Who is the “Mastermind behind the whole Enron scandal you ask? Jeffery Skilling, who was hired by Ken Lay, helped develop into what turned out to be one of the biggest fraud scandals in the United States. Skilling, who earned his MBS from Harvard, came to Enron in 1990. Not knowing what he would get himself into, he soon became CEO after a few years of working for the company. Making more strides than he ever could imagine, by being hired to become Enron’s leader in commodities trading unit. In 1997, just six years after being named chairman and CEO of Enron’s Corporation of Finance, Skilling helped develop Enron to trade $27 billion in one quarter. Thus, made Enron into the biggest wholesaler of electricity and gas company. But as time went through, Enron’s scandal would come upon slowly but surely. It didn’t help that when the crisis started to show, Skilling sold about $60 million in Enron Shares, then declaring bankruptcy in December of 2001. Costing billions of dollars to their investors, having over 20,000 of their employee’s lost their jobs, and in the end being investigated for one of the biggest scandals to hit the US. Even though, Skilling announced and stated, “I was not aware of any inappropriate financial agreements, he still was found guilty on multiple federal felony charges; false statements to auditors, insider trading, fraud, money laundering, etc. Skilling was then fined over $45 million, but only paid $40 million when a judge in 2013 reduced his 24-year 4-month sentence a whole decade. Originally, being sentenced in a Federal Correctional Institution in Waseca, Minnesota, he was moved to a prison in Colorado. But later in 2014, a year after his reduced hearing, he was moved to a minimum-security prison in Alabama. Still today, he claims he is innocent, but with his reduced sentence he received in 2013 and with his good behavior, Skilling should be free within a year or two.

Every mastermind, needs his sidekick, right? To Skilling, that was Ken Lay. Ken Lay was born and raised in Tyrone, Missouri. He attended the University of Missouri, receiving his two degree’s in economics, his master’s and bachelor’s degree. But his education didn’t stop there. Lay also received his Ph.D. of economics from the University of Houston, With being the genius he was and the draft becoming the highest at its time, Lay applied to Officer school for the Navy. Serving as an economist for three years and an energy deputy for the United States of Department of Interior for one. Lay became involved with Enron when his company, Houston Natural Gas Co. combined with InterNorth, a natural gas company, in 1985. But shortly, one year later in 1986, Lay soon was appointed chairman and Chief Executive Officer of Enron. From there, he participated in many board meetings and made many executive decisions. One for example, creating and approving the off-balance sheets that were illegal, but no one knew about. To Lay, the “transactions were legal because the attorney’s and accountants approved them . “relying on the lawyers, accountants, executives, etc. to inform him of any misconduct (Ferrell and Thorne, pg. 516). But when being investigated, that didn’t turn out to be true. Finding Lay guilty on 19 counts of fraud, conspiracy, and insider trading. But even before he could serve his sentence in 2005, Lay died in his home in Colorado due to heart failure.

Lastly, bringing in the brain behind the whole project and the “smartest man in the room, Andrew Fastow the CFO of Enron. Fastow is most known for being the mastermind behind the years of losses, off-balance sheets, stock rise, thousands of people getting let off, shareholders losing millions, and the biggest known bankruptcy in the 2000’s. Making a statement to an article written by Clifford Coonan, “You can follow all the rules and still commit fraud (Coonan, 2016). As in his article, Coonan writes, “Every single deal I did at Enron was approved by the accountants at Enron, the outside auditors, the interal attorneys, the outside attorneys, and the board of director. How can you get approval from all those people and still commit fraud? (Coonan, 2016). Sorry for the outcome Fastow was, and never intended to hurt anyone in general. He takes full responsibility for the damage done to the company and how much they had lost not only to them but also to their shareholders, customers and employees. While being called “Chief loophole officer, Fastow diminished every principle possible. He knew of the loopholes in the accounting area and took advantage of it when paying taxes. Instead of doing what everyone does and takes a hit on the business name and look, he designed Enron to look better than it was actually doing. Fastow admitted he was just “following the rules we have in the rulebook when in reality was making unethical decisions. But his stories didn’t match up, with him stating he never thought it was illegal, but making more than $30 million and disguising that $30 million as gifts for their company. Fastow did this by leading SPE’s (raised money for company and not documenting onto balance debt sheet) to a partnership with LJM’s. Initially, Fastow was charged with 78 counts of fraud and hiding the off-balance sheet also adding to pay $30 million to the government. Fastow struck a deal with a plea-deal making his 10-year plea deal to six with only pleading guilty on two counts of fraud. Now, since he is out, he is giving lectures to college students studying business ethics on how “businesspeople must be able to recognize when issues are too far and stop them before they snowball into an Enron crisis (Ferrell and Thorne, pg.515).

