Student Name: YUSRA MERAJ Enrollment No: 02-112211-036

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Code: FIN 201 Assignment: 01

Course: Introduction to finance Class: BS (A&F)-3A
Teacher: Miss Sobia Murtaza Date: March 16, 2022

Case Study I – The Fall of Enron

LOGO:
TYPE: Public
INDUSTRY: Energy
FOUNDED: July 16, 1985 in Omaha, Nebraska, U.S.A
FOUNDER: Kenneth Lay
DISCONTINUE: December 02, 2001
CAUSE: Bankrupt (accounting fraud)
KEY PEOPLE:
 Kenneth Lay (founder, chairman and CEO)
 Jeffrey Skilling (former president, COO, and CEO)
 Andrew Fastow (former CFO)
 Rebecca Mark-Jusbasche (former vice chairman, chairman and CEO of Enron
International)
 Jason Paxton (interim CEO and CFO)
Abstract
Enron was founded in 1985 by Kenneth Lay in the merger of two natural-gas
transmission companies, Houston Natural Gas Corporation and InterNorth Inc.
The merged company, HNG InterNorth, was renamed Enron in 1986. Enron
transformed itself into a trader of energy derivative contracts, acting as an
intermediary between natural-gas producers and their customers. The Enron
Corporation was regarded as a corporate giant (Blue Chip Company). But after a
good run, it failed miserably and ended up as a bankrupt business. The failure and
bankruptcy of the Enron Corporation jolted Wall Street as well as it put several
employees on the verge of the financial crisis. The corporation had massive debts
in its name. It tried to conceal these with the help of special purpose vehicles.
Enron traded at the highest market price of $90.75 at the period of December 2,
2001. And when the accounting scandal emerged, stock prices went down to a
record low of $0.26 per share.
1. Research the Enron case, provide background in to what led to
the fall of Enron.
As the boom years came to an end and as Enron faced increased
competition in the energy-trading business, the company’s profits shrank
rapidly. Under pressure from shareholders, company executives began to
rely on dubious accounting practices, including a technique known as
“mark-to-market accounting,” to hide the troubles. Mark-to-market
accounting allowed the company to write unrealized future gains from
some trading contracts into current income statements, thus giving
the illusion of higher current profits. Furthermore, the troubled operations
of the company were transferred to so-called special purpose
entities (SPEs), which are essentially limited partnerships created with
outside parties. Although many companies distributed assets to SPEs, Enron
abused the practice by using SPEs as dump sites for its troubled assets.
Transferring those assets to SPEs meant that they were kept off Enron’s
books, making its losses look less severe than they really were. Throughout
these years, Arthur Andersen served not only as Enron’s auditor but also as
a consultant for the company. When both external and internal parties,
decide to ignore essential ethical practices due to personal greed, it will
most likely lead to investor loss whether or not regulations are enforced.
This greed does not benefit the corporation, but instead simply destroys
those interested parties that invest in the organization. The greed of high
placed executives never was intended to actually help the company at all.
Greed caused the downfall of both the corporation by developing a system
where no one was actually looking out for the good of the company. The
hunger fueled executives to make decisions in their own personal interest,
at the sacrifice of the company, which led to the Enron collapse.

2. What was the fallout of the Enron case?

At the time, Enron’s collapse was the biggest corporate bankruptcy to ever hit
the financial world. The Enron scandal drew attention to accounting and
corporate fraud as its shareholders lost $74 billion in the four years leading up
to its bankruptcy, and its employees lost billions in pension benefits.
Increased regulation and oversight have been enacted to help prevent
corporate scandals of Enron’s magnitude. However, some companies are still
reeling from the damage caused by Enron. Most recently, in March 2017, a
judge granted a Toronto-based investment firm the right to sue Skilling (the
former Enron CEO), Credit Suisse Group AG, Deutsche Bank AG, and Bank of
America’s Merrill Lynch unit over losses incurred by purchasing Enron shares.

3. How did the Enron case affect the accounting and accountability
of corporations in the US?
Sarbanes-Oxley was legislation passed by Congress in the summer of 2002.
The act was passed in response to a number of corporate accounting
scandals that occurred in the 2000–2002 period. This act, put into place in
response to widespread fraud at Enron. In it, about half of the language
deals with setting up a new regulator for the accounting profession called
the Public Companies Accounting Oversight Board that oversees the audit
firms. The rest of the legislation deals with some important things like
ensuring that management is held accountable for the financial reports that
they file with the SEC. It improves the independence of corporate boards,
as well as the independence of the auditors, and it increased some of the
penalties for those who shred documents or violate the security laws.

References:
 https://www.britannica.com/event/Enron-scandal/Downfall-and-bankruptcy

 https://www.wallstreetmojo.com/enron-scandal

 https://www.investopedia.com/updates/enron-scandal-summary

 https://www.thebalancesmb.com/sarbanes-oxley-act-and-the-enron-scandal

 https://en.wikipedia.org/wiki/Enron