Saturday, June 14, 2008

Enron: A Lesson in Ethics, or Lack Thereof

Enron originated from a company known as the Northern Natural Gas Company. After purchasing Houston Natural Gas in 1985, the name changed to "Enron.” Kenneth Lay took the helm as CEO shortly after. The initial function of the company was to channel gas and electricity across the nation, and manage the operation of pipelines and major power plants. Enron had an advantage in this industry because it owned a large chain of untapped gas lines utilized by interacting with many other gas businesses. These lines were the only part of Enron that made significant profit, and made it possible for the organization to dominate the industry. Soon after, in 1998, Enron expanded their control to include the water division. This led to the formation of the Azurix Corporation. However, this creation proved unsuccessful and eventually dissolved in 2001. Although this initiative proved to be a failure, the company began to prosper, largely due to their marketing power and innovative abilities.

Despite what was going on behind the scenes, Enron was a renowned and well known company. They were named as one of Fortune's "100 Best Companies to Work for in America" as well as earning the title of “America’s Most Innovative Company” for six consecutive years. However, everyone was oblivious to Enron’s fast growing financial debt, even its own employees. From an outsider's perspective, the company offices even seemed affluent. Many respected the company and it was even referred to for its amazing benefits and efficacious management. However, the secret scandal was soon to be brought to light by a utilities analyst named Daniel Scotto. After he found out what was happening within the corporation he wrote a document called, "All Stressed Up and No Place to Go." This report suggested to the general public that they should refrain from buying Enron securities.

Soon after this information was discovered, it became known to the public that almost all of Enron's reported profits and net worth were amplified to astronomically enlarged numbers. In some cases, portions of the reported earnings were actually nonexistent, a practice the company started as far back as 1987. Enron Oil Corporation was constantly climbing to higher levels of debt while the stock price was soaring to record highs. Some people questioned Enron’s unexplainable profit increases, and the company repeatedly claimed that they didn’t have the records to provide to the public that truly depicted their economic growth. CEO Jeffrey Skilling felt that he had gotten in over his head, and resigned from the company in August 2001.

The large amounts of debt were able to be covered up by the creation of offshore bank accounts that were not reported in any of the company’s financial earnings statements. The scandal was also concealed with vast and intricate methods of hiding financial transactions in order to make them virtually impossible to be detected. Some employees, such as Louis Borget, even took millions of dollars of corporate funds and transferred them into their own personal accounts. Another major way the company found to deceive the public and economy was by the Hypothetical Future Value (HFV) system. This was the market-to-market accounting that Jeff Skilling introduced to the company. Here the company could claim any amount of income that they wanted based off of future accounts.

These systems were implemented to take any unprofitable records off of Enron's statements. This gave the appearance that the company was earning billions of dollars in profit but in all actuality, they were losing colossal amounts of money. The only people who actually knew about the deceptive operations that were occurring were the executive officers. At the end of each financial period, the executives would have to hide more and more debt, which led to the black hole of bankruptcy and resulted in one of the biggest corporate scandals in history.

In late 2001, Enron filed for bankruptcy and didn’t emerge from it until November 2004. This was one of the largest bankruptcy cases in American History. Enron’s bad name has become linked to dishonesty and fraud. In September 2006, they sold their remaining business to Prisma Energy International, figuring their name couldn’t be cleared.

Jeffery Skilling, former CEO, was sentenced to 24 years in jail in late 2006. He was convicted of 19 different charges and still pled not guilty. Kenneth Lay, chairman and CEO, was convicted of 10 charges and faced 20-30 years in jail. However, he died of heart attack resulting from coronary artery disease while vacationing in Colorado about three months before he was scheduled to be sentenced. Andrew Fastow was sentenced to 6 years in jail and 2 additional years of community service. Fastow helped the prosecution by testifying against other Enron employees and had his jail sentence reduced