Who was Enron?
History of Enron is traced in the course of 2(two) natural gas companies:
1- InterNorth, 2- Houston Natural Gas (HNG)
InterNorth
InterNorth (a gas pipeline) was started on 1930 in Nebraska and was known as Northern Natural Gas ,( a name that was kept until 1980 ,then changed to InterNorth) .The Company doubled its capacity by 1950 and in 1960 launched processing and transportation of natural gas liquids. In 1983 Belco Petroleum was purchased by InterNorth remarkably extending the size of the business, furthermore during the same period InterNorth was very active assisting the construction of Northern Border Pipeline which lnked Canadian fields with Us markets ( Hampton, Hoovers D & B) .
Houston Natural Gas (HNG)
Houston Natural Gas was a gas distributor, created in 1925 in south Texas, which start developing oil and gas properties in 1953. After purchasing Houston pipeline Company ( in 1956) and Valley Gas Production (in 1963) Houston Natural Gas Company decided to:
a) Sell its original distribution properties to Entex (in 1976),
b) Extend, by adding Transwestern Pipeline of California and Florida Gas Transmission,
c) Refocus on natural gas (Hampton, Hoovers D & B) .
Enron
The name Enron was first utilized in 1985 after InterNorth acquired Houston Natural Gas (HNG), creating the largest natural gas pipeline system of USA, which relocated its headquarters from Omaha to Houston. While rapidly growing within US, Enron was simultaneously expending it business globally by:
1) Acquiring companies in Portland, Argentina Porto Rico,UK
2) Controlling Brazilian utility,
3) Power trading in Australia (Hampton, Hoovers D & B).
In 2001 Enron restated its net income from 1997 through the first half of 2001 to reflect an overall 20% reduction and agreed to be purchased by a smaller rival (Dynegy) for $22 billion. However the deal was canceled by Dynegy as Enron‘s credit rating and stock price were continuously plummeting leaving Enron with no other options but filing for Chapter 11 bankruptcy protection. Enron’s financial chaos and collapse were also followed by legal consequences, since in 2002 the US justice Department launched a criminal investigation into Enron’s downfall and congressional committees began their own inquest (Hampton, Hoovers D & B).
As controversy over Enron’s collapse was mounting Enron made the decision to fire it auditor (Arthr Anderson LLP) after it was revealed that its employees had destroyed audit-related documents. In addition:
1) More than 80% of corporate employees in Houston were laid off or resigned
2) About 40% of the company’s global employees lost their jobs
3) Many other jobs in low level were vanished during asset sales process.
Amazingly the company regrouped three of its prize assets into a new corporate entity. The court finally approved company’s bankruptcy plan in July 2004 and according to the plan Enron was ordered to distribute any cash obtained from asset sales and /or shares (which were lastly concluded in 2004), to its creditors ( Hampton, Hoovers D & B) .
Enron Chronology
1985. - Houston Natural Gas merges with InterNorth to form Enron (USA Today, 2006).
1989. - Enron starts trading natural gas commodities (USA Today, 2006).
1995. - Enron considers Europe one of the company's prime growth markets
(Chron / Business, 2002)
2000. - Enron was ranked the sixth-largest energy company in the world, based on market
capitalization (Chron/ Business, 2002).
Aug. 2000. - Enron shares reach high of $90 (USA Today, 2006).
Oct. 2001. - Enron announces $638 million in third-quarter losses and a $1.2 billion reduction in
shareholder’s equity (USA Today, 2006).
Nov. 2001. - Enron’s stock plunges below $1 as Dynegy aborts its plan (USA Today, 2006).
Dec. 2001. - Enron goes bankrupt, thousands of workers laid off (USA Today, 2006).
Jan. 2002. - Justice Department begins a criminal investigation of Enron (USA Today, 2006).
July 2004. - U.S. Bankruptcy judge confirms Enron’s reorganization plan: Most creditors will
receive 1/5 of $63 million they were owned (USA Today, 2006).
What went wrong with Enron and why?
Enron is a case of sophisticated fraud that was committed over an extended period of time
The problems with Enron were very diverse, but what really stand out was:
1- Enron and its senior executives’ greed.
Enron’s senior executives got used to gigantic compensation incentives package to the point
that they were willing to intentionally manipulate the accounting, in order to maintain their
compensations (Giroux, 2008)
2- Enron’s senior executives’ arrogance (they believed they will get away with it).
3-The existence of deregulation (allowed Enron to hide the loses and manipulate balance
sheets) .Enron’s distinction was internationalization of market mechanism, and this opportunity was result of the deregulation subsistence (Kobrak, 2009).
4- Enron utilized sophisticated fraud, based on complex financial instruments.
5- Third party assistance on committing the fraud and hiding it (Enron’s auditor, Arthur
Anderson played an enormous role on Enron’s scandal) (Giroux, 2008).
