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Enron Case Scandal - One of The Largest Banckrupcies in The World Due To An Online Banking Scandal
During Enron’s Good days in 2000, the stock price reached $90, while in 2001 it directly fell to bankruptcy. With its fast growth and vast gas distribution network, it became the 7th largest company in America. Although most of its development was actually from non-energy interests, it was profiting from brokering and trading.
Did you know about one of the largest bankruptcies in U.S. history? It was a failure of business and Corporate Governance. It began with a merger that happened in 1985 between two companies, ‘The Houston Natural Gas Company’ and ‘Into North Inc.,’ and then that resulted in the formation of the combined entity Enron, which was an energy company. The CEO of Houston was ‘Ken Lay,’ and he continued to become the CEO of the combined entity Enron. Then in 1990, Ken Lay, who was still the CEO, hired Jeff Skilling, an important person because he, later on, became the architect of an accounting technique (MTM). At that time, he was also one of the partners at McKinsey & Company, which was the consulting company advising Enron.
During Enron’s Good days in 2000, the stock price reached $90, while in 2001 it directly fell to bankruptcy. With its fast growth and vast gas distribution network, it became the 7th largest company in America. Although most of its development was actually from non-energy interests, it was profiting from brokering and trading. Increased gas supply, lower pricing, and competition were the result of the 1980’s natural gas deregulation. But high volatility in prices brought risk to both producers and consumers. They established a natural gas bank and offered long-term fixed-price contracts. They expanded in new markets and commodities internationally using the same trading model. By 2001, they were the most significant buyer/seller of natural gas and electricity.
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Table of Contents
What Were The Origins of This Scam?
Obtaining money, assets, or property from depositors or financial institutions is basically bank scamming. There are various scams such as overpayment scams, check-cashing scams, unsolicited check frauds, automatic withdrawal scams, phishing scams, government imposter scams, charity scams, and employment scams. Criminals get their personal information through such scams and have numerous ways to trick people into giving their sensitive information like numbers and passwords. Overpayment scams typically happen to those who provide online services or sell products. People scam by paying more money than required for the development, and you lose both the money and product.
In check-cashing scams, people usually convince you to believe their stories of needing money in cash and give you a check instead, which is fake. Such people typically meet you outside a bank or financial institution, preying upon your compassion and generosity. In unsolicited check fraud, you may receive an email that you were not expecting, telling you to sign a check or fill it for gift cash/ bonus/ free money or a lucky draw. Beware of such frauds because it is a tactic to make people sign up for something else, like any loan or commitment that may cost a lot.
As for the automatic withdrawal scams, scammers do calls or random text messages requiring some personal information upon delivering a special offer or prize, and then they add up your details on demand draft where the money is transferred without requiring your signature, you might not even know about this scam until you verify or check your daily bank transactions. Imposters pretend to be government employees and ask for your personal information for any taxes or payments. For charity scams, these people tend to make phone calls and pretend to be in need or from trust and ask for donations by taking advantage of some generous people and scamming them, often using fake names, identities, and phone numbers.
Some phone calls, emails, and websites are fake to advertise employment and interview people asking for all of the personal information and scamming them. To protect yourself and your banking accounts from scamming, do not let out your personal information and avoid such frauds. They target a massive amount of people using the same tactics and methodologies, knowing that some of them might actually fall into the trap, always do proper research and search for the validation as well as the authenticity of the proposal or call, etc., and never trust these scammers.
The Ins & Out of The Enron Scandal
When Jeff Skilling devised the new accounting technique called mark-to-market (MTM), he could adjust the value of an asset on the balance sheet from its historical cost up to the fair market value and capture that difference as a gain or revenue. So basically, when he built the power plant, this allowed him to look at the value of the power plant today (when you created it) and then look at its future revenue. Then adjust the value of the plant-based on the cash flow that it is expected to generate, allowing him to capture the projected revenue from that plant. This technique got approved by the SEC in 1992, the effect of using the mark-to-market technique was incredible for income and the stock performance.