Enron was one of many scandals to happen in the US. After multiple scandals occurred to multiple companies a federal law passed by U.S. Senator Paul Sarbanes and U.S. Representative Michael Oxley wanting to improve accuracy and make company disclosures reliable for their statements. The law would also set standards for accounting firms, board of directors, and corporate management. The Sarbanes Oxley Law became a law in July of 2002, being signed by President George W. Bush. The U.S. Senator and U.S. Representative wanted to aim this law specially at corporations, so they could control their financial internally and be more aware of the recording and reporting of their financial procedures. “Enacted a comprehensive reform of business financial practices (Peavler, 2018). All in all, the act protected the employees, shareholders, and the public from any errors that would occur with a company’s accounting or fraudulent financial practices.

Enron pertained to our class, SBU (Society and Business 200), by majority of what we studied, but there are three learnings that stood out the most. First off, we learned how to identify ethical elements and moral judgements by looking into Enron and how it impacted their employees of the rank and yank system and their customer by how they saw millions of people lose their money over Enron. It shut out the weak in their company but showing no empathy by Enron and ignoring all integrity. Second, we learned that about corporate social responsibility encompasses economic, legal, ethical and voluntary components. A section of Enron that I learned was that no one would take the full blame of what had happened to the company and stating that it was “already approved but doing everything in their power to get smaller sentences when pleading guilty and putting anyone under the bus for their freedom. Lastly, our third SBU study relating to describing issues relating to corporate ownership, corporate governance, and responsiveness to corporate stakeholders. Enron didn’t have any of these, especially with the CEO’s, CFO’s and company managers, selling their stock before the company went bankrupt. Enron show no moral respect for anyone within their company, as long as they were making money and looking good while doing so, everything was fine to them.

In conclusion, the Enron scandal became a learning lesson to many over the years. Some learning what not to do with their business and what to do with some of their successes. It becomes a very important tool on how to identify the important alerts in a company such as ethical and unethicalness of the workspace, moral issues, corporate work, and most importantly business and how to works in our society. Being the “biggest bankruptcy in its time, we learned on what to expect and what not to expect. Companies must know their laws, regulations, policies and procedures for the betterment of their company. They must have people willing to take ownership when all fails and who to contact when it does. Not everyone is successful and when doing it legally, it is harder to get by. When running a business illegally, it is easier to mess up, get caught and risk not only your life’s work but other’s in the making. But when you follow the law, do what you are supposed to, and enjoy what you are doing there is nothing else you need to be successful.

Citation

1. Bondarenko, P. (2018, January 31). Enron scandal. Retrieved from https://www.britannica.com/event/Enron-scandal
2. Coonan, C. (2016, January 06). Former Enron CFO Andrew Fastow: ‘You can follow all the rules and still commit fraud’. Retrieved from                                                                                                    https://www.irishtimes.com/business/companies/former-enron-cfo-andrew-fastow-you-can-follow-all-the-rules-and-still-commit-fraud-1.2485821
3. Enron Case study. (2018, April 25). Retrieved from https://www.applied-corporate-com/case- study/enron-case-study/
4. Enron Corporation. (2017, March 01). Retrieved from https://www.econcrises.org/2016/12/07/enron-corporation-2001/
5. Enron Fast Facts. (2018, April 23). Retrieved from https://www.cnn.com/2013/07/02/us/enron-fast-facts/index.html
6. Ferrell, & Thorne. (n.d.). Bookshelf Online. Retrieved from https://bookshelf.vitalsource.com/#/books/9780997117141/cfi/165!/4/2@100:0.00
7. Jeffrey Skilling. (2014, September 09). Retrieved from https://www.biography.com/people/jeffrey-skilling-235386
8. Kenneth Lay. (2016, May 19). Retrieved from https://www.biography.com/people/kenneth-lay- 234611(n.d.). Retrieved from https://www.sec.gov/news/press/2002-143.htm
9. Peavler, R. (2018, August 16). Enron, Corporate Fraud, and SOX. Retrieved October 24, 2018, from https://www.thebalancesmb.com/sarbanes- oxley-act-and-the-enron-scandal-393497
10. REED ABELSON and JONATHAN D. GLATER. (2002, January 15). ENRON’S COLLAPSE:THE AUDITORS; Who’s Keeping the Accountants Accountable? Retrieved from                                                         https://www.nytimes.com/2002/01/15/business/enron-s-collapse-the-auditors-who-s-keeping-the-accountants-accountable.html
11. Segal, T. (2018, September 26). Enron Scandal: The Fall of a Wall Street Darling. Retrieved from https://www.investopedia.com/updates/enron-scandal-summary/

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