Enron: From The Beginning To The End

Introduction

When many people hear the word Enron, they immediately associate it with the most important accounting scandal of our lifetimes. Enron was an American gas company that began as the Northern Natural Gas Company in 1931. Internorth, a holding company in headquartered in Omaha, Nebraska, purchased the Northern Natural Gas Company and reorganized it is 1979. Enron arose from the 1985 merger of Houston Natural Gas and Internorth. After building a large, new corporate headquarters in Omaha, the new Enron named former Houston Natural Gas CEO Kenneth Lay as CEO of the newly merged company, and soon moved Enron's headquarters to Houston, Texas. After becoming the newly created top executive, Lay later became chairman of the board and hired Jeffrey Skilling as Chief Executive Officer. Under their leadership, Enron adopted an aggressive growth strategy. Andrew Fastow, Enron’s Chief Financial Officer, helped create the complex financial structure for the new Enron. (Reinstein, et all, 2002)

Products and Services

Enron was originally involved in the transmission and distribution of electricity and gas throughout the United States, and the development, construction, and operation of power plants, pipelines and other infrastructure worldwide. The corporation had a variety of products that it offered such as petrochemicals, plastics, power, pulp and steel. Enron also had a variety of service lines such as Energy and Commodities Services, Broadband Services, Capital and Risk Management Services, Energy Transportation and Upstream Services, and Commercial and Industrial Outsourcing Services.

Rapid Expansion

Government regulation is one way that society shows it cares about responsible conduct in business. In the early 1990s the Congress of the United States of America passed legislation deregulating the sale of electricity. It had done the same for natural gas some years earlier. Enron took advantage of the lack of regulation of its energy trading business to influence government officials and play games with the numbers. (Nussbaum, B. 2002) Enron rapidly changed its business from a regulated natural gas company into one of the world’s largest energy traders. The corporation became an unregulated derivative вЂ"trading company. It generated funds by entering into extremely volatile, risky, and expensive hedging transactions. The company changed its business focus from primarily delivering and brokering energy domestically to focusing on three new key business areas: water, international energy brokerage, and broadband communications. (Reinstein, et all, 2002)

Between 1996 and 2000, the average Chief Executive Salaries and bonus increased by 24% to $1.72 million. Total CEO Compensation, including stock options and restricted stock grants, grew 166% to an average of $7.43 million. In the same period, corporate profits grew by 16%, and per capita income grew by 18%. (Reinstein, et all, 2002) By the late 1990s, Enron’s stock was trading for $80-90 per share. Enron reported revenue of $111 billion in 2000. As the corporation grew rapidly, the emphasis was more on short-term effects and not on the long-term. It became all about living up to the expectations of growth. The system of internal control and control by the management could not keep up with the way Enron was growing. No one outside of the company could figure out how Enron was able to generate so much revenue compared to its counterparts. Occasionally, when pressed, Enron executives attributed the growth and success to new approaches to management, “creative financing”, and their commitment to hiring executives who knew their way through the corridors of power in capitals across the globe. (Perkins, 2004)

Role of Management

In order to continue to grow, increase its profits and push up its share price, Enron needed additional capital despite its substantial debt load. Therefore, it formed a series of partnerships between various Enron directors and outsiders that appeared to be independent but were effectively controlled by Enron executives. These were named “Special Purpose Entities” (SPE). These SPEs were of doubtful legality and served a number of purposes. (Walsh, 2002) At first Enron apparently set up these SPEs correctly with the help of its independent auditors, Arthur Anderson. When Enron ran into some difficulties finding replacement for these SPEs, it started using key management personnel for this purpose. What Enron was in fact doing, was using these Special Purpose Entities to move debt off the balance sheet and using the company stock as collateral. (Reinstein, et all, 2002)

Enron’s Downfall

Concerns about Enron’s financial stability were mounting. On August 14, 2001, Jeffrey Skilling, the chief executive of Enron, a former energy consultant at McKinsey & Company who joined Enron in 1990, announced he was resigning from his position. Skilling cited that his reasons for leaving were personal. The months leading up to his resignation, Skilling had sold at minimum 450,000 shares of Enron at a value of around $33 million. After Skilling’s departure Lay reassured the concerned public that Enron was not facing any problems and was in a healthy state. Lay reassumed the position of Chief Executive after Skilling left but a lot of attention was now being focused on the company. Meanwhile, Kenneth Lay had cashed in hundreds of millions of dollars of his own shares but failed to warn others of the tidal wave that was heading their way, particularly those employees that had their entire life savings invested in Enron stock. The public was beginning to lose its confidence in Enron and company refused to elaborate on its unusual investment and accounting practices. By the end of October, 2001, Kenneth Lay removed Andrew Fastow from his position as Chief Financial Officer. At this point in time, Enron stock was trading at $16.41, having lost half its value in a little over a week. Toward the end of November, Enron stock was trading at $7.

In December, 2001, Enron filed for bankruptcy. At this time, this was the biggest bankruptcy in the United States History and it cost 4,000 employees their jobs. Enron was estimated to have about $23 billion in liabilities, both debt outstanding and guaranteed loans. Citigroup and JP Morgan Chase had significant amounts to lose with Enron’s fall. In addition, many of Enron’s major assets were pledged to lenders in order to secure loans.

Sherron Watkins is considered by many to be the whistle blower who helped uncover