Enron

Loren M.
Favia BSA 3
Enron: The Collapse of Corporate Integrity
The Enron scandal is one of the most notorious corporate fraud cases in American
history. It involved Enron Corporation, an energy, commodities, and services company
based in Houston, Texas, which became famous for its widespread corruption and
accounting fraud. The scandal came to light in 2001 and led to the bankruptcy of Enron,
once one of the largest companies in the U.S.
Key Points:
Fraudulent Accounting Practices: Enron used complex accounting techniques to hide

its debt and inflate profits. The company employed "mark-to-market" accounting,
allowing them to book potential future profits as current income, even if the deals had
not yet made any money.
Special Purpose Entities (SPEs): Enron created SPEs to keep debt off its balance
sheet. These entities were used to hide the company's financial losses and make its
financial condition appear healthier than it actually was.
Role of Arthur Andersen: The accounting firm Arthur Andersen, one of the largest in
the world at the time, was complicit in Enron’s fraud. They were responsible for auditing
Enron’s financial statements and failed to flag the irregularities. The firm was later found
guilty of obstruction of justice for shredding documents related to the Enron audit.
Whistleblower and Discovery: The scandal began to unravel when Enron executive
Sherron Watkins raised concerns about the company's accounting practices.
Investigations by the SEC and media outlets eventually exposed the depth of the fraud.
Bankruptcy and Aftermath: In December 2001, Enron filed for bankruptcy, marking
one of the largest bankruptcies in U.S. history at the time. Thousands of employees lost
their jobs and savings. The scandal also led to the dissolution of Arthur Andersen and
triggered major reforms in corporate governance and accounting practices, including the
Sarbanes-Oxley Act of 2002, which introduced stricter regulations to improve the
accuracy of financial reporting.
The Enron case serves as a cautionary tale about the consequences of corporate
greed, lack of transparency, and the importance of regulatory oversight in the financial
markets.
Key Events:
1985
 Formation of Enron: Enron Corporation is formed by the merger of Houston

Natural Gas and InterNorth. Kenneth Lay becomes CEO.
1989
 Entry into Energy Trading: Enron begins trading natural gas commodities,
marking the start of its transformation into a dominant energy trading company.
1990
 Creation of Enron Finance Corp: Jeffrey Skilling joins Enron and introduces the
"Gas Bank" idea, leading to the formation of Enron Finance Corp.
1996
 Rapid Expansion: Enron expands aggressively into new markets, including

electricity, broadband, and international energy trading.
1999
 Launch of EnronOnline: Enron launches its online trading platform,

EnronOnline, which quickly becomes the largest web-based energy trading
platform.
2000
 Peak of Success: Enron reports revenues of over $100 billion, and its stock
price reaches an all-time high of $90.75 per share.
August 2001
 Jeffrey Skilling Resigns: CEO Jeffrey Skilling unexpectedly resigns, citing
personal reasons. Kenneth Lay resumes the role of CEO.
 Sherron Watkins Whistleblower Letter: Enron Vice President Sherron Watkins

sends an anonymous letter to Kenneth Lay, warning of accounting irregularities
and potential scandal.
October 2001
 Third Quarter Losses: Enron announces a $618 million loss and a $1.2 billion
reduction in shareholder equity due to accounting errors.
 SEC Investigation: The U.S. Securities and Exchange Commission (SEC)

begins a formal investigation into Enron’s accounting practices.
November 2001
 Restatement of Earnings: Enron admits to overstating earnings by nearly $600

million since 1997. This leads to a collapse in investor confidence.
December 2, 2001
 Bankruptcy: Enron files for Chapter 11 bankruptcy protection, marking the

largest bankruptcy in U.S. history at that time.
January 2002
 Arthur Andersen Indicted: The U.S. Department of Justice indicts Arthur

Andersen, Enron’s accounting firm, for obstruction of justice for shredding Enron-
related documents.
June 2002
 Arthur Andersen Conviction: Arthur Andersen is found guilty of obstruction of

justice, leading to the dissolution of the firm.
July 2002
 Sarbanes-Oxley Act: In response to the Enron scandal, the U.S. Congress
passes the Sarbanes-Oxley Act, implementing stricter regulations on corporate
governance and financial reporting.
2004
 Enron Executives Charged: Former Enron executives, including Kenneth Lay,

Jeffrey Skilling, and Andrew Fastow, are charged with fraud, conspiracy, and
other crimes.
2006
 Convictions: Jeffrey Skilling is convicted on multiple counts of fraud and

conspiracy and sentenced to 24 years in prison. Kenneth Lay is convicted but
dies of a heart attack before sentencing.
2011
 Jeffrey Skilling Sentence Reduction: Skilling’s sentence is reduced to 14 years

following a Supreme Court ruling on issues related to his trial.
This timeline captures the rise and fall of Enron, highlighting the key events that led to
its eventual collapse and the broader impact on corporate governance and regulation.
Why it collapse?
1. Fiduciary Failure
- BOD failed to safeguard ENRON shareholders.
- BOD witnessed numerous indications of questionable practices by Enron
Management over several years but chose to ignore them.
2. High Risk Accounting
- From traditional historical value accounting to mark-to-market accounting.
- Recorded expected revenue as actual revenue.
3. Extensive Undisclosed off-the-books activity
- Window-dressing of financial statements.
- Creation of network companies that hide Enron’s losses through CFO,
Andrew Festow.
4. Excessive Compensation
- The BOD approved excessive compensation for company executives.
- The BOD failed to monitor the following:
 Cumulative cash drain by Enron’s 2000 annual bonus and
performance units plan
 Abuse of CEO Kenneth Lay of company-financed-multimillion
dollar, personal credit.
Significant Impacts:
- 4,500 employees losing their jobs.
- Investors losing some US60B within a few days.
- Obliteration of the company’s employees’ pension fund.
- Citizens’ loss of trust in the American Economic System.
- Losses in the financial market amounted to the worst stock value loss in
peaceful times.
- Passing of the Sarbanes-Oxley Act of 2002.
- Auditing firm Arthur Andersen lost its accreditation (the firm surrendered its
CPA liscence on August 31, 2002 and 85,000 employees lost their job)
Leadership Issues:
1. Failure of the BOD of their duties and responsibilities.
2. Agency problem.
3. Moral/ethical issues.
4. Conspiracy/connivance.

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Loren M.

Enron: The Collapse of Corporate Integrity

Fraudulent Accounting Practices: Enron used complex accounting techniques to hide

 Formation of Enron: Enron Corporation is formed by the merger of Houston

 Rapid Expansion: Enron expands aggressively into new markets, including

 Launch of EnronOnline: Enron launches its online trading platform,

 Sherron Watkins Whistleblower Letter: Enron Vice President Sherron Watkins

 SEC Investigation: The U.S. Securities and Exchange Commission (SEC)

 Restatement of Earnings: Enron admits to overstating earnings by nearly $600

 Bankruptcy: Enron files for Chapter 11 bankruptcy protection, marking the

 Arthur Andersen Indicted: The U.S. Department of Justice indicts Arthur

 Arthur Andersen Conviction: Arthur Andersen is found guilty of obstruction of

 Enron Executives Charged: Former Enron executives, including Kenneth Lay,

 Convictions: Jeffrey Skilling is convicted on multiple counts of fraud and

 Jeffrey Skilling Sentence Reduction: Skilling’s sentence is reduced to 14 years

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