The Enron CorporationвЂ" Dilemma In The Workplace

The Enron CorporationвЂ" Dilemma in the Workplace

The Enron Corporation (Enron) was once one of the world's leading energy companies. In December 2001, Enron filed the largest corporate bankruptcy claim in United States history. The collapse led to investigations of both Enron and Arthur Andersen, an accounting firm employed by Enron. Investigators focused on charges that Enron deliberately concealed its financial problems, misled investors, and failed to pay income taxes.

Enron has taken a downward slide since January making their stock worthless today. With corrupt executives and the help of their auditing firm, they have been able to provide investors with false financial information, which gave them a false picture of the company’s true state of affairs. The collapse of Enron has made thousands of employees lose their life savings in 401k plans, and company stock holdings. Investors were defrauded out of billions of dollars and everyone is asking the questions, “How did this happen, and can we prevent this from happening again?”

Company Background

In 1930, Northern Natural Gas, a Nebraska-based gas pipeline company was founded. By 1950, the company had doubled in size. A decade later, it started processing and transporting natural gas liquids. The company was renamed InterNorth in 1980 and bought Belco Petroleum three years later. InterNorth also helped build the Northern Border Pipeline to link Canadian fields with the United States markets. (C-Span.com, 2002)

Houston Natural Gas (HNG) formed in 1925 as a South Texas natural gas distributor. The company started developing oil and gas properties in 1953. It bought Houston Pipe Line Company in 1956 and Valley Gas Production in 1963. HNG sold its original distribution properties to Entex in 1976. In 1984, HNG dealt with a hostile takeover attempt by a competitor and, as a result, brought in a former Exxon executive as Chief Executive Officer (CEO). The executive refocused HNG on natural gas and added Transwestern Pipeline and Florida Gas Transmission. (WashingtonPost.com, 2002)

By 1985, HNG operated the only transcontinental gas pipeline. In 1985, InterNorth bought HNG, creating the United States’ largest natural gas pipeline system. Once these companies merged, it was renamed to Enron. The headquarters was then moved from Omaha to Houston.

In 1992, Enron and three partners acquired control of a 4,100-mile pipeline in Argentina. Enron bought several gas businesses from gas leader Williams in 1993 and began its power marketing business as the global electricity markets began deregulating.

In 1997, Enron bought its own electric utility, Portland General Electric (PGE). In 1998, Enron began power trading in Australia and became the first power marketer in Argentina. The company continued to expand by buying power plants near New York City. In addition, Enron

acquired more companies globally such as Wessex Water in the United Kingdom and companies in India and China.

In 2000, Enron contributed its retail residential energy business to The New Power Company. This contribution was to compete in deregulated US markets. In addition, Enron also purchased international metals marketer “MG plc” in a 2 billion dollar deal.

Enron sold Houston Pipe Line Company to American Electric Power in 2001 and it also agreed to sell Portland General Electric (PGE) to another Oregon utility, Northwest Natural Gas. Later that year, the company announced that it would sell its Indian gas assets to UK oil and gas group and they also announced plans to sell their power plant in India.

Also in 2001, Enron was in talks with a small rival, Dynegy. The initial agreement of 22 billion dollars was discussed. However, Dynegy soon canceled the deal as Enron's credit rating and stock price continued to drop. Days after the agreement collapsed, Enron filed for Chapter 11 bankruptcy protection and filed a lawsuit alleging that Dynegy breached the merger agreement and contested the Northern Natural Gas option. In January 2002, Enron agreed to let Dynegy take control of the pipeline; however, Enron would have the option to repurchase the pipeline in June of 2002. (C-Span.com, 2002)

Key Problems and Issues

The Energy financial group ranked Enron the sixth largest Energy Company in the world. In January 2001, Enron’s stock hit a closing high for the year at 82.00 dollars per share (Goldberg & Davis, 2001). Investors and analysts knew Enron’s financial statements were very complicated, but because Enron did not show any big fluctuation in their earnings growth, nobody wanted to question the company and took them at face value. On October 16, 2001, Enron reported that they were taking a major loss on their third quarter earnings. As a result, everyone was questioning their financial stability. The third quarter losses were connected to the ending of the relationship with a pair of investment partnerships that were created by Chief Financial Officer (CFO) Andy Fastow. The partnership LJM Cayman and LJM2 were formed using Enron’s equity and outside capital. They were designed to help the company grow quickly without adding too much debt to its books or diluting the value of the company’s stock. The CFO’s relationship with these entities was a cause for concern because it put him on both sides of the deal; representing himself as the buyer and seller simultaneously. This was a major conflict of interest on his part because they did not really know whom he was representing in any of the transactions during the partnership. On October 22, 2001, the Securities and Exchange Commission (SEC) announced it was investigating the possible conflict of interest related to the company’s dealings with the partnership. Enron’s reluctance to share detailed information on the partnership left many to assume the worst and their stock started to plummet. On October 31, 2001, the SEC upgraded their inquiry to a formal investigation giving them the power to subpoena witnesses and documents. A growing number of shareholders filed lawsuits against the company following the earnings report and the SEC investigation. The stock rapidly declined and the company fell into financial ruins. On December 2, 2001, the company declared bankruptcy making it the largest filing in history.

Enron’s independent auditing company Arthur Andersen failed to arouse suspicions about the energy company’s finances