The Enron scandal is arguably the world’s largest, most complicated, and a most well-known accounting scandal. Enron Corporation, US-based energy, commodities, and services corporation, was able to deceive its investors into believing that the company was doing far better than it actually was by using deceptive accounting techniques.
The story of Enron Corp. illustrates a firm that rose to dizzying heights only to plummet. Thousands of employees were touched by the fated company’s demise, which shocked Wall Street to its core. Enron’s stock peaked at $90.75, and it was trading at $0.26 immediately before declaring bankruptcy on December 2, 2001. What was particularly concerning about the scandal was how such a large-scale deception scheme was able to go undetected for so long and how regulatory authorities failed to intervene. The Enron disaster, in conjunction with the WorldCom (MCI) debacle, revealed the extent to which corporations exploited legal loopholes.
Many people still marvel how such a formidable company—at the time, one of the largest in the United States—could disintegrate so quickly. It’s also difficult to comprehend how its management was able to deceive regulators for so long using fictitious holdings and off-the-books bookkeeping. The Sarbanes-Oxley Act was enacted in response to the increased scrutiny, with the goal of protecting shareholders by making company disclosures more accurate and transparent.
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Bank fraud is the false impersonation of a bank or other financial institution in order to obtain money, assets, or other property owned or held by a financial institution or to obtain money from depositors. Bank fraud is a criminal offense in many cases.
Accounting fraud is exemplified by the Enron scandal. They employed deceptive bookkeeping to overestimate sales and income, inflate the value of the firm’s assets, and declare a profit when the company was losing money to mask major financial issues. These altered records are then used to seek investment in the company’s bond or security issues or to make fraudulent loan applications in a final attempt to obtain more money to prevent the unproductive or mismanaged organization from collapsing.
Enron was founded in 1985 when Houston Natural Gas Co. and Omaha, Neb.-based InterNorth Inc. merged. Kenneth Lay, the former CEO of Houston Natural Gas, became Enron’s CEO and chair after the merger. Enron was immediately rebranded as an energy dealer and supplier by Lay. Enron was prepared to profit from the deregulation of the energy markets, which allowed corporations to wager on future prices. Lay founded Enron Finance Corp. in 1990 and named Jeffrey Skilling as its CEO after being impressed by his work as a McKinsey & Co. consultant. Skilling was one of McKinsey’s youngest partners at the time. Skilling came to Enron at a fortunate time. Because of the era’s lax regulatory framework, Enron was able to thrive.
The dot-com bubble was in full swing towards the end of the 1990s, and the Nasdaq had reached 5,000 points. Most investors and authorities just accepted soaring share prices as the new normal because revolutionary Internet stocks were valued at absurdly high levels. Skilling was instrumental in moving Enron’s accounting from a standard historical cost accounting approach to mark-to-market (MTM) accounting system, which the company got official SEC clearance for in 1992. MTM is a method of calculating the fair value of accounts that fluctuate in value over time, such as assets and liabilities. MTM is a genuine and commonly used approach that tries to provide a realistic assessment of an institution’s or company’s actual financial status. However, because MTM is based on “fair value,” which is more difficult to pin down, the approach can be manipulated in some situations. Some feel MTM was the start of Enron’s demise, as it essentially allowed the company to record anticipated profits as actual profits.
Fastow and others at Enron allegedly coordinated a conspiracy to disguise Enron’s mountains of debt and toxic assets from investors and creditors by using off-balance-sheet special purpose vehicles (SPVs), sometimes known as special purposes entities (SPEs). These SPVs were created with the sole goal of concealing accounting reality rather than operating results. Enron would transfer some of its fast-growing stock to the SPV in exchange for cash or a note in a conventional Enron-to-SPV transaction. After that, the SPV would utilize the stock to hedge an asset on Enron’s balance sheet. As a result, Enron would guarantee the value of the SPV, lowering the apparent counterparty risk.
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After the United States Congress passed a series of laws liberalizing natural gas sales in the early 1990s, the firm lost its exclusive right to run its pipelines. Enron converted itself into a trader in energy derivative contracts, serving as an intermediary between natural-gas suppliers and their clients, with the help of Jeffrey Skilling, who started out as a consultant and subsequently became the company’s chief operating officer. Producers were able to limit the risk of energy price swings by setting the selling price of their products through a contract negotiated for a charge by Enron.
Enron quickly controlled the natural-gas contract market under Skilling’s leadership, and the business began to profit handsomely from its trades. Skilling also modified the company’s culture overtime to promote aggressive trading. He hired top MBA candidates from throughout the country and built a fiercely competitive climate within the firm, where the emphasis was increasingly on closing as many cash-generating trades as possible in the quickest amount of time. Andrew Fastow, who quickly ascended through the ranks to become Enron’s top financial officer, was one of his sharpest recruits. Fastow was in charge of the company’s funding, which included investments in increasingly sophisticated securities, while Skilling was in charge of the company’s large trading activity.
