James Lorenz B.

Felizarte
FINACC - ASMPH
Dr. Maria Diana D. Dela Vega
January 14, 2021

Enron Corporation Analysis

Background
Enron Corporation was founded in July 1985 following a merger between Houston Natural Gas
Company and Omaha-based InterNorth Incorporated. Kenneth Lay, the former CEO of Houston
Natural Gas became the CEO and the chairman of Enron. Kenneth Lay’s career started with him
being in the forefront of the deregulation of Natural Gas. This removes government restrictions
then letting gas float into the public market. Kenneth was known to be close to the Bush family
and George Bush Sr. even helped secure billions of government subsidy for Enron.

Initially, the company was seen in good light and Lay having moral eptitude but the first test of
his morality was with the Valhalla Scandal back in 1987. In the scandal, two traders
misappropriated Enron’s money by betting on behalf of the company on the price of oil. The
traders manipulated earnings, destroyed daily trading records, and gambled beyond their limits.
Lay’s reaction to this was to not do anything and even as far as to support them by saying “please
keep making us millions.” By that time, the only part of the combined company that was making
money was the trading division. When the traders were finally losing money and were sentenced
into jail, Lay suddenly changed his narrative that he was never informed or didn’t know anything
about any trading and stated that he “can’t be responsible for the things I didn’t know.”

Now that he needs a new way of making money, he sought out for a new direction and a new
partner in his company – enter Jeffrey Skilling. Jeffrey, now the company’s new chief operating
officer, envisioned a new way Enron can deliver energy – by being a stock market for natural gas.
Enron transformed into a trader of energy derivative contracts and made energy into a tradeable
asset. In 1992, Enron dominated this space and became the biggest player in North America.
Jeffrey may have provided such a huge boost into Enron’s future, but he joined the team with one
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specific condition in mind: him to do mark-to-market accounting. Fortunately for them, the SEC
approved of this and this marked the start of the illusionary rise of this innovative company.

Skilling created an environment of competition, pitting employees to be better than the other. He
guaranteed that the lower 10% of the employees (graded based on his newly made Performance
Review Committee) will be fired without question. In this notion, traders became the most
aggressive and the strongest engine of the company in generating profits.

One under Skilling was Lou Pi. Lou Pi was Skilling’s “Intercontinental Ballistics Missile.” This
was an inside joke than in retrospect means that Lou Pi will do whatever it takes to generate profit
even by leaving a trail of dead bodies and sketchy dealings. Lou Pi had a infamous run in the
company but left Enron early with $250 million of earnings at hand. In surface, a single employee
leaving early with that much profit was unheard-of un unknown to the people and thanks to mark-
to-market accounting, Lou Pi left his division with a $1 billion loss that was covered up by the
company.

Deep diving into stock trading, the company started doing institutional stock plays. Enron top
executives did what stock traders call “pump and dump.” They “pumped” the price by hyping the
media and the employees and as it went higher, they “dumped” their stock shares at that peak.
Retail stock traders seeing it go down would do a cut loss and sell their shares as well especially
those who got it on the rise. Meanwhile, the executives, again, are just waiting at a specific price
range to buy back shares again – rinse and repeat. In addition to pump and dump, they also bet
into stock options, a platform where you may double or completely lose your money by just
predicting if a stock will go up or down after a specific period, that the stock would rise as they
also hype up the community about Enron.

During the 1990s, Enron’s stock price continued to rise rapidly giving the impression that the
company was profiting when, Enron was going south. Looking into a specific project in India, that
powerplant was a billion-dollar loss since India can’t pay for the electricity they plan to provide.
This could have signaled a red flag but with mark-to-market, the company reported in their books
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that the powerplant was successful and profitable. With that illusion, the executives justified giving
themselves bonuses.

Enron entered the California scene by merging with Portland General Electrical. This merger
prompted more to invest and put their savings and 401k in Enron stock. Stock analysts even
recommended buying more of the stock especially backed with alluring certified financial
statements. As the stock prices went up, the image of Enron being a large profitable corporation
became more and more of an illusion.

As the prices soar, they pushed to enter more and more commodities ranging from something meta
like bandwidth and as outrageous as weather. They even had a deal with blockbuster on a streaming
service (similar to Netflix now) and still booked the profits even when the project failed. Another
catalyst was when the dot com market bubble popped, wall street trader clung onto Enron being
the next big thing and with financial statements that support their beliefs, it is hard to say otherwise.

Enter Andrew Fastow the new CFO of the company at that time. As Enron grew bigger and bigger,
it became harder and harder to hide their losses and debts in the eyes of the SEC. Andrew’s role is
to cover for the losses of the company and continue to create the image that the company is
profitable. He did this using the technique called “structured financing.” During his time as CFO,
he only wanted one thing, to please the boss. What better to do to please the boss than hiding an
actual $30 billion debt and kept on helping the stock price go higher?

Andrew felt pressured now he is in a continuous cycle of attempting to raise the stock price quarter
by quarter. He created several companies to help make Enron debt disappear. One of which was
LJM the most ambitious creation he made where he got a $45 million profit for himself. LJM was
composed of 96 well known bankers aiming to only buy Enron assets even if those assets were
loans. This scheme helped him cook books and used Enron stock as collateral to the banks literally
betting on himself. The banks were somehow in it and profited though it. It was a type of
“synergistic corruption.” With so much layers, those who supposed to say no, did not say no. As
a result, Enron’s debt was nowhere to be found. The accounting firm, Arthur Anderson (one of the
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largest auditing and accounting companies in the world) did not question these profits and these
dealings as the financial statements were certified.

