History and Background of Enron Company - Essay Example

Ethics in Accounting - Enron (History and Background of Enron) The rise and fall of big companies around the world has been as a subject of research and investigation since such cases provide valuable business and accounting lessons. One such company is Enron, whose failure led to massive losses to investors, banks and insurance companies. The history of Enron can be traced back to 1985 in Nebraska. Houston Natural Gas Company and InterNorth Pipeline Company merged to form a new company under the leadership of Kenneth Lay (Lucian & Cristina, 2007). This new company became the first company to create a nationwide natural gas pipeline supply system. Lay was named the chief executive officer in 1986. This is when the company adopted the name Enron Corp. During the merger, Enron had incurred a huge debt and lost its executive rights to pipelines as a result of deregulation. In 1987, the company realized that it had made a loss of close to $ 1 billion, it worked the loss down to $ 142 million, and the loss made the company adopt a different strategy in order to cushion itself against price fluctuations (Lucian & Cristina, 2007). Jeff Skilling, a consultant hired by the company, came up with a new business plan that would help the company generate earnings. This new approach called for the creation of gas banks where Enron Corp bought gas from different suppliers and sold it to consumers (Thomas, 2002). Enron assumed the associated risks. The company started to venture into other business areas beyond the natural gas and pipeline. This saw Enron become a financial trader as well as market maker in various products and services including water, broadband, coal, power, and steel among others. In 1992, the Enron extended its operations to South America through the acquisition of Transportadora de Gas del Sur. By 1993, the company’s power plant in England began to operate. By the late 1990s, the company had started to implement a number of innovations that would help to lower the cost of electricity and gas by almost 50 percent. In 1994, the company did its first electricity trade which proved to be profitable. In 1995, after the establishment of a trading center in London, Enron ventured into the European wholesalers market. The construction of the Dabhol power plant to be located in India started in 1996, although the project was later abandoned and put up for sale due to political reasons. During the same year, Skilling was made the chief operating officer for the company. He managed to convince Lay that the gas bank model he had introduced could be applied to electric energy (Thomas, 2002). As a result, both Lay and Skilling embarked on a campaign to promote the idea to the heads of various power generating companies and also to the energy regulators in the country. This made the company have a major political influence in the country, and was on the forefront calling for the deregulation of electric utilities (Thomas, 2002). In 1997, Enron acquired the Portland General Electric Corp, which was however sold in 2001.this acquisition cost the company close to $2 billion. Enron Energy Services was also formed in 1997 and was given the mandate of providing energy management services to industrial and commercial consumers. In 1998, Enron acquired Wessex Water in the UK which was the main water subsidiary Azurix. However, a third of the Azurix was sold to the public through a public offer, and this led to a great decline in the shares of the company (Lucian & Cristina, 2007). Enron was growing the energy business at a very high rate through investments within and outside the United States. This acquisition of assets was mainly financed by debts and this meant that the debt-to-equity ratio was very high. It is worth noting that Enron was operating as two different companies. The first dealt with the supply of energy by purchasing electrical power plants and pipelines (Lucian & Cristina, 2007). The other part of Enron was a financial institution whose main focus was on while and derivatives transactions relating to energy products. One of the major developments made by the company was the formation of the Enron Online in 1999. This was a commodities trading website. This online platform proved to be a major success, and in 2000, it was handling more than $ 300 billion worth of commodities online (Thomas, 2002). Due to the advancements in the technology world that were being witnessed during the late 1990s, Enron seized the opportunity and ventured into broadband. At the start of the year 2000, the company announced a plan to build a broad-band telecommunications network. Enron aimed to provide broadband services in a similar way as it did for electricity and gas. In July 2000, Enron entered into a deal with Blockbuster with the aim of providing video on demand to consumers via high speed internet connections (Thomas, 2002). The company started to invest millions of dollars in the broadband business with minimum returns. By the year 2000, the company’s annual revenues were at $ 100 billion, and this was a significant increase, which was more than double from the previous year. During the same year, Enron was ranked the sixth largest energy company worldwide, and this ranking was done by The Energy Financial Group and was based on market capitalization (Lucian & Cristina, 2007). During this time, Enron was admired worldwide and was seen as one of the innovative companies. Enron was considered to be a successful company not only in the United States but worldwide. The first indication that things were not well at the company was seen in 2001 when the vice chairman Clifford Baxter resigned, followed by the resignation of Skilling three months later. These two had resigned for unnamed personal reasons. In the same year, the company announced that it was to restate its earnings reported from 1997 to 2001 (Lucian & Cristina, 2007). This was as a result of what the company termed as accounting errors. Specifically, the errors were as a result of its transactions with LJM Cayman and Chewco Investments. These were the initial signs to investors and financial analysts that there was something wrong with the company. In October 2001, the company announced that the previous financial reports had overstated the worth of the company, and the actual worth was $ 1.2 billion less than what was previously reported. By the end of 2001, the company’s share value had dropped by 89 per cent since the start of the year (Lucian & Cristina, 2007). This revelation forced the Securities and Exchange Commission to investigate the company. The investigation showed that the company engaged in a number of illegal practices with the full knowledge of the high raining company executives, the accounting firm (Arthur Anderson) and the investment banking partners. The managerial and accounting practices that led to the fall of this company are discussed in the sections below. References Lucian, C & Cristina, D (2007). Fraud Case Analysis: Enron Corporation. The Annals of the University of Oradea Economic Sciences, 2, pp. 194-198. Retrieved on 4 march 2014 from http://steconomice.uoradea.ro/anale/volume/2007/v2-finances-accounting-and- banks/41.pdf Thomas, W.C (2002).The Rise and Fall of Enron. Journal of Accountancy. pp. 41-45, 47-48. Texas Society of CPA’s. Read More