Enron’s goals were fueled by the 1990s bull market, which contributed to the company’s fast expansion. Deals were everywhere, and the corporation was prepared to establish a market for anything that anyone was willing to exchange. As a result, it traded derivative contracts for a number of commodities, including power, coal, paper, and steel, as well as weather. During the dot-com boom, Enron developed an online trading business, Enron Online, which by 2001 was performing online trades worth $2.5 billion per day. Enron also put money into a broadband telecommunications network to make high-speed trading possible.
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Enron’s revenues decreased fast as the boom years drew to an end, and the company faced growing competition in the energy trading market. Under pressure from shareholders, corporate management began to use questionable accounting procedures to mask the problems, including a tactic known as “mark-to-market accounting.” The corporation used mark-to-market accounting to put unrealized future gains from some trading contracts into current income statements, giving the appearance of bigger current earnings.In addition, the company’s troublesome operations were moved to so-called special-purpose organizations (SPEs), which are effectively limited partnerships formed with third parties.
Despite the fact that many businesses distribute assets to SPEs, Enron took advantage of the process by employing SPEs as dump sites for its failing assets. By transferring those assets to SPEs, Enron was able to keep them off its books, making its losses appear less severe than they were. Fastow, ironically, was in charge of some of those SPEs. During this time, Arthur Andersen not only worked as Enron’s auditor but also as a consultant to the business. Skilling became Enron’s chief executive officer in February 2001, while Lay remained chairman. However, Skilling abruptly left in August, and Lay took over as CEO. Lay had received an anonymous memo from Sherron Watkins, an Enron vice president who had become concerned about the Fastow partnerships and warned of prospective accounting concerns by this time.
As a number of analysts dug into the details of Enron’s publicly issued financial accounts in mid-2001, the gravity of the situation became clear. Enron stunned investors in October when it revealed a $638 million loss for the third quarter and a $1.2 billion fall in shareholder value, due in part to Fastow’s partnerships. The Securities and Exchange Commission (SEC) began looking into the transactions between Enron and Fastow’s SPEs shortly after. After then, several Arthur Andersen employees started trashing papers connected to Enron audits.
Enron’s stock plummeted when details of the accounting irregularities became public. Fastow was sacked, and the stock price of the corporation plunged from a high of $90 per share in mid-2000 to less than $12 per share by the beginning of November 2001. Enron tried to escape disaster that month by arranging to be acquired by Dynegy. Dynegy, on the other hand, pulled out of the contract a few weeks later. The disclosure led Enron’s stock to plummet to under $1 per share, wiping out the value of the company’s 401(k) pension plans, which were heavily reliant on the stock. Enron filed for Chapter 11 bankruptcy protection on December 2, 2001.
Many Enron executives were indicted and sentenced to prison for a variety of offenses. In 2006, both Skilling and Lay were found guilty of multiple conspiracies and fraud offenses. Skilling was sentenced to more than 24 years in prison but only served 12. Lay, who faced a term of more than 45 years in prison, died before his punishment could be carried out. Fastow also pled guilty and was sentenced to six years in prison in 2006 but was released in 2011. Arthur Andersen was also heavily scrutinized, and the US Department of Justice indicted the business for obstruction of justice in March 2002. Clients that needed assurance that their financial statements would meet the highest accounting standards turned to competitors instead of Andersen.
Employees from Andersen and entire offices eventually followed. Thousands more workers have also been laid off. Arthur Andersen was found guilty of shredding evidence on June 15, 2002, and their license to practice public accounting was revoked. Three years later, Andersen’s lawyers persuaded the United States Supreme Court to reverse the obstruction of justice decision based on incorrect jury instructions. But by that time, the firm had only 200 staff left to manage its lawsuits. 4,000 jobs were lost as a result of the Enron incident. Thousands of Enron employees were told to pack their belongings and leave the building within 30 minutes of the company filing for bankruptcy. Enron stock, which was purchased at $83 in early 2001 and was now basically worthless, was used in nearly 62 percent of 15,000 employees’ savings plans.
Despite losing billions in pensions and stock prices, Enron employees and stockholders received scant compensation in lawsuits. Following the claims, all of the executives were charged with felonies. Following the crisis, a slew of new laws and legislation aimed at improving the reliability of financial statements for publicly traded corporations was enacted. The Sarbanes-Oxley Act of 2002, the most important of these laws, set hefty penalties for deleting, changing, or fabricating financial documents. The statute also made it illegal for auditing firms to perform concurrent consulting work for the same customers.
This may have been one of the world’s largest bankruptcy reorganizations and the worst audit failure, but it was essentially a swindle that cost tens of thousands of people their jobs. Their financial ambitions were thwarted by a scandal that should have been exposed sooner. This is where the Chargebacking method comes into play; it is a fund recovery service that helps people and organizations recover funds that have been stolen. They have specially trained personnel with expertise in recovering funds from banking scammers. The Enron controversy was a series of events involving questionable accounting procedures that led to Enron Corporation’s bankruptcy and the breakup of the accounting firm Arthur Andersen. This was a bank fraud that took people’s livelihoods and squandered their entire lives’ savings.
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