The collapse that ruined lives revealed the dark side of business
The fall of Enron, then ranked seventh in the United States, affected thousands of employees and rocked Wall Street.
File photo of the entrance to the head office of Houston-based energy trader Enron at 1400 Smith in downtown Houston, Texas. AFP
On December 2, 2001, 20 years ago, energy giant Enron – then the seventh largest company in the United States – filed for bankruptcy, sending shock waves through the investor world, leading to historic layoffs and ravaging retirement savings accounts.
The collapse of Enron, which held more than $ 60 billion in assets, continues to generate interest and spark much debate about improving accounting standards and practices.
So what was all the hubbub about and why is it still being talked about today?
The Rise of Enron
In 1985, Enron was formed by the merger of Houston Natural Gas Company and Omaha-based InterNorth Incorporated. Kenneth Lay, who had previously been CEO of Houston Natural Gas, became CEO and chairman of Enron and quickly rebranded the company as an energy trader and supplier.
With the help of Jeffrey Skilling, Enron quickly dominated the natural gas contract market and the company began to generate huge profits on its transactions.
The skills have also changed the culture of the company and put more emphasis on aggressive trading. One of his brightest recruits was Andrew Fastow, who quickly rose through the ranks to become the chief financial officer of Enron. Fastow oversaw the financing of the company through investments in increasingly complex instruments.
The fall of Enron
However, as they say, what goes up must come down and the same happened to Enron. In the fall of 2000, Enron was starting to crumble under its own weight. Faced with increased competition in the energy business, the company’s profits began to decline rapidly.
In an attempt to hide the losses, the company created an array of related business entities and used accounting tricks to cover up massive business losses and large debts. They adopted the dubious tactic of “mark-to-market accounting”, in which the company recorded future unrealized gains from certain trading contracts in the current income statements, giving the illusion of higher current profits. .
These tactics eventually stopped working, and in October 2001, Enron revealed a huge quarterly loss of $ 638 million. Soon after, the Securities and Exchange Commission (SEC) began investigating the company’s transactions and deals.
Investigations revealed a horrific story of accounting fraud in which Arthur Andersen, then one of the world’s largest accounting firms, ultimately revealed that his employees destroyed Enron documents that could have been used to prosecute the business.
Enron went into a deep dive; The company’s shares, which had peaked at $ 90 per share in mid-2000, fell below $ 12 in early November 2001.
On November 7, 2001, his rival Dynegy voted to acquire the company at a very low price of around $ 8 billion in shares. However, days later, Dynegy ended his merger talks, dropping Enron shares to less than $ 1 a share. Finally, without an option, Enron filed how to file bankruptcy on December 2, 2001.
On the day they filed for bankruptcy, thousands of employees were ordered to pack their belongings and were given 30 minutes to leave the building.
Lawsuits and legislation
Arthur Andersen was one of the first victims of Enron’s notorious disappearance. In June 2002, the company was convicted of obstructing justice for shredding Enron’s financial documents in order to conceal them from the SEC. The conviction was later overturned on appeal; however, the company has been deeply dishonored by the scandal.
Enron founder and former CEO Kenneth has been convicted of six counts of fraud and conspiracy and four counts of bank fraud. Prior to conviction, he died of a heart attack in Colorado.
Former Enron star CFO Andrew Fastow has pleaded guilty to two counts of wire fraud and securities fraud for facilitating Enron’s corrupt business practices. He eventually made an agreement to cooperate with federal authorities and served more than five years in prison. He was released from prison in 2011.
Former Enron CEO Jeffrey Skilling was convicted of 19 of 28 counts of securities fraud and wire fraud and acquitted of nine others, including insider trading charges. He was sentenced to 24 years and 4 months in prison. In 2013, the United States Department of Justice struck a deal with Skilling, which saw him reduce his sentence by 10 years.
Lessons from Enron
The Enron collapse was a financial disaster for thousands of people, and its indirect impact injured millions more.
However, this also led to the passage of the Sarbanes-Oxley Act in 2002. This legislation imposed severe penalties for destroying, altering or fabricating financial records. The law also prohibited audit firms from carrying out concurrent consulting activities for the same clients.
With contributions from agencies