Enron is an energy trading company based in Nebraska which primarily provides natural gases in the United States of America. It was formed in July 1985 behind the major supervision of Ken Lay, the Chief Executive Officer and chairman of Enron who was the former CEO of Houston Natural Gas. Soon, he decided to begin and join the trading industry for gas commodities.
Afterwards, hired Jeffrey Skilling who is an energy consultant to run a new subsidiary called Enron Finance Corp. as his co-executive and he remained as the chairman. (CG, A., 2016)After joining Enron, Skilling worked with the condition of using mark-to market accounting. Simply, this allows a company to record potential profits on certain projects immediately after contracts were signed, regardless of the actual profits that the deal would generate. (Segal, T., 2018) Enron was not the only corporation who uses this practice of accounting for many of them believed that using it was very tempting way to commit accounting fraud especially when the market price cannot be identified objectively because there was no real market value available. Jeffrey Skilling was the one who persuaded Enron to trade natural gas, wherein buyers and sellers of natural gas would transact with Enron being the mediator and will arrange the contracts.
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Through his idea, he made Enron immediately rise and made the company as one of the major gas trading corporation during that time. With a good reputation in the said industry, its national reputation created rapid expansions to domestic and international business. Under his leadership, Enron had dominated the market of natural gas and the company started to generate huge profits on its trades. With the continuous growth of revenues and earnings, Skilling was appointed as the Chief Financing Officer of Enron. Considering the stable condition of the company, Skilling recruited Andrew Fastow who said to be the brightest among his recruits and quickly rose through the ranks and soon became the Chief Financial Officer.
He was in charge for overseeing the investing activities of the company. He continued to hire recruits and later established a committee whom will rank the employees’ performance and fire the bottom fifteen percent. This unethical process with the nickname “rank and yank” was known worldwide and was done annually in Enron (Enron Fast Facts, 2018). During the 2000s, Enron was still able to deceive people that it sustains its condition even though they have encountered lots of troubles including the issue during “dot com era”, rise of market competitions, the collapsing of their water and business service and such. Enron was even named as the “most admired” corporation for being very innovative by Fortune magazine.
However, an investor and a reporter questioned the irregularities of the company’s financial statement. Skilling became agitated and responded to the questions explicitly by calling the investor an “asshole” and the reporter’s action as “unethical”. Jeffrey Skilling knowing that Enron is not in the good status anymore, before long, stepped down and departed Enron. Skilling’s behavior made the investors cease to engage with Enron. In 2001, Enron declared bankruptcy which made the mighty company in tatters. Arthur Andersen ended its partnership with Enron. With Andersen gone, the Enron’s accountants issue a series of restatements that erase majority of the company’s profits.
Acknowledging that Enron posted losses instead of profits, its stock value became weak. Sherron Watkins, the vice president, had notice that the values in their financial statements does not add up and smelled that something was going wrong. She advised and warned Ken Lay about the issue and that it could be the start of the actual collapse of Enron but Lay did not listen and ignored her. (Enron Fast Facts, 2018). As a result, some of the analysts had become suspicious of it too but of course Enron and could not managed to cover up their real status through cooked books or the fraudulent financial statements anymore. After the criminal investigation had begun, Andrew Fastow, the Chief Financial Officer was convicted in federal court of obstruction of justice. Many of the executives of Enron were indicted on a variety of charges and were later sentenced to prison including Lay and Skilling. (Bondarenko, 2018)The scandal resulted a profound damage for thousands of people who had lost their jobs, pensions, investments etc.
It was then that new regulations and legislations were designed to increase the accuracy of financial reporting.