Enron Case Study

Enron started about 18 years ago in July of 1985. Huston Natural Gas merged with InterNorth, a natural gas company. After their merge they decided to come up with a new name, Enron. Enron grew in that 18-year span to be one of America's largest companies. A man named Kenneth Lay who was an energy economist became the CEO of Enron. He was an optimistic man and was very eager to do things a new way. He built Enron into an enormous corporation and in just 9 years Enron became the largest marketer of electricity in the United States. Just 6 years after that, in the summer of 2000 the stock was at a tremendous all time high and sold for more than 80 dollars a share. Enron was doing great and everything you could see was perfect, but that was the problem, it was what you couldn't see that was about to get Enron to the record books.

Enron was in trouble because of something that almost every major corporation during this time was guilty of. They inflated their profits. Things weren't looking good for them at the end of the 2001-year, so they made a common move and they restated their profits for the past four years. If this had worked to their like they could have gotten away with hiding millions of dollars in debt. That completely admitted that they had inflated their profits by hiding debt in confusing partner agreements. Enron could not deal with their debt so they did the only thing that was left to do, they filed for chapter 11 bankruptcy. This went down as one of the largest companies to file for bankruptcy in the history of the United States. In just three months their share price dropped from $95 to below $1.

No recent events caused any of their troubles to surface. They were having a difficult time so they decided to restate their funds for the past four years. When they did this, it showed huge differences of money from what they had posted and what they restated it as. In fact so much that they were eventually forced to file for bankruptcy. They brought the trouble on themselves. If someone didn't become suspicious after Skilling quit, then they probably could have gotten away with it for a few more years. But I do believe that they would have been caught eventually.

Many companies were and still are experiencing what Enron went through. Many companies are looked at differently now because of what happened in the Enron scandal. Tyco is one; they denied that they bolstered their earning growth by taking excessive write-downs for merger costs and using them later. General Electric says they don't smooth quarterly profits by carefully matching one time gains and losses and by boosting income from its pension plan. AMR is another, the parent of American, like many airlines, owes billions of dollars in long-term lease agreements that do not show up as debt on the balance sheet but for which it is liable. IBM says it is justified in raising estimates of returns to its pension fund - a move that instantly boosts revenues. Even Coca-Cola shifted billions of dollars of debt to coke bottlers in which it has large ownership stakes, and says it is in compliance with accounting rules. Those are just a few but, there are many more to come, and I'm sure the list isn't done growing yet.

Enron's public accounting firm was Arthur Andersen. They are one of the biggest accounting firms in America. They have 85.000 employees in 84 different countries. Their job was simply to audit financial statements, but they didn't do just that. Arthur Andersen was with Enron for all 16 years. According to Enron's financial statements Andersen earned $25 million for the auditing work that they did and $27 million for the non-audit fees in 2000 alone. But, that is from Enron's financial statement and I guess we can't really rely on that. After Enron filed for bankruptcy, the SEC questioned Andersen CEO Joseph Berardino. They questioned Berardino on his firms auditing and Enron's overstated profits. He told the SEC that Enron's audit statements were misleading. When Andersen's Huston partner