The Fall of Enron - Essay Example

The Fall of Enron In the most general terms, the meaning of crime can be defined as an act of wrongdoing that goes against the principles and rules laid down by a particular country or set of people. A crime committed could be attributed to a state of mind and/or body by the criminal and his/her intent. The nature of crime is determined by several legal factors depending on the circumstances and situation it was committed in. Nonetheless, several different types of crime are being committed daily. The one being presented in this paper is that of white-collar crime, also referred to as organized crime, for it is carefully planned and systematically executed over a period of time. It was 1985 when Kenneth Lay’s Houston Natural Gas merged with Nebraskan-Northern Natural Gas Company’s holding company, InterNorth, to form Enron. The two separate companies were primarily dealing with the distribution and transmission of oil and electricity in the United States of America. They were also active in the construction, development and maintenance of power plants, pipelines and other similar infrastructure worldwide (Wikipedia, 2006). Under the new company name, Lay was appointed as the Chief Executive Officer and wanted to expand Enron’s market share as he had envisioned for his former venture. Houston Natural Gas had previously been in the business of generating their revenues from junk bonds from which its proceeds were used in the formation of Enron. Kenneth Lay aimed at becoming the biggest player in the energy sector through successful trade earnings from futures contracts (NPR, 2006). To his advantage, Spectrum 7, an oil-well concern welcomed a partnership with Enron a year after its creation. Spectrum 7 was headed by George W. Bush, son of the then-Vice President George H. W. Bush. With falling gas prices in the mid 1980’s, Enron and other gas firms vigorously lobbied for deregulation. The deregulation action came into effect when buyers switched to the cheaper alternative – fuel oil. No doubt fluctuating gas prices allowed Enron to start marketing gas futures; securing gas prices at later date promised to their stakeholders. Similarly, the company lobbied once again for electricity just before selling electric power futures contracts (NPR, 2006). From then on, Enron was aggressive in expanding its services in the water utility sector by creating Azurix that partly collapsed on the NYSE in 1999 and shut down operations in 2001 (Wikipedia, 2006). Jeffery Skilling was hired in 1990 to lead the new division – Enron Financial Corporation. He was the major proponent in the trading businesses and became the president and COO for Enron seven years later. The company drew its wealth from trading in 30 different industries during its lifetime. It was reputed as being pioneers in the marketing and promotion of power industry, steel and wood fiber contracts, financial instruments, weather derivatives and Internet bandwidth capacities. Market futures included the futures in sugar, coffee, grains, hog and other meat varieties (Wikipedia, 2006). The new financial president diversified Enron’s businesses with numerous trading ventures by creating partnerships in every contract. He even allowed for the company to create new markets for itself making a new-economy trailblazer (NPR, 2006). The company was still providing products and services for its original industry – electricity and gas – through construction, distribution and maintenance of its power plants. Enron had heavily invested in partnerships worth hundreds and billions of dollars within the few years of the early 90’s. Yet at the same time, those investments did not produce enough returns for the company to be gaining profits on it and were being ignored. In an effort to remain the biggest and leading player in trading businesses, Enron developed and launched EnronOnline in October 1999. EnronOnline was to be the first web-based transaction system that would allow buying and selling commodities globally. EOL’s earnings came from being a third-party in all business transactions placed on its website. It earned a total of $335 billion in 2000 before proving to be another fatal financial blow to Enron (Thomas C. W., 2002). Subsidiaries like Azurix, Enron Energy Services, the closure of the original pipeline that generated the company’s revenue and broadband services drained the company of its cash flow. This placed more emphasis on the Enron Global Finance department to keep the company afloat (Wikipedia, 2006). In an immediate effort to rescue their remaining assets, Enron entered into talks with rival company, Dynergy, for a partnership. Dynergy accused the company of deceitful bargaining and pulled out of the deal within the initial weeks of negotiation. This final straw had lead Enron to open its books to the world and uncover the truth. On December 2, 2001, Enron filed for bankruptcy. Not only the financial world but traders and key investors worldwide were alarmed by the company’s latest action. What seemed to be the most stable and trusted energy company representing the American industry was down to nothing. Labeled as Fortune Magazine’s “America’s Most Innovative Company” for six consecutive years (1996 to 2001) had suddenly turned non-existent (Wikipedia, 2006). The US Congress had begun its investigation by mid-December and summoned Enron’s executives into the Congressional hearings. Kenneth Lay did not appear in two of those hearings. Following reports revealed that all relevant documents were destroyed, top government administration officials were being sought for help and allegations that company officials ignored heeded earlier warnings about the company’s position while pocketing millions to billions of dollars