Enron Case Study

The mission of the Financial Accounting Standards Board (FASB) is to establish and improve standards of financial accounting and reporting for the guidance and education of the public. Accounting standards assist analysts, potential investors, and corporate figures in determining and comparing the financial performance of a corporation. In recent years, a wave of accounting scandals broke, and a number of companies admitted to following fraudulent accounting procedures to defer attention from the company's financial performance. Enron Corporation, a natural gas provider, led the pack with dubious accounting practices, a series of off-balance sheet transactions, and a series of investigations that ultimately led to beginning of accounting reform.

The Beginning of the End of Enron

Enron Corporation, an energy and communications company was established in 1985 by the merger of Houston Natural Gas and InterNorth (enron.com). This merger catapulted Enron into becoming the largest natural-gas company in America. Fortune magazine named Enron "America's Most Innovative Company" in the years of 1996 to 2000. And in 2000, Enron was Fortune's "100 Best Companies to Work for in America." In 1986, Enron's CEO, Kenneth Lay, proclaimed that the vision of Enron is to become "the premiere natural-gas pipeline in North America" (enron.com). However, this vision of Enron would ultimately lead to the most scandalous fall of a business lead by corporate greed.

Enron continued its meteoric rise to becoming the world's leading Energy Company. In 1989, Enron formed a trading company, Gas Bank, run by CEO Jeffrey Skilling, and within a year Gas Bank became Enron Finance Corporation and Enron Gas Services. This corporate split was renamed in 1997 to Enron Capital & Trade Resources. This marked the beginning of a series of events that brought on the evolution of Enron into different markets. Originally Enron was the operator of gas pipeline, but soon diversified into other markets. In 1998, Enron created Azurix, a water company to enter into the water and waste waterforms market. In 1999, Enron stretched even further by creating Enron Broadband Services, which sells broadband internet services as a wholesale commodity. It appeared Enron had created a successful business through diverging itself into different areas of energy and service markets; Enron was trading pulp, paper, fertilizer, plastics and other commodities in addition to natural gas. By 1999, Enron had grown so much that it was involved in about a quarter of all energy deals. In late 2000 Enron reported earnings tripled since 1998; however, this event would mark the sudden fall of a great empire.

In May 2001, the energy market took a tumble as Californians struggled with the soaring prices of energy. California politicians blamed Enron for manipulating the energy market. In 2001, Californians were hit with skyrocketing energy prices, rolling blackouts, and one of the leading utility companies, Pacific Gas and Electric Company, filing for bankruptcy. Enron was hit with a change of CEO's; Lay resigned as CEO and Skilling replaced him (for only a short time). In October 2001, the energy crisis took a turn for the worst and marked the beginning of the end of Enron. On October 12, 2001, Enron disclosed a $638 million loss in its third quarter for the fiscal year. This monetary disclosure sparked an interest by the US Securities and Exchange Commission (SEC), who began to inquire about Enron's financial statements. Shortly after, Enron fired Andrew Fastow, the organization's CFO, due to what Enron calls losing investor confidence (Swartz). The termination of Fastow increased suspicion and the SEC announced Enron will undergo a formal investigation.

The once mighty energy company took a downward spiral into the largest bankruptcy in US history. Enron revised their financial statements; they restated earnings, which decreased by $586 million and a reduction of shareholders' equity of $1.2 million over the past four years (enron.com). Enron also announced $690 million in debt with an additional $6 billion due by next year. Dynergy, another energy business, attempted to rescue Enron by entering into an agreement to purchase stock and relieve debt, but later withdrew and terminated the agreement on November 28, 2001. On November 30, 2001 the stock closed at 26 cents per share and in an effort to relieve its debt obligations, Enron filed for Chapter 11 Bankruptcy on December 4, 2001 (schwab.com).

With the announcement of revised statements and changes to key executive positions, the stock price took a nose dive, causing the market to halt the sale of the stock as it reached an all time low. The graph below illustrates the rise and fall of Enron's stock prices:

Source: Encarta.com

Crucial moments show the downward trend of Enron's stock value:

Date Event Stock Price

8/23/2003 Enron Stock Reaches All Time High $90.00

8/14/2001 Jeff Skilling Resigns $42.93

10/12/2001 Enron Announces $638 Million Loss $35.81

10/24/2001 Andy Fastow Is Fired $16.41

10/31/2001 SEC Announces Formal Investigation $13.90

11/8/2001 Financial Statements Revised $8.41

11/19/2001 S&P Downgrades Enron Stock to "Junk Status" $9.06

11/28/2001 Dynergy Terminates Agreement to Assist Enron $0.61

11/29/2001 Stock Plummets $0.36

11/30/2001 Stock Reaches All Time Low $0.26

12/4/2001 Enron Files Chapter 11 Bankruptcy $0.87

Source: Investingguide.com

The fall of Enron's stock ultimately led to the removal of trading Enron on the stock market. The current value of Enron stock (ENE - renamed to ENRNQ) is 4 cents (investingguide.com). Enron also laid off nearly 4.000 employees, who lost nearly 90 percent of their 401(k) investments.

How it Came Tumbling Down

In order to keep Enron growing, it had to borrow money, which in turn made earnings less impressive. In order to keep investor confidence, Enron engaged in mark-to-market accounting and the most complex off-balance sheet accounting. Many executive members of Enron and auditors of Arther Anderson contributed to demise of Enron; however, Jeffrey Skilling,