History of Enron Company
How it works
Northern Natural Gas Company was founded in Omaha, Nebraska, in 1930, and over the next decades changed the name several times finally becoming Enron in 1986. The area of expertise of the company changed dramatically with time as well. Starting as a company that was a conventional natural gas supplier, Enron became an energy-trading company that served an intermediary between producers of energy products and end users. Aggressive expansion policy of the company attracted attention of the business circles, and the New Economy business model made the c-suite of Enron recognized as skillful entrepreneurs and gained superstar status.
Unfortunately, company was more concentrated on enhancing their company’s operating results and growing revenues and profits than on delivering the quality services to their customers. The company openly claimed in the 2000 annual report that “Enron is laser-focused on earnings per share. Despite the rapid growth of profits, Enron’s stock price drifted lower. Initially, Enron executives attempted to explain the lowering of the stick price to the shareholders as a result of slumping of natural gas prices and overall weakness of the American economy. When the stock price had fallen from the lower $80s to the mid-$30s, Enron issued the quarterly earnings report where the company showed a huge loss it suffered. The main problem with the report was “a mysterious $1.2 billion reduction in Enron’s owners’ equity and assets that was disclosed […] in the earnings press release. As the result the exceptional Enron’s performance in the late 1990s and 2000 appeared to be fake after Enron’s earnings restatement in the fall of 2001.
How it works
In fact, Enron’s growing revenues were supported by a smart accounting scheme where all the losses were reported by the special purpose entities (SPE). The underlying motivation of their creation was debt avoidance: loans were acquired by SPEs and not Enron. Therefore, Enron did not indicate these debts in its reports. It became possible due to so-called 3 percent rule that allowed allowed a company not to indicate SPE’s assets and liabilities in its financial statement if the parties independent independent of the company provided a minimum of 3 percent of the SPE’s capital. Later, Enron made a financial statement revealing the losses over the long period of time. As the result, the stock prices dropped and company had to file the bankruptcy.
Andersen was largely critiqued after their second largest client, Enron Corporation, went bankrupt. Allegations included statements that the company auditors were aware of the Sherron Watkins’s letter, where she told about her suspicions concerning Enron’s accounting issues. Andersen’s chief executive Berardino testified before the Congress claiming that enterprise’s auditors had been only minimally involved in the transactions that resulted in the $1.2 billion reduction of owners’ equity as most of the fraudulent transactions took place in early 2001 that Andersen had not audited yet. David Duncan, the former Enron auditor, had pleaded guilty to the obstruction of justice agreed to testify against Andersen. In June 2002, the firm was found guilty of obstruction of justice. The company terminated relationship with the rest of the clients and was, in fact, forced out of business by the felony conviction.
The main critical issue that led to the Enron’s bankruptcy was accounting and auditing incompetence. The federal law requires the publicly traded corporations to be audited externally by an independent auditor. Anderson had contract with Enron on audit of their actives but ignored improper accounting practices. Moreover, the auditors of Anderson were actively involved in planning and implementing debt shadings (Enron, 2002).
The company also experienced corporate governance issues (Dobson, 2006). Top management sold billions of dollars worth of company’s stocks. Andrew Fastow earned $30 million dollars as the result of his investments being the company’s CFO. Some of his friends also raised significant capitals investing in some of SPEs. Some of these individuals earned $1 million on $5,800 investment. The gains were realized in as little as 60 days.