6- Lack of ethical standards by everyone involved.
In 1987, Arthur Anderson and Law firm Vinson and Elkins suggested their interests in profit
over ethics and willingly concealed the bad news. Investment bankers would structure any
financial deal anywhere in the world to receive big fees.
Financial analysts were persistently evaluating Enron as a strong buy, no matter regardless of the economic realty. Also individuals who raised doubts 9inside or outside of the corporation) were fired (Giroux, 2008).
7- Political system used by some politicians.
Some politicians constantly favored Enron, thanks to massive contributions to their campaigns
and immense lobbying (Giroux, 2008).
Accounting fraud caused the seventh largest corporation to fall victim of the white collar crime. What happen with Enron was due to accounting practice in violation of Securities and Exchange Commission (SEC) regulations. From its founding to its end, Enron was constantly expending and the more it grew, the more it diversified. The accounting Fraud at Enron was complex and that’s exactly why resulted on Enron’s collapse. Enron’s annual reports to
shareholders stated very high earnings, but kept nearly all its debt off the annual reports by stating in a footnote that a special purpose entity covered all its debts, but that special entity did not have the assets to cover the debt and was headed by individuals connected to the corporation that covered the debt [that was a violation of (SEC) regulations]. Furthermore, investors in the special purpose entity did not have sufficient capital at risk [also violation of (SEC) regulations]. It would have been wiser for Enron to utilize its high income for paying its debts, but then shareholders would have been unhappy with their dividends and stock prices would have advanced with a slower past. Consequently Enron’s debts increased to $1.2 billion (while there were no assets available) forcing Enron to file for Bankruptcy (Siegfried, 2005).
The role of Arthur Andersen’s on Enron scandal
Once upon a time Arthur Andersen Co (founded in 1913 by Arthur Andersen and Clarence Delany) was the leader in the accounting profession.
The success of the organization was related to two important facts:
a) The strict ethical values which served as foundation of Andersen & Co.
b) The way that these strict values influenced the four management functions in
Andersen & Co. (Dyck, 2010, p.164).
However on June 16 2002, the accounting firm of Arthur Andersen was found guilty of a felony charge for obstructing justice in the Securities and Exchange Commission (SEC) investigation of the Enron Corporation. Andersen employees (ordered by David Duncan, the lead auditor for Enron account) destroyed more than a ton of Enron’s documents and deleted over 30,000 e-mails and computer files, which were apparently confidential to the account.
For 17 days the Andersen‘s Houston office eliminated Enron related documentation, until November 9, 2001, when the SEC issued a subpoena for Anderson to cooperate with the investigators (Rouse, 2005). Since 1987 Arthur Andersen had knowledge of Enron’s wrongdoings, but Andersen advocates its interests in profits over ethics and willingly hided the information from the shareholders and the public. Even though Enron’s editor, Arthur Andersen investigated and discovered several unusual transaction and fraudulent acts they refused to make statements or make public comments. (Giroux, 2008).If Andersen would have disclose its findings on Enron’s impropriety to the Securities and Exchange Commission (SEC) than Enron would have faced several sanctions and would have been required to restate its earnings (Giroux, 2008)
Legislative consequences, the Sarbanes-Oxley Act of 2002.
Enron’s financial collapse had substantial ramification throughout the financial investment field, tax compliance professions and the accounting profession. An Intense Congressional examination resulted in a new era of transparency, strict standards (as provided in Sarbanes – Oxley) and substation penalties for failure to comply (Bottiglieri, 2009). In immediate response on July 30, 2002, President Bush signed into law the Public Company Accounting Reform and Investor Protection Act of 2002. Chief sponsors of this Act were Senator Paul Sarbanes (D-MD) and Representative Michael G. Oxley (R-OH). The short title of this legislation was Sarbanes – Oxley Act of 2002 and is considered the most significant change to federal securities legislation in the country in over 50 years (Encyclopedia of small business, 2007).
The Sarbanes – Oxley Act’s purpose is: 1- To protect investors 2-Enforce the prohibition on audit firms from providing supplementary services to their clients 3- Govern the activities of publicly traded companies. This bill increases supervision of the accountants that audit public companies, strengthened corporate responsibility, increased transparency of corporate financial statements, also increased protections for employees’ access to their retirement accounts (Bottiglieri, 2009)
Titles of Sarbanes – Oxley Act
The Sarbanes – Oxley Act has 11 titles, which are divided into 2(two) sections. Title I – Public accounting Oversight Board Title II – Auditor Independence Title III – Corporate Responsibility Title IV – Enhanced Financial disclosures Title V – Analyst Conflicts of Interest Title VI and VII – Sec Role and Studies
Title VIII – Corporate and Criminal Fraud accountability
Title IX – White Collar Crime Penalty Enhancements
Title X – Corporate Tax returns
Title XI – Corporate fraud and accountability (Encyclopedia of small business, 2007).
