ENRON CORPORATION

About the Company Enron was a Houston-based energy company founded by a brilliant entrepreneur Kenneth Lay. The company was created in 1985 by a merger of two American gas pipeline companies in Nebraska and Texas. Lay assumed the role of chairperson and CEO, a position he held through most of the next 16 years, until the company's downfall in 2001. As Enron became the largest seller of natural gas in North America by 1992, its trading of gas contracts earned $122 million, the second largest contributor to the company's net income.

The company owned and operated a variety of assets including gas pipelines, electricity plants, pulp and paper plants, water plants, and broadband services across the globe. The corporation also gained additional revenue by trading contracts for the same array of products and services with which it was involved. In a period of 16 years the company was transformed from a relatively small concern, involved in gas pipelines, oil and gas exploration, to the world's largest energy trading company. Enron's stock increased from the start of the 1990s until year-end 1998 by 311% percent. Only modestly higher than the average rate of growth in the Standard & Poor 500 index.

However, the stock increased by 56% in 1999 and a further 87% in 2000, compared to a 20% increase and a 10% decrease for the index during the same years. By December 31, 2000, Enron's stock was priced at $83.13 and its market capitalization exceeded $60 billion, 70 times earnings and six times book value, an indication of the stock market's high expectations about its future prospects. In addition, Enron was rated the most innovative large company in America in Fortune's Most Admired Companies survey.

Scandal At the end of 2001, it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud, known as the "Enron scandal". Enron has since become a popular symbol of willful corporate fraud and corruption.

Enron’s Fall The Enron scandal was a financial scandal involving Enron Corporation and its accounting firm Arthur Andersen, that was revealed in late 2001. After a series of revelations involving irregular accounting procedures conducted throughout the 1990s, Enron was on the verge of bankruptcy by November of 2001. Its complex business model and unethical practices required that the company use accounting limitations to misrepresent earnings and modify the balance sheet to indicate favorable performance. Enron filed for bankruptcy on December 2, 2001.

Profit to Enron from all this? Enron received $10 million in guarantee fee + fee based on loan balance to JEDI. Enron received a total of $25.7 million revenues from this source. In first quarter of 2000, the increase in price of Enron stock held by JEDI resultedin $126 million in profits to Enron. But everything fell apart when Enron’s share price started to drop in Fall 2000. In November 2001, Enron admitted to the SEC that Chewco was not truly independent of Enron. Chewco went bankrupt shortly after this admission by Enron.

Bad Accounting Practices? Auditing companies often consult for the companies they audit. Audit company partners often later accept jobs from their client companies. Companies often retain the same auditing company for long periods of time. Auditing companies have been allowed to police themselves.

Appointment of auditor company is in theory by shareholders but in practice by senior management. Audit Committee members often are not independent of senior management - insiders are the ones with the most accurate understanding. Audit Committee members have typically been required to own company stock to align their incentives with those of company.

The Whistleblower In June 2001, Enron Vice President Sherron Watkins was given the task of finding some assets to sell off but it was very difficult for her. Watkins prepared a Memo regarding the various problems and placed it into the box but this Memo was not taken into consideration. On August 22,Watkins handed CEO Lay a seven page letter and told him that Enron would implode in a wave of accounting scandals”.

Against Watkins letter Lay, the CEO, arranged to have a Enron's Law Firm Vinson and Elkins that looked after all questionable deals. Watkins continued to do her work and sold stock of 30000 dollar in August,2001 and some in late September. In February 2002,she revealed the various facts regarding Enron partnerships and finally resigned in November. But Watkins Revealed all the facts only after Enron filed for bankruptcy.

Corporate Issues In Enron The Enron deception was practicing the accounting fraud by creating the SPS (Special Purpose Entity) which exchange the debt and failing investment into sales revenue in financial statement. This Fraud is done by the cooperation of Enron CFO, few of Enron people and Andersen’s chief auditor for Enron.