Kenneth Lay founded Enron in 1985 in the merger of InterNorth, Inc. and Houston Natural Gas Corporation. Enrod dominated natural gas markets and initially generated huge profits (Byar, 2022). However, increased competition in energy trading led the company’s profits to shrink rapidly. Instead of seeking alternative actions to raise their revenues, the company executives began using dubious accounting practices to hide poor performance from the shareholders. They use mark-to-market accounting practices which let the company take unrealized future gained from contracts on their income statement, making the company allude to high-profit levels. The company committed a financial statement and asset misappropriation fraud based on improper gain recognition and asset transfers. The investors would see that the company looks profitable as they hide the actual performance of the company.
The high-ranking executives took the opportunity to commit the fraud with the justification that the company would eventually become profitable. However, this did not occur, and people began to uncover the frauds committed, and investigations were done. The company decided to post a $638 million loss for the third quarter, which led to the intervention of the Securities and Exchange Commission. The stocks fell from $90 per share in mid-2000 to $12, eventually falling to $1 per share (Khan et al., 2022). The company then filed for Chapter 11 bankruptcy on 2 December 2001. The Founder, CEO, and CFO were sentenced to 45, 24, and 6 years in prison consecutively for fraud and conspiracy charges (Khan et al., 2022). The employees in the Enron company were let go with their 401(k)-pension depleted as their pension had been tied to the company’s stock. The Enron accounting scandal consequently resulted in the downfall of Arthur Anderson, the Enron company’s consultant and auditor (Abatecola, 2019). Clients of Arthur started distancing themselves in the quest to ensure their investors felt their respective financial statements were of high accounting standards. The employees of Arthur Andersen began to leave, and others lay off.
In the accounts of the Enron Scandal, I would say that greed is like drinking salt water. The more you drink, the more you become thirsty. Aspects of financial cleverness are not a quality of good governance. Even in the presence of the most talented people, the tone of top drives towards wrong decisions may result in an inevitable downfall. Top management’s awareness, action, and attitude about the entire entity are significant. The control environment is usually set and influenced the control consciousness of the people, and the internal control is the foundation that produces structure and discipline. When this aspect fails, all other control aspects and the whole entity may lack to function accordingly.
The Enron Company was big to fall at that time and was considered one of the most admired companies. Instead of seeking alternative measures, the company is backed by corporate greed and intolerable culture of competitiveness. The top executive encouraged behaviors to get things done despite the questionable means used to achieve them. The system bred arrogance and competitive players willing to take unbelievable risks to gain the highest returns. The case is a great lesson that intelligence can have high consequences if one does not pay attention to the important things. This case should be a wake-up call to all, bankers, shareholders, and the public to pay attention to how companies they stake in are being run. They should consider looking past the digits and understand how the companies make earnings and the behavior of their top leaders
References
Abatecola, G. (2019). Prioritizing short-termism in behavioral strategy: Lessons from Enron-20 years on. Web.
Byar, Z. (2022). Analyzation of audit procedures in the wake of the early 2000s Accounting scandals. [Master’s thesis, University of Nebraska]. Digital commons.
Khan, M. A., Khan, U. N., Jamali, A. K., & Jamshed, J. (2022). The Factors contributing to a corporation’s demise: An analysis of Enron. Journal of Management Practices, Humanities and Social Sciences, 6(2), 15-21. Web.