Lies, Fraud and Obstruction: A Look Back at Enron's Downfall

Voleo  |

History

Enron was an energy, commodities, and services company based in Houston, Texas. It was one of the top energy companies during its time. The company was founded after Houston Natural Gas and InterNorth merged together. Enron grew to employ approximately 20,000 staff and claimed to have revenues of $111 billion at its peak by 2000.

Another company involved in the scandal was Arthur Andersen, an accounting firm competing with the likes of PwC, Deloitte and KPMG.

Financial Accounting Scandal

The first analyst to question the validity of Enron’s financials was Daniel Scotto, which encouraged investors to sell Enron’s stocks. Enron used accounting practices to hide its losses and report non-existing profits. Andrew Fastow, Chief Financial Officer, created the scheme to make the company appear profitable when in reality many of its subsidiaries were struggling. The scheme was not sustainable and by April 2001, the fraud started to unravel when analysts questioned Enron’s numbers.

The accounting firm, Arthur Andersen, that was supposed to ensure Enron’s accounting methods were proper, did not fulfill its professional responsibilities in preventing or reporting the fraud. As a result, Arthur Andersen was convicted of obstruction of justice for shredding documents related to audits on Enron.

Aftermath

Enron was found to have losses of $591 million and debt totaling $628 million. The stock prices steadily declined from its highest value of $90 in 2000 to less than one dollar by the time the scandal was exposed. During all this time, senior management kept selling their shares while encouraging other investors to continue to buy. They were convicted of insider trading. In December 2001, the company declared bankruptcy.

Arthur Andersen’s reputation was also heavily damaged, despite having their conviction reversed. To this day, it is still dealing with civil suits regarding the scandal. John Cunningham, former director, coined the phrase: “We have all been Enron-ed.”

Outcomes

Shareholders lost more than $60 billion. Enron’s rise and fall is a reminder of what can happen when a company and its management are obsessed with profits with no ethical considerations.

The scandal led to the passage of the Sarbanes-Oxley Act which expanded penalties for accounting fraud and instructed accounting firms to remain independent of their clients.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Comments

Watchlist

Symbol Last Price Change % Change
AAPL

     
AMZN

     
HD

     
JPM

     
IBM

     

Blockchain in Digital Identity - Discussion at the EU Parliament

From the recent Blockchain For Europe Summit in Brussels: Panel on Digital Identity