13 Major DOS and DON’TS of Sarbanes – Oxley Act
1-Audit firms shall be registered. They must do audits only. If they do other work for a company, they must not do audits for that company (Encyclopedia of small business, 2007).
2-The Company’s audit committee members shall be independent board members.
3-Stock analysts shall be subject to conflict of interest rules.
4-Companies must disclose all pertinent information that may in any way affect company finances, whether on or off the balance sheet.
5-Companies shall not lend money to executive officers or directors.
6-CEO and CFO compensation, bonuses, and profit sharing shall be reported to the public.
7-Insider trades must be made public immediately.
8-Insiders shall not trade company stock during periods of pension fund blackouts.
9-Financial reports must be certified by the CEO and CFO.
10-Financial reports must be accompanied by a special report on internal controls and an assessment on how well they work.
11-Federal income tax filings must be signed by the CEO.
12-Whistleblowers shall be protected.
13-Violators shall pay higher fines and spend longer times in prison than heretofore. (Encyclopedia of small business, 2007).
The consequences for Enron and Arthur Anderson & Co
1- Enron collapsed and filed chapter 11 bankruptcy protection.
2- 15 former executives of Enron were found guilty and punished by law.
3- The conviction of the Enron’s founder Ken Lay was dismissed because of his death.
4-Former CEO Jeff Skilling was sentenced to 24 years in prison.
5-Former Chief financial officer Andrew Fastow was sentenced to 6 year in prison.
6- Former Chief accounting officer Richard Causey was sentenced to 5and ½ years in prison.
7-Michael Cooper former executive was sentenced to 3 and ½ years in prison.
8-Former CEO, Kenneth Rice was sentenced to 27 months in prison and $15 million fine.
9-Former Enron Breadboard COO Kevin Hannon was sentenced to 2 years in prison and fined
$125,000.
10- Mark Koenig former investor’s relations chief was sentenced to 18 months in prison.
11- Former Breadboard CEO Joe Hirko was sentenced to 16 months in prison.
12- Vice president of finance Kevin Howard received 1 year probation (9 moths of that under
home confinement) and $25,000 fine (Cellmates, 2007)
Consequences for Arthur Anderson & Co1- Auditor Arthur Andersen LLP was sentenced to 5 years probation and $500,000 fine.
2- Andersen firm lost its right to audit Public companies
3- Andersen (once the largest accounting firm with 85,000 employees) within a year was reduced
to a small company with less than 300 employees (Rouse, 2005).
4- Andersen lost almost all its clients and business
5- Andersen firm was forced (from the situation created) sell all its assets to it competitors.
6- Lost its reputation (Flower, 2002).
Could another Enron be around the corner? (Conclusion)
Corporate fraud and bankruptcies have always been and will continue to be part of the business environment. As we all are aware of, business failures and frauds are witnessed every decade and not surprisingly the major ones accrue during recession and/or problematic situations with the economy. Normally the reason behind frauds, scandals and scams are greed and arrogance. After Enron’s collapse we observe a considerable and effective oversight and regulations been enforced. Furthermore, the less numbers of accounting – related scandals are suggesting that the post Sarbanes –Oxley oversight and regulations are working reasonably well Giroux, 2008).But despite the reforms provided by Sarbanes-Oxley, scandals continue to occur (not on the scale that they were witnessed in previous decades though). For instance, the multi –billion dollars scandal of Madoff’ or Sanford Financial group fraud (with its billionaire Allen Sanford) conforms the above statement and reinforces the fact that other Enrons could possibly be around the corner which means oversight and regulations are not only necessary and need to continuously be enforced ,but also it is obligatory to evaluate the situations constantly and create new rules and regulations to prevent the frauds and scams before they transpire (Bottiglieri,2009)
.
References
Bottiglieri, W. & Reville, P. & Grunewald, D. ( 2009). The Enron Collapse – The Aftershocks.
Journal of Leadership, Accountability and Ethics. Lighthouse Point: 1-9
Dyck, B. & Neubert, M. (2010). Management current practices and new directions.
Boston:Houhghton Mifflin Harcourt Publishing Co.
Flower, T. & Flood, M. (2002). Arthur Andersen gets the maximum sentence. Chron.
Retrieved December 6, 2009 from:
Giroux, G. (2008). What went wrong with? Accounting fraud and lessons from the recent
scandals. Social research. New York: 75, 1205-1238.
Hampton, S. (n.d). History of Enron. Hoovers D & B Company / Proquest
(n.d).(2002). Enron timeline. Chron/Business. Retrieved November 10, 2009 from:
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Retreived November 9,2009 from: LIRN / Computer database via Gale .
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LIRN / Gale Virtual References Library. Gale Document Number: GALE|CX3438900038
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