EnronPlunges Into Bankruptcy
Establishedin the backdrop of a recession in 1985, Enron Corporation wasvirtually one of USA’s most innovative companies throughout the90s. The firm was formed following a merger between InterNorth Inc.and Houston Natural Gas Co (NPR). Kenneth Lay, who had been the CEOof Houston Natural Gas Co., became the chairman of the infantcompany which he swiftly rebranded into an energy supplier andtrader (TSHA). In the first year of operations, Enron Corporationmade only 14million dollars in losses, but had an asset base of morethan 13 billion dollars and 16,000 employees (Jon Peterson). At thetime, the firm was the second largest gas pipeline network in theUnited States. The company was on Fortune’s500“Most Innovative” list in the US listing for several years(TSHA).
Enron’srapid success was underwritten by the era’s regulatory environmentthat deregulated markets, authorizing companies to autonomously placebets on future market prices of commodities. As a result, Enronplunged into the online business of trading commodities in October of1999 through which Enron Online (EOL) was born (Jon Peterson).Regardless of spending millions of dollars establishing a high-speedbroadband trading platform, the company ended up realizing almost noreturns. At its peak, its shares were trading at around 90 dollars ashare. The company shook Wall Street to the core because it was wortha staggering 80 billion dollars. Nonetheless, these moments ofbasking in the sun of financial glory were not to last. On the 2ndof December, 2001, Enron Corporation filed for bankruptcy. Theshareholders of the firm lost more than an estimated 75 billiondollars, with thousands of employees losing their jobs and retirementaccounts (NPR).
Sowhat occasioned the “sudden death” of such a reputablecorporation? Conceivably, the greatest contributor to the dizzyingcollapse of Enron Corporation was its irrational bookkeepingprocedures (AccountingDegree). The executives of the firm hadingenious ways of sweeping the company’s losses under the carpet.Bearing in mind that the firm had associate companies, instead ofsheltering the loss, the executives of Enron Corporation wouldtransfer these losses to an off-the-book “subsidiary corporation.”In such a scenario, the publicized financial records of Enron couldnot reflect the losses hence they would go unaccounted andunreported.
Thesecond irregular accounting procedure that saw Enron Corporation hitrock bottom was its indulgence in mark-to-market bookkeepingprocedures (TSHA). In the backdrop of a “free market,” Enron waserroneously measuring the value of their securities on the basis oftheir current market value instead of their real book value. Underthe leadership of Mr. Lay, the company indulged in an accountingprocedure in which the present value of anticipated revenue wasrealized once the contract was signed expensing the costs ofgratifying the contract instantaneously (Jon Peterson).
Usingthis platform of trading, whenever Enron Corporation would build anew asset, for instance power plant X, it would immediately claim thebook-projected profits even though it had not made even one dime fromthe infant plant. If the turnover from plant X were less than thebook-projected value, the company would transfer these losses to theoff-the-book subsidiary companies instead of taking and shelteringthe loss. Employing this model of trading, the company would makemillions of losses, but still publish falsified reports of its “true”financial position so as to attract more investors into the“seemingly profitable” company.
Thethird inappropriate bookkeeping procedure that caused the dizzyingcollapse of Enron Corporation emanated from its online trading ofcommodities (NPR). Using special purpose accounting procedures, theexecutives of Enron Corporation managed to hide the accumulatingamount of toxic assets and piling amounts of toxic losses from itscreditors and investors. Employing this scheme to conduct its onlinetrading of commodities, Enron Corporation hid the true losses of theill-fated stocks, while reflecting the factual turnover of only theprofitable stocks. Owing to the deregulated market, Enron Corporationoverstated the real value of their online commodities, which explainswhy the stocks of the company hit an all-time high of almost 90dollars per share. Nonetheless, after filing for bankruptcy inDecember 2001, the value of Enron Corporation’s stock nosedived to0.96 dollars by late January 2002 (Jon Peterson).
Somepeople say that the deregulation of the industry is what caused thecollapse of Enron Corporation (TSHA). To some extent, this is truebecause it is the deregulation of the market that drove theexecutives of Enron Corporation into enlisting irregular accountingpractices. Were it that the market was under state regulation at thattime, then the executives of the firm would not have unconventionallydecided their terms of trade. However, this is not a strong opinionbecause there are many companies that survived the 1990s era of thefree-market. These companies are still existent because theirexecutives chose to adhere to internationally recognized standards ofaccounting for their profits and losses.
Totry and revive Enron Corporation, Dynegy Corp., one of the world’sleading oil and oil products supplier, considered merging with thecompany right before it filed for bankruptcy. The agreement was thatwith 8 billion dollars, Dynegy would own 65% of the firm with Enronfortifying a meager 35% share (CNN). However, this was not tomaterialize with Dynegy’s 28thNovember announcement that it had terminated the merger dialogueswith Enron Corporation. With this last effort of breathing life backto Enron Corporation out of the picture, the firm eventually filedfor bankruptcy protection on the 2ndof December, 2001 (CNN). And this is how Enron Corporation plungedinto bankruptcy.
Simplyput, Enron Corporation plunged into bankruptcy for its tolerance ofunconventional accounting protocols. These accountability issues arefurther confirmed by the famous 2001 Enronemail scandal, wherethousands of email exemplified how the executives of the firm ignoredemployee queries regarding improper accounting procedures withSherron Watkins as the most prominent whistleblower (CNN). Theexecutives of the company engaged in broadcasting falsifiedstatements of financial position to the stakeholders, creditors, andhopeful shareholders, with the aim of intentionally conveying thewrong trading signals.
Usingthe falsified statements as a tool, Enron managed to attractthousands of investors, who injected billions into the seeminglyprofitable company. Eventually, the company crumpled under its ownweight when it could not recover the initial injections itextravagantly made. Unable to pay its debts, the company filed forbankruptcy on the 2ndof December, 2001. This came as a shock to the whole world because atsome point, Enron Corporation was ranked the 7thbest company in the world. Skilling, who took over from Lay, got asentence of 24 years imprisonment for the roles he played in theobliteration of Enron Corporation. Unfortunately, Lay died beforeserving time in prison. Arthur Andersen was also found guilty and iscurrently serving his time in prison (AccountingDegree).
AccountingDegree.(2014). The 10 Worst Accounting Scandals of All Time. RetrievedOctober 04, 2016, from http://www.accounting-degree.org/scandals/
CNN.com. (2016, April). Enron Fast Facts. Retrieved October 04, 2016, fromhttp://edition.cnn.com/2013/07/02/us/enron-fast-facts/
JonPeterson, R. (2016). Enron Case Study. Retrieved October 04, 2016,from https://www.sophia.org/tutorials/enron-case-study
NPR.org.(2016). The Fall of Enron. Retrieved October 04, 2016, fromhttp://www.npr.org/news/specials/enron/
TexasState Historical Association.org. (2015). ENRON CORPORATION.Retrieved October 04, 2016, fromhttps://tshaonline.org/handbook/online/articles/doe08