List of Partners vendors. Enron was an energy-trading and utility company based in Houston, Texas, that perpetrated one of the biggest accounting frauds in history. Enron's executives employed accounting practices that falsely inflated the company's revenues and, for a time, making it the seventh-largest corporation in the United States.
Once the fraud came to light, the company quickly unraveled, and it filed for Chapter 11 bankruptcy in December The former Wall Street darling quickly became a symbol of modern corporate crime. Enron was one of the first big-name accounting scandals, but it was soon followed by the uncovering of frauds at other companies such as WorldCom and Tyco International. Lay quickly rebranded Enron into an energy trader and supplier. Deregulation of the energy markets allowed companies to place bets on future prices, and Enron was poised to take advantage.
Skilling was then one of the youngest partners at McKinsey. Skilling joined Enron at an auspicious time. The era's minimal regulatory environment allowed Enron to flourish. At the end of the s, the dot-com bubble was in full swing, and the Nasdaq hit 5, Revolutionary internet stocks were being valued at preposterous levels and, consequently, most investors and regulators simply accepted spiking share prices as the new normal.
The company's collapse shook the financial markets and nearly crippled the energy industry. While high-level executives at the company concocted the fraudulent accounting schemes, financial and legal experts maintained that they would never have gotten away with it without outside assistance.
The Securities and Exchange Commission SEC , credit rating agencies and investment banks were all accused of having a role in enabling Enron's fraud. Initially, much of the finger-pointing was directed at the SEC, which the U. Senate found complicit for its systemic and catastrophic failure of oversight.
Meanwhile, the investment banks—through manipulation or outright deception—had helped Enron receive positive reports from stock analysts, which promoted its shares and brought billions of dollars of investment into the company.
It was a quid pro quo in which Enron paid the investment banks millions of dollars for their services in return for their backing.
Accounting scandals such as Enron's are sometimes difficult for analysts and investors to detect before they unravel. Make sure to do your due diligence and analyze company financial statements thoroughly in order to spot potential red flags. One of Skilling's key contributions to the scandal was to transition Enron's accounting from a traditional historical cost accounting method to mark-to-market MTM , for which the company received official SEC approval in Mark-to-market is an accounting practice that involves adjusting the value of an asset to reflect its value as determined by current market conditions.
The market value is hence determined based on what a company would expect to receive for the asset if it was sold at that point in time. Problems, however, can arise when the market-based measurement does not accurately reflect the underlying asset's true value.
Enron disclosed the SPVs' existence to the investing public—although it's certainly likely that few people understood them—it failed to adequately disclose the non-arm's-length deals between the company and the SPVs. Enron believed that their stock price would continue to appreciate—a belief similar to that embodied by Long-Term Capital Management , a large hedge fund, before its collapse in The values of the SPVs also fell, forcing Enron's guarantees to take effect.
Duncan, who oversaw Enron's accounts. As one of the five largest accounting firms in the United States at the time, Andersen had a reputation for high standards and quality risk management. However, despite Enron's poor accounting practices, Arthur Andersen offered its stamp of approval, signing off on the corporate reports for years.
By the summer of , Enron was in freefall. By Oct. This action caught the attention of the SEC. A few days later, Enron changed pension plan administrators, essentially forbidding employees from selling their shares for at least 30 days. Fastow was fired from the company that day. Also, the company restated earnings going back to By Dec.
Once Enron's Plan of Reorganization was approved by the U. The company's new sole mission was "to reorganize and liquidate certain of the operations and assets of the 'pre-bankruptcy' Enron for the benefit of creditors. Its last payout was in May Arthur Andersen was one of the first casualties of Enron's notorious demise. In June , the firm was found guilty of obstructing justice for shredding Enron's financial documents to conceal them from the SEC.
Several of Enron's executives were charged with conspiracy, insider trading, and securities fraud. Enron's founder and former CEO Kenneth Lay were convicted on six counts of fraud and conspiracy and four counts of bank fraud.
Prior to sentencing, he died of a heart attack in Colorado. Enron's former star CFO Andrew Fastow pled guilty to two counts of wire fraud and securities fraud for facilitating Enron's corrupt business practices. He ultimately cut a deal for cooperating with federal authorities and served more than five years in prison.
He was released from prison in In , Skilling was convicted of conspiracy, fraud, and insider trading. Enron's collapse and the financial havoc it wreaked on its shareholders and employees led to new regulations and legislation to promote the accuracy of financial reporting for publicly held companies.
In July , President George W. Bush signed into law the Sarbanes-Oxley Act. The act heightened the consequences for destroying, altering, or fabricating financial statements and for trying to defraud shareholders. As one researcher states, the Sarbanes-Oxley Act is a "mirror image of Enron: the company's perceived corporate governance failings are matched virtually point for point in the principal provisions of the act.
The Enron scandal resulted in other new compliance measures. Moreover, company boards of directors became more independent, monitoring the audit companies, and quickly replacing poor managers. These new measures are important mechanisms to spot and close loopholes that companies have used to avoid accountability.
At the time, Enron's collapse was the biggest corporate bankruptcy to ever hit the financial world since then, the failures of WorldCom, Lehman Brothers, and Washington Mutual have surpassed it. Increased regulation and oversight have been enacted to help prevent corporate scandals of Enron's magnitude. However, some companies are still reeling from the damage caused by Enron. Joint Committee on Taxation. Accessed Jan. Securities and Exchange Commission. December 17, October 9, September 30, June 24, March 4, August 30, May 31, March 1, November 16, August 31, History of Financial Crises.
September 29, Back To Top. Related Articles. The Volkswagen Short Squeeze September 29, Black Monday September 29, The Subprime Mortgage Crisis September 29, Charles Ponzi September 29, History of Financial Crises September 29, Panic of September 29, The Dotcom Bubble Burst September 29, Asian Financial Crisis of September 29, The Savings and Loan Crisis September 29, Is it apples and oranges, two different types of disaster?
I think the line between what happened at Enron and what happened in the global financial crisis is much blurrier than people might think. Both were examples of lots of people manipulating the rules and figuring out how to make money for themselves out of something that was pretty much destined to collapse and leave economic wreckage for a lot of others in their wake. And both were, arguably, quite legal. There was just a different appetite for prosecution in the wake of Enron.
I think one part of it is that what happened after Enron actively scared the Justice Department from prosecution because they did successfully prosecute Arthur Andersen, the big accounting firm. It went bankrupt; it destroyed tons of jobs. McLean: I worry that it was.
I think that justice is not equal. A lot of it depends on time and place and the appetite for going after things.
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