Case Study: The Fall of Enron

Why Enron scandal is important

The Enron scandal is significant in terms of learning perspectives for both new financial
professionals and experienced professionals. The scandal tells us why strong corporate
governance is the key to success for any business to sustain and drive profitable business.
Additionally, it draws insights as to how accounting policies should not be used and applied.
Any misuse can have drastic results or impacts on the health of the business.

Due to the bankruptcy of the business, employees lost several perks and pension benefits. Many
came on the verge of the financial crisis. The crisis was so deep that the shareholders of the
business lost an estimated value of $74 billion. Such corporate fraud should be taken as learning,
and an understanding should be drawn as to why regulations and compliance are necessary.

History of Enron

The Enron Scandal involves Enron duping the regulators by resorting to off-the-books
accounting practices and incorporating fake holding. The company utilized special purpose
vehicles to hide its toxic assets and big amounts of debts from the investors and creditors.

The Enron corporation was regarded as a corporate giant. 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 economic entities as well as 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.
Rise of Enron Scandal

The scandal began with the Enron misdeeds in the video rental chains. The business collaborated
with a blockbuster to penetrate the VOD market. After entering the market, the business
overstated the earnings basis for the growth of the VOD market.

The business executed $350 billion in trades, but it did not last long as the dot com bubble came
in. It spends a significant amount on broadband projects, but the business was unable to recover
costs from the spending made. The company was exposed to massive exposures, and investors
lost money as market capitalization deteriorated.

In 2000, the business started to crumble. CEO Jeffrey Skilling concealed all financial losses
resulting from the trading business and broadband projects by applying the accounting concept
of mark-to-market accounting. The company kept building assets. It reported profits that were
yet to be earned. If the actual profit earned were less than the reported earnings, the loss was
never reported. Additionally, the business transferred the asset to the off-the-books corporation.
Like this, the corporation concealed their losses.
To add to the agony, the chief financial officer of the business Andrew Fastow deliberately
resorted to the plan that displayed that the business is in good financial shape even though its
subsidiaries lost a lot of investor’s money.

Time Line of Downfall

The year was 1985, and Enron was incorporated as the merger of Houston Natural Gas company
and Internorth Ince. In 1995, the business was recognized as the most innovative business by the
Fortune, and it made it successful run for the next six years. In 1998, Andrew Fastow became the
CFO of the business, and the CFO created SPVs to conceal the financial losses of the Enron.
During the period of 2000, the shares of Enron traded at the price levels of $90.56.

On February 12, 2001, Jeffrey Skilling came in place of Kenneth as a chief executing officer. On
August 14, 2001, Skilling abruptly resigned, and Kenneth took over the role once again. Same
period, the broadband division of the business reported a massive loss of $137 million, and the
market prices of stock fell to $39.05 per share. In the period of October, the CFO ‘s legal counsel
instructed auditors to destroy the files of the Enron and asked to maintain only the utility or
necessary information. The business reported a further loss of $618 million and a write off of
$1.2 billion. The price of the stock deteriorates to $33.84.

On October 22, the business got into a probe from securities and exchange commission. With
this news, the stock of Enron further deteriorated and was reported at $20.75. In November 2001,
the business for the first time admitted and made the revelation that it inflated its income levels
by $586 million. Also that it has been doing so since 1997. On 2 nd December 2001, the business
files for bankruptcy and the stock prices end up flat at $0.26 per share.

On January 9, 2002, the justice department ordered a criminal proceeding against the business.
On January 15, 2002, the NYSE suspended Enron, and the accounting firm, along with Arthur
Andersen was convicted on the grounds of obstruction of justice.

Question# 1 What are some of the corporate governance issues that led to the fall of Enron
as a company?
Question# 2 After going through the case study can you explain what are some of ethical
issues that led to the fall of Enron as a company?

Question# 3 Please explain in your own words How this fraud can be protected by the
company?

Note: Any assignment that contains more than 19% plagiarism or if copied from other class
mates will result in Zero Marks. The length of assignment should be between 500 to 1000 words.
Please use Times New Roman as Font Style with 12 Font size and 1.5-line spacing. Do not
forgot to mention your REG# and Name on Assignment.

Best of Luck