In 2000, Enron entered a deal with a blockbuster to provide a video-on-demand service. This partnership would allow blockbuster to streamline movies online, and Enron was supposed to give the internet or broadband service behind it. Enron took the profits from the contract that they expected to make in the future and booked it as revenue today in the year 2000. But this deal went nowhere because the technology was not there yet. The beginning of its end was showing up because of the performance of the business, the cash that was coming in was not matching up the revenue that was being booked, but for investors, including retail and institutional investors, the start was a no-brainer to invest in. the revenue growth, debt to equity ratio and stock price were on point.
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Enron Declared Bankruptcy in Early 2001
In 2001, after Enron declared bankruptcy, the stock went from 85-88 dollars a share to about 50 cents per share. Ken Lay and Jeff Skilling were arrested and prosecuted from 2001 to 2006. Ken lay died during this from a heart attack as he was having health issues and stress from the prosecution, while Jeff Skilling was convicted and sentenced to 12 years in jail. However, Jeff just got out of prison in 2019 and is surprisingly back in the business. He states that during his jail time, he came up with a business plan for an energy software business. Enron employed almost 20,000 staff and was one of the world’s significant electricity, natural gas, communications, and pulp and paper company.
It claimed revenues of nearly $111 billion during 2000 and was America’s most innovative company for six consecutive years. For the complex business model, fast expansion required huge capital investment of $10 billion yearly for financing expansion to new sectors, and they stretched the limits of accounting, leading to financing problems. There was heavy use of stock option rewards to motivate managers to increase short-term stock performance. Enron was hiding the accurate picture of liabilities, by using Special Purpose Entities (SPE) to achieve better financial reporting and to attract investors; debt was not reported in balance sheets, and liabilities were understated while equity and earnings were overstated, also, by providing minimal disclosure of its relation with SPEs, and by applying MTM accounting for the evaluation of assets in market prices.
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A Loss of $70 Billion Was Incured
Enron had been forming off-balance-sheet entities to move debt off the balance sheet, overstate earnings, and transfer risk to other business ventures. The largest bankruptcy ever with the immediate lay-off of 4,000 employees, who also lost their pension funds and savings. The share price fell from $90 to $0,30 with a loss of $70 billion for stakeholders, and the international-scale market was shocked. A $10,000 investment in January 2001 was worth $6.25 by December. In the first significant public sign of disaster on October 16, 2001, Enron announced a substantial third-quarter loss of $618 million.
The securities and exchange commission (SEC) began inquiring into Enron’s accounting practices on October 22, 2001. And Enron filed for bankruptcy on December 2, 2001, leaving Enron investors and retirees with worthless stock. It was charged with securities fraud, including fraudulent manipulation of publicly reported financial results lying to the SEC. Enron’s seniors used complex and murky accounting schemes from 1993 to 2001. They did this to reduce tax payments, inflate income and profits, inflate stock price and credit ratings, hide losses in off-balance-sheet sub diaries, engineer off-balance-sheet schemes to funnel money to themselves, friends, and family, and misrepresent Enron’s financial conditions in public reports fraudulently.
On paper, Enron had remarkable corporate governance, and only 2 out of 14 members of BoD were insiders. Independent members of BoD had their ties with the firm; the BoD members’ incumbency had been long-term as they had become native and reluctant to question practices. The Enron audit committee failed, and internal auditing became inefficient. Dependent external auditors included two of the top accountants of Enron from Anderson, and some of the editors had been placed to Enron’s offices, becoming imbued with the company’s corporate culture and auditors’ remuneration for 2000 reached $25 million for audit services and $27 million for consultancy.
Stock options compensated the managers, they aimed at rapid, short-term increase of stock price, but they failed to create medium- or long-term value. The performance review committee remunerated those who fell in line and prosecuted those who objected. They used international information from top management for their benefits, sort of gaming with the shares. There was a deception for the investors’ community, and specific information was revealed to stakeholders. All of this resulted in ending the Enron company because of the bankruptcy.
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The company Enron was a trendy and renowned one when it started due to its superb idea and remarkable growth with relevant proposals and strategies. Still, as time passed, all the plans were of no value because of the failure. The CEO of this company gave an outstanding performance, and the profits of Enron were off the charts. Still, it collapsed in time, and unfortunately, the plan failed; the company was a disaster, people were fired, everything had just fallen apart, and stock prices, as well as the revenue, went too low. Lay and Jeff were prisoned and charged for this tragic bankruptcy failure in banking history.
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