As the company grew and grew, Skilling became more unhinged. The hole just gets deeper and
deeper and at this point, Jeff already knew the situation. People are demanding for the government
to act but the law states that this was a federal issue. Guess who was the President during this time?
Bush. As the pressure became more apparent, Jeff Skilling suddenly resigns as CEO, trying to
avoid the implosion of the company. Kenneth Lay took over the CEO role afterwards. The day
after, a letter was sent to Kenneth Lay stating of the immense fraud and corruption in the company.
The wall street journal and the SEC went into investigation. Investors become nervous. Kenneth
Lay tried to minimize the panic by speaking to them directly unknown to others that the documents
of the company were being shredded just a few blocks away. On October 23, 2001, Arthur
Anderson accounting firm shredded 1 ton of papers from Enron. Finally, they caved. Enron
announced a third-quarter loss of $618 million and that it had overstated its earnings dating back
to 1997. The stock price of Enron, which they took decades of hyping up and thousands of
investors in, had plummeted to less than $1 per share from a record-high $90.75 per share. Before
implosion, the executives even pushed employees and investors to invest even more of the stock
while they were secretly selling theirs. This huge scandal created many events that followed: Cliff
Baxter, an Enron trader, killed himself after being summoned for a hearing, and Arthur Anderson,
one of America’s oldest accounting firms dissolved after being indicted with obstruction of justice.
Many of Enron’s executives including Lay, Skilling, and Fastow were later indicted on numerous
charges and sentenced to prison as the US Department of Justice opened a criminal investigation.
Kenneth Lay died in prison.

Insights

Accounting came from the term “accountability.” It was designed as a tool for transparency and
truth. Instead, this Enron scandal used accounting as the exact tool to hide their deceit. What they
lack can be summarized into the Ignatian values.

Finding God in All Things

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With their action, they did not pursue the divine rather pursued the devil. They
succumbed to their greed and later their guilt. None were prideful of what they
accomplished rather seen as something that burdens them greatly. One in particular is
Skilling reportedly being unhinged after finally knowing the actual status of the company
back in 2001. He was so ashamed that he quit the company in hopes of being absolved of
his actions. What he lacked was to do God’s work and to do good for many. This is not just
for him but apparent also to most of the crucial people in the story.

Cura Personalis

This lacked right at the start of the company. Kenneth Lay never really bothered to
take action on the Valhalla scandal as well as at the end when he recommended people to
buy Enron stock as he unloaded his. He lacked the care for others and focused on his and
his close’s well-being. He protected fellow executives by ensuring gains and protected the
mindset of investors by lying to them. He forgot the look into the person as a whole
especially on what their actions will do to these individuals after the company imploded.

Magis

This value was never been exercised at all. In magis, you are to choose from 2 good
choices on which of the two would be better serve the Lord. In every single transaction,
everything was riddled with evil and ambition – to cover, and profit while delaying the
inevitable. Their choices were to either bury or to ignore rather than to bring light or claim
accountability to their actions.

Men and Women for and with Others

The executives lived for themselves and profited for themselves. They never had a
profitable company nor anything holding them to the praise they were achieving at their
peak. They served only to please their greed and nothing more. Not for the company’s
vision, not for the employees benefit, not for the community they are providing their
services for.

Faith that Does Justice

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Lastly, this value should aim for seeking justice for all God’s creatures, especially
the poor and marginalized. This was not done for the masterminds were unable to take
responsible actions bound by moral and ethical values. In every action presented, they did
not provide justice to their constituents, investors, and stockholders.

Recommendations

Internally, ethics and morality play a huge part in this. The biggest recommendations for the
company are to review what they were made for and why they were doing it. The simple mission,
vision, and organizational restructuring with financial transparency and reporting could have been
done. They should have centered on values that the company highly cares about as well as
providing each employee a check and balance in which even the CEO and chairman is not immune
to.

Externally, the problem is neither the company nor the accounting regulations at play but rather
the system of capitalism. The sheer manipulation of legal proceedings and approved processes lead
to the scandal of Enron. The community was blinded on the illusion that the company was profiting
more that what they really were. Capitalism and the stock market helped on the lie in which the
people thought that the statements and the stock price were the actual measures of transparency in
where they do not. Stock prices are not measuring of the company’s performance rather a
manifestation of the public’s view on it. Alas, people use stock price as their measure of
performance leading to a cycle that investors rely on what they dictated as a basis of investing.

The government and the regulatory body should also do some routine checks and clean their laws
on regulation as well as remove mark-to-market accounting once and for all. Structured financing
should also have a limit since it enables capitalist to do shady deals, hide transactions, and even
launder money. This was apparent before and the system still has not yet improved now.

Conclusion

The Enron scandal was a story of people and a commentary of the capitalist system. It was never
about the money nor the numbers but about deceit, lies, and denial. They kept digging a hole for
themselves which resulted to them unable to salvage and kept on digging deeper. Innovation and
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profits are temporary but the impacts to the lives of many and the financial situation of the poor
could last forever. This scandal is already a part of many and every single one we can say to be a
call for accountability but alas, we still are waiting for those in position to change the system that
has corrupted the world for too many years. Enron’s motto is to ask why but no one bothered to
ask why.

References

a Magnolia Pictures release of a 2929 Entertainment & HDNet Films presentation in association
with Jigsaw Productions ; produced by Alex Gibney, Jason Kliot, Susan Motamed ; written
and directed by Alex Gibney. (2006). Enron: the smartest guys in the room. Los Angeles,
CA :Magnolia Home Entertainment,

“Enron Fast Facts.” CNN, Cable News Network, 24 Apr. 2020,

www.cnn.com/2013/07/02/us/enron-fast-facts/index.html.

“Ignatian Values.” Ignatian Values: Group: Graduate School Chaplain Resources,

blueline.instructure.com/courses/1154693/pages/ignatian-
values?module_item_id=11502421.