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Enron, the story of a resounding bankruptcy

The most innovative company in the United States during several consecutive years, Enron went bankrupt in 2001 prompting an evolution in financial and accounting regulation in the US.

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Enron was formed due to the merging of Houston Natural Gas and Intermoth Omaha in 1985. It?s core business was the transmission and distribution of electricity and gas throughout the United States, as well as the development, construction and management of electric exchange, pipelines and other energy or electricity-related infrastructures.

From its early years, the company collaborated with another Texan company whose CEO was none other than George W Bush, future president of the United States. Ken Lay, CEO of Enron, benefited from an impressive address book which he used to make his company grow.

At the same time, the United States was going through a deregulation phase in electricity and the energy sector. Enron saw this as an opportunity to increase his positions and to diversify his activities under the guidance of Jeff Skillings, a Mc Kinsey consultant and Harvard MBA graduate, who became an intermediary of “commodities” trading.

Enron spoke of innovation and announced of having created a new business which consists of transforming gas, electricity and the other raw materials into exchangeable goods on the trading rooms? electronic platforms. It used new methods of buying and selling electricity or the other raw materials by means of derived, sophisticated and complex products.

With the company?s aggressive communication and Kenneth Lay?s charm, Enron quickly became the favourite in the financial markets and in the economic press. Fortune even rated the Texan company as “the most innovative american company” for six consecutive years from 1996 to 2001 !

Enron reached its peak when it announced a turnover of 101 billion dollars. Yet already the company?s reputation was tarnished by certain rumours of presumed practice of corruption and the political pressures that Enron exerted on Latin America, Africa and the Philippines to gain contracts.

The most controversial incident that the company had to deal with was a deal in India, when it had to resort to the American administrative services to obtain a contract worth 3 billion dollars which the world bank refused to finance because it considered it economically absurd!

This project, like all those related to international development, bore the hallmark of Rebecca Mark, another Enron big shot. She had to finalise deals concerning important projects in the energy domaine, deals whose returns where sometimes uncertain. The deal in India was a huge “success” and earned her a Forbes appearance in 1998. Following this, she took up a position within the board of directors at Harvard and Yale.

In the middle of November on 2001, after a series of financial scandals involving Enron and its auditing firm Arthur Andersen, the company was on the brink of one of the most devastating bankruptcies in the history