in their personal accounts (NPR, 2006). Enron had again been listed in Fortune Magazine for the year 2000. This time as one of ‘100 Best Companies to Work for in America’. Its offices were of a quality their competitors would be envying. It was praised and hailed mainly by its labor and workforce as one of the best companies to work for. Long-term pensions, effective management policies and worker benefits were the reasons why people wanted to work for such a company. From a total of over 20,000 employees, Enron’s headquarters laid off more than 4,000 employees from its own division. The numbers kept increasing as the days of investigation and reporting were taking place (Wikipedia, 2006). Lurking underneath all those flashy layers of state-of-the-art offices, long-term financial benefits and security for its employees, Enron was a company committed to its own executives’ financial gain rather than generating sales revenues. The harshest known employee-ranking system in the country was introduced by its president, Jeffery Skilling. The Performance Review Committee (PRC) was also referred to as the 360-degree review which was based on the RICE criteria – respect, integrity, communication and excellence. Those with the lowest score of five were fired and those closer to one were the real performers or stars of the company. Skilling was known to replace up to 15% of his workforce annually (Thomas, C. W., 2002). The largest and most successful trading business of the world had seen its decline with persistent rumors of bribery and political pressure in gaining worldwide markets. Central and South America, Africa and the Philippines were the regions Enron had keen eyes on for their business interests. They earned their notoriety when they used political connections from the Clinton and Bush administrations in finalizing a $3 billion contract with the Maharashtra State Electricity Board in India. A controversy resulted from this deal ending of whatever negotiations Enron had made with the Indian company (Wikipedia, 2006). Investigated information later revealed insider trading from the company’s initiation that let to fraud and deceit. In 1988, Enron’s two auditors - David Woytek and John Beard – found millions of dollars from the company’s account being moved into unknown personal accounts. Later revealed, the accounts belonged to the consorts (Louis Borget and Thomas Mastroeni) for the rulers of Kuwait and Saudi Arabia to gain information regard OPEC. The auditors’ insider information led to increased cash flows from oil dealings while the senior executives believed the rumored details. CEO Lay informed the auditors to continue their investigation. The investigation was meant to return every rightful penny back to its lawful owners. However, when the reports were complete, no immediate action was taken against the accused. The two auditors pursued their findings only to be told that L. Borget had brought in tens of millions of dollars to the company and so should stop further investigation. A total of sixteen people pleaded guilty for the crimes committed at the company after Enron filed for bankruptcy. Five others were former Merrill Lynch employees who were founded guilty. Eight former Enron executives testified, mainly John Fastow, against his former bosses – K. Lay and J. Skilling (Wikipedia, 2006). Enron’s shortcomings uncovered the secret mishaps of the accounting world where Authur Andersen, their auditing company, was charged on obstruction of justice for the same company. The scandal at Enron took place under the very eyes of Arthur Andersen’s auditors who worked there all year round. The telecommunications company, WorldCom too was declared bankrupt creating the domino effect for other accounting malpractices. High-level corruption, accounting errors and insider trading were the main reasons for Enron’s downfall and also for WorldCom along with other accounting practices (Thomas, C. W., 2002). Enron had donated a total of $7 million in 1990 in contributions to political figures for their campaigns. Three-fourth of the US contribution was donated to the George W Bush’s presidential campaign (Wikipedia, 2006). The question arises: was the political administration a major cause for Enron’s fallout and eventually demise? Millions of dollars were lost and/or misplaced as a result of the scandal. The US economy is still recovering from the aftershocks yet people are suffering. Only a small percentage of its employees were laid off. The rest are unaware of the bleak future that awaits them as the company is battling its way to keep alive. Its founder, Kenneth Lay, died after a cardiac arrest while vacationing in Colorado on July 5, 2006 (Wikipedia, 2006). An empire that grew too fast too quickly was only meant to crumble some day. Critics termed it as ‘once a new-economy trailblazer, now beleaguered and bankrupt’ (NPR, 2006) and ‘when a company looks too good to be true, it usually is’ (Thomas C. W., 2002). Enron had reached heights that no other company had dared achieving let alone dreaming. As those involved in the scandal are being tried and sentenced, the accounting and financial world has taken a 360-degree turn in its accounting practices and policies. Maybe this was the turn the industry needed. Works Cited: NPR, 2006. NPR: The Fall of Enron. Retrieved on December 3, 2006 from National Public Radio (NPR) website: http://www.npr.org/news/specials/enron/ Thomas, C. W. 2002. The Rise and Fall of Enron. Retrieved on December 3, 2006 from The American Institute of Certified Public Accountants (AICPA) website: http://www.aicpa.org/PUBS/jofa/apr2002/thomas.htm Wikipedia. 2006. Enron. Retrieved on December 3, 2006 from Wikipedia, the free encyclopedia website: http://en.wikipedia.org/wiki/Enron Read More