NUST Business School

FIN-329 Behavioral Finance

Assignment# 2

Submitted to:
Sir Nabeel Safdar
Submitted by:
Mahrukh Chohan

Bs. AcF 2K16-A

Date: April 4th, 2019.

 Enron Scandal
The Enron scandal, publicized in October of 2001, eventually led to the bankruptcy of
the Enron Corporation, an American energy company and the dissolution of Arthur
Andersen, which was one of the five largest audit and accountancy partnerships in the world.
In addition to being the largest bankruptcy reorganization in American history at that time,
Enron was cited as the biggest audit failure.
Enron Corporation was a US based Energy, commodities and services company, which was
formed by the Merger of 2 smaller energy companies in 1985. It was also involved in the
trading of energy-based commodities apart from energy provision. Before its bankruptcy on
December 3, 2001, Enron employed approximately 29,000 staff and was a
major electricity, natural gas, communications and pulp and paper company, with claimed
revenues of nearly $101 billion during 2000. Fortune named Enron "America's Most
Innovative Company" for six consecutive years. Introducing revolutionary ideas amongst the
deregulation of energy companies in the early 80’s caused Enron to soar to unseen heights as
its sales increased by fifty seven percent along with a share price of almost 90 dollars per
share due to the high-volume trading of commodities. However, in the late 1990’s, analysts
had difficulty understanding the financial statements since the CFO, Andrew Fastow had
taken advantage of loopholes to hide the real position of the company.
The CFO had run a habit of offloading debt obligations into offshore partnership accounts as
well as reporting incorrect trading revenues by showing all transactions in which it acted as a
middleman to two trading parties as revenue of the company. It also kept on recording
revenues on contracts it used to transfer back and forth amongst itself. Problems became
apparent when the new CEO resigned suddenly, causing the old CEO, who was now acting as
chairman to resume the position of the CEO. On October 2001, Enron reported a major loss
of about 600 million dollars for the quarter which led it to take a 1.2-billion-dollar reduction
in shareholder equity. Another issue that came up was Enron’s external auditing firm, Arthur
Anderson LLP hastily shred the audit documents of Enron.
Enron shareholders filed a $40 billion lawsuit after the company's stock price, which
achieved a high of US$90.75 per share in mid-2000, plummeted to less than $1 by the end of
November 2001.[2] The U.S. Securities and Exchange Commission (SEC) began an
investigation and at the end of October 2001, this had evolved into a full-blown investigation
with the CFO being forced out and the CEO trying to get the Commerce secretary to stop
Moody’s Investor Service from downgrading Enron’s bonds. Rival Houston
competitor Dynegy offered to purchase the company at a very low price but due to its
consistent irregularities and junk bond status, backed out.. The deal failed, and on December
2, 2001, Enron filed for bankruptcy. And like this, what was once in the top 10 US companies
at the time, was bankrupt. Its business was sold off to European companies, its employees
forced to sit through legal proceedings, with all their stock rewards now being worthless.
Enron's $63.4 billion in assets made it the largest corporate bankruptcy in U.S. history
until WorldCom's bankruptcy the next year.