I.

Background

a. Name of the Company

Enron Corporation was a US-based company that provided energy,

commodities, and services. It was founded by a man named Kenneth Lay in the

merger of two; the merged company, HNG InterNorth, was renamed Enron in 1986.

b. Location of the Company

The company was located in Houston, Texas, in the United States of America.

However, they also had, at the same time, some overseas assets.

c. Value of the Company if Applicable

At its peak, before its bankruptcy, Enron was once worth 70 billion US dollars,

with shares being 90 dollars each.

d. Story/Evolution of the Scandal

Enron was formed in 1985 by Kenneth Lay in the merger of Houston Natural Gas

and InterNorth. By the time Jeffrey Skilling became the company's chief operating

officer, Enron had transformed itself into an energy trader and supplier. Under

Skilling's leadership, Enron was able to generate huge profits on its trades and, as a

result, became a leader in the market for natural-gas contracts. One of Skilling's

contributions was the transition of Enron's accounting from a traditional historical

cost accounting method to mark-to-market (MTM) accounting. MTM measures the

fair value of an asset or liability that can change over time.

As Enron faced increased competition and profits decreased rapidly; however, they
used MTM to hide financial losses and other operations of the company. This

allowed Enron to write unrealized future gains from trading contracts into current

income statements. Moreover, if the revenue from an asset were less than the

projected amount, the company would transfer the asset to special purpose entities

(SPEs) owned by Enron's chief financial officer Andrew Fastow, abusing the practice

by making the losses go unreported and appear less severe than they really were.

This type of accounting allowed Enron to hide losses and make the company look

profitable.

Besides Lay and Skilling, another major player in the scandal was Enron's

accounting firm, Arthur Andersen, one of the largest and most reputable accounting

firms in the United States. Despite this, they ignored, failed to report, and played a

part in the questionable accounting and auditing practices surrounding the Enron

scandal. Moreover, the accounting firm shredded documents and evidence related to

Enron audits.

By 2001, analysts began to examine Enron's publicly released financial statements.

Around this time, Enron announced its first quarterly loss, which caught the attention

of the SEC and made them begin an investigation on transactions between Enron

and Fastow's SPEs. As the details of the accounting fraud were discovered, the

company started to collapse. Fastow was fired from the company. Enron had losses

of $591 million and also $690 million in debt. Enron filed for bankruptcy on

December 2, 2001.
e. Main Players in the Story

The main players of the story are the following:

Ø Kenneth Lay - the business's founder, chairman, and CEO, was the primary culprit

in the Enron fraud scheme. He persuaded stockholders to invest in the company by

making false public assertions about the profitability of the company. When he saw

that the company was going out of business, he sold his stock while simultaneously

encouraging his staff to make additional stock purchases. While Enron's stock was

falling rapidly in the days leading up to the company's bankruptcy, the company's top

executives were able to sell $1 billion worth of shares. In contrast, the stocks of

Enron's employees were frozen and thereby rendered unsellable.

Ø Jeffrey Skilling - who later became the Chief Operating Officer, employed a

method of accounting called mark to market (MTM), which enabled Enron to register

possible future profits regardless of how much.

Ø Andy Fastow, - The Chief Financial Officer of Enron, kept the company's stock

price unnaturally high by hiding the company's debts and losses through the use of

structured financing. This allowed the

Ø Louis Borget - Enron Oil's president

Ø Thomas Mastroeni – Enron Oil's treasurer

Ø Lou Pai - the Chief Executive Officer of Enron Energy Services He utilized the

company jet for his own personal travel and charged his own expenses to the Enron

Ø Tim Belden - who oversaw the trading desk for Enron's west coast operations,

took advantage of the state of California's deregulated energy market. By causing

power outages across the state of California, he would manufacture artificial

electricity shortages, which, according to the laws of supply and demand, would lead

to an increase in the cost of electricity.

In addition to the above mentioned, a number of different financial institutions,

including Arthur Anderson, a firm specializing in accounting, Vinson & Elkins, a firm

specializing in law, and others, were also involved.

II.Analysis – Using the Applicable Financial Analysis and How could the scandal be

prevented using the FS analysis?

In 1990, Jefferey Skilling joined the company and introduced the MTM

technique. This technique was innovative then; however, it used fair value instead of

book value. They use projected earnings more than actual earnings, and when there

are losses, they put the losses on an offshore company. To prevent this, we suggest

that Enron should not use the MTM technique and give reasons to be sure.

In the 90s, many companies due to being too aggressive and fooling many investors

into investing, thereby vastly inflating the worth of the company way more than its

actual worth. Of course, we would suggest that Enron take investors without

overinflation. The need for investors was that Enron also had competitors. Instead of

vastly overinflating its actual worth, Enron should rather market itself as innovative or

something trendy for the 90s. It is not illegal to market themselves as innovative or

something worth investing in. Just don't take too many investments, more than the

company can handle.

If the company desperately needs the funds, it could instead apply for a loan from a

bank. At the same time, Enron was too aggressive at mergers and other business

dealings. Instead of the aggressive approach, use the moderate one and market

themselves as transparent as well as reputable.

Another accounting technique Enron used that allowed inflating revenues further was

the "merchant model," in which the entire value of each of its trades is reported as

revenue and is an aggressive accounting interpretation compared to the

conventional "agent model" used by other trading companies wherein only the

trading or brokerage fee would be reported by as revenue.

Lastly, it is recommended that the accounting firm of a business such as Enron

should perform their duties up to the standards and uphold their ethics in auditing so

as to detect red flags in the financial statements and fraudulent practices, as well as

alert the public and report to the proper authorities when needed.

III Recommendations to prevent the scandal from happening

After it was discovered that the firm's values and norms were being altered by

the organizational structure that had been implemented, the corporation should have

been forced to abandon the structure and find a new one to use instead. The

workers are needed to be motivated to collaborate as a group, and the established

objectives ought to have been comprehensible and attainable. A third-party

company, rather than the newly established internal authority, should have been in
charge of conducting the review of the staff members. The culture of independence

and "keeping an eye out for one another "would not have been sufficient if this had

been done, as the reviews would have been honest as a result. Additionally, the new

members of management should have been granted the autonomy and ability to

conduct transactions on behalf of the company with the oversight of senior

management. It is always the responsibility of senior management to mentor

younger managers and assists them in adjusting to their new roles within the

organization.

The management team of the corporation should have been more outspoken

regarding the state of the company's finances. The management of the company

ought to have been equipped with mechanisms that would have required it to report

and make available to shareholders the report on the balance sheet. It is important

for businesses to maintain stringent oversight of their executive ranks in order to

prevent problems similar to those that plagued Enron. This is due to the possibility

that, if given the opportunity to run the firm without any oversight, they will collide

with one another and bring the corporation to its knees, just as Enron did.
IV References

Bondarenko, P. (2022, August 13). Enron scandal. Encyclopedia Britannica.

https://www.britannica.com/event/Enron-scandal

Dharan, B. G., & Bufkins, W. R. (2008). Red flags in Enron's reporting of revenues &

key financial measures. Available at SSRN 1172222.

ENRON | English Theatre Study Guides. (n.d.). NAC.

https://nac-cna.ca/en/englishtheatre/studyguide/enron/background

Segal, T. (2021, November 27). Investopedia: Enron Scandal The Fall of a Wall

Street Darling https://www.investopedia.com/updates/enron-scandal-

summary/