ENRON

The start-up.. Enron began life as an energy producer in 1985 as a result of the merger of Internorth and Houston Natural Gas. Enrons core business was the transmission and distribution of power but the company branched into many non-energy-related fields over the next several years, including such areas as Internet bandwidth, risk management, and weather derivatives (a type of weather insurance for seasonal businesses). Their growth was occurring through their other interests until it ended up as an energy bank because the company guaranteed quantities at set prices over the long term. Over the years Enron became a market-maker in the US acting as the main broker in energy products. It grew from nowhere to become America's seventh largest company, employing 21,000 staff in more than 40 countries. Fortune magazine named Enron "America's Most Innovative Company" for six consecutive years from 1996 to 2001. Everyone desired a job at Enron. Most of the business schools considered Enron as the new age company. Then came the investigations into their complex network of off-shore partnerships and accounting practices. The problem.. The Enron fraud case is extremely complex. Maybe Enrons demise is rooted in the use of an accounting method known as mark to market. With this technique the price or value of a security is recorded on a daily basis to calculate profits and losses. This allowed Enron to count projected earnings from long term energy contracts as current income. This was money that might not be collected for many years. Many of these gambles on the future energy prices were losing money, and to disguise this, a network of "partnerships" were created by the companys executives benefiting them, their families and friends. This entities named the Raptors were created to move debt off of the balance sheet and transfer risk for their other business ventures, also were established to keep Enron's credit rating high, keeping profits high and shareholders happy. In sum the Raptors were established to cover their losses if the stocks in their businesses fell. Executives had used those elaborate structures to hide millions of dollars of losses and debts also the value of key assets was being exaggerated. The deals were so complex that no one could really determine what was legal and what wasn't. After a while the losses were hidden, eventually coming to light in 2001. At Enrons downfall many of the executives got massive profits by selling their shares before the company's problems went public and its stock price collapsed.

When Enron's stock began to decline, the Raptors began to decline as well. On August 14, 2001, Enron's CEO, Jeff Skilling, resigned. Consequences of questionable accounting practices, taking advantage of the SEC authorization for using Mark to market accounting method left behind $31.8bn (18bn) of debts, its shares become worthless near 60 cents per share when they reach $90 at the peak in 2000. And 21,000 workers around the world lost their jobs. At December 2001, Enron declares itself bankrupt. Jeffrey Skilling, Enron's former chief executive, faced 28 counts of fraud, conspiracy, insider trading and lying to auditors for allegedly trying to fool investors into believing Enron was healthy before the firm crashed. Enron's founder and former chairman Ken Lay had faced six counts of fraud and conspiracy for perpetuating the scheme after Skilling quit in August 2001. On 2006 Jeffrey Skilling and Kenneth Lay were convicted for conspiracy and fraud this marked the end to a scandal that gripped corporate America. But less than two months later, Mr Lay died of a heart attack while awaiting sentencing. Andersen, which audited Enron's accounts, went on trial in Houston, Texas, after allegations that employees had illegally destroyed thousands of documents and computer records relating to its scandal client, which was based there. With the conviction of the former Enron bosses also the jury in the United States has found accountancy firm Arthur Andersen guilty of obstructing justice by shredding documents relating to the failed energy giant Enron. This verdict stress the death knell for the 89-year old company, once one of the world's top five accountants. Effects of Enrons collapse The Enron case was the biggest in a series of scandals that damaged the reputation of corporate America. As a direct result the US Congress passed a new law, called Sarbanes-Oxley, which imposed stricter rules on auditors and made corporate directors criminally liable for lying about their accounts. The conviction of Lay and Skilling will be seen as a vindication of the legislation. It has also moved the balance of power away a little bit from company boards towards investors. Could it ever happen again? There is a fierce debate among corporate experts about whether the reforms introduced after Enron have done enough to prevent future fraud.

There is certainly more caution among chief executives about signing off accounts that might be inaccurate now that they face criminal penalties. But the temptation to boost stock prices has been a consistent feature of booming markets from the 1920s to the present especially when the rewards for chief executives can be so high. In one year, Ken Lay earned $252m including stock options. As a result, the US has been the pioneer in tougher financial regulation, from the creation of the Securites and Exchange Commission itself in the l930s. Nevertheless, many argue that it has to be a change in corporate culture, rather than legal restrictions, that are needed to prevent another recurrence of corporate fraud.

Sources: Q&A: The Enron case, visited May 26 2009. http://news.bbc.co.uk/2/hi/business/3398913.stm Whistleblower recalls Enron crisis, visited May 26 2009. http://news.bbc.co.uk/2/hi/business/5335214.stm The rise and fall of Enron, , visited May 26 2009. http://news.bbc.co.uk/2/hi/business/5018176.stm Obringer, Lee Ann. "How Cooking the Books Works." 16 August 2005, visited May 27 2009. http://money.howstuffworks.com/cooking-books.htm