Carpio, Frances M.

Management Reporting

BSMA-4A March 8, 2023

Enron: The Smartest Guys in the Room (2005)

Kenneth Lay formed Enron in 1985 by merging two natural-gas transmission firms, Houston
Natural Gas Corporation, and InterNorth Inc. The merged company, HNG, and InterNorth were then
renamed Enron in 1986. Following the U.S. Congress passing a series of bills deregulating natural gas
sales in the early 1990s, the firm lost its exclusive authority to run its pipelines. Enron converted itself
into a trader of energy derivative contracts, functioning as a middleman between natural-gas producers
and their clients. The transactions permitted the producers to offset the risk of fluctuating energy prices by
setting the selling price of their products through a contract executed for a fee by Enron. Enron quickly
dominated the market for natural-gas contracts under Skilling's leadership, and the business began to reap
enormous profits on its trading with the assistance of Jeffrey Skilling, who began as a consultant and
subsequently became the company's chief operating officer.

Lay established the Enron Finance Corporation in 1990 and appointed Jeffrey Skilling as CEO,
whose work as a McKinsey & Company consultant had impressed Lay. Skilling was one of McKinsey's
youngest partners at the time. Skilling also steadily altered the company's culture to promote aggressive
trading. He hired top applicants from MBA programs around the country and fostered a fiercely
competitive climate within the firm, with an emphasis on closing as many cash-generating deals as
possible in the quickest amount of time. Andrew Fastow, one of his finest hires, swiftly ascended through
the ranks to become Enron's top financial officer. Enron offered a wide range of energy and utility
services all over the world. The Enron corporation was considered a corporate giant. The firm was
burdened with enormous debts, and it attempted to obscure these by using special economic entities and
special purpose vehicles. Yet, after a successful run, it fell terribly and went bankrupt. The fall and
bankruptcy of the Enron Company shocked Wall Street and threatened numerous workers' financial
crises. On December 2, 2001, Enron reached a peak market price of $90.75. After the accounting fraud
became public, stock prices plummeted to a record low of $0.26 per share. In 1992, the Enron
Corporation announced plans to build a $3 billion natural gas power station in Dabhol, Maharashtra's
westernmost district. Instead, Enron has been an economic disaster and a human rights nightmare in
India. Enron worked with corrupt Indian politicians and officials to expedite the project. From 1992 to
1993, Enron and the Indian firm Reliance paid the Indian petroleum minister to secure a deal to produce
and export oil and gas from the neighboring Panna and Mukta fields to feed the facility. Enron's profits
declined significantly as the company faced increased competition in the energy trading market. Under
pressure from shareholders, the company's management began to depend on questionable accounting
procedures, such as "mark-to-market accounting," to conceal the issues. Mark-to-market accounting
allowed the corporation to carry unrealized future gains from certain trading contracts into current income
statements, giving the impression of higher current profits. Additionally, the troublesome activities of the
corporation were shifted to so-called special purpose organizations (SPEs), which are limited partnerships
formed with outside parties. Besides the fact that many corporations allocated assets to SPEs, Enron
abused the system by employing SPEs as dump locations for failing assets. Moving those assets to SPEs
meant they were kept off Enron's books, making the company's losses appear less severe than they were.
The severity of the issue became clear in mid-2001 when several experts began to dive into the specifics
of Enron's publicly disclosed financial accounts. Enron shocked investors in October when it reported a
$638 million loss for the third quarter and a $1.2 billion reduction in shareholder value, due to Fastow's
partnerships. The Securities and Exchange Commission (SEC) began investigating the transactions
between Enron and Fastow's SPEs shortly after.

This whole scandal boils down to misrepresentation of what was true. The alteration of
management reporting to deceive the external stakeholders into investing their money thinking that Enron
is a good money gamble. Now not only external stakeholders were affected but also the thousands of
employees who lost their jobs and their pension plans as well. Following the Enron scandal, several new
laws and legislation intended to enhance the accuracy of financial reporting for publicly listed firms were
implemented. It shows the importance of good management reporting that follows the laws and
regulations and your moral and ethical beliefs of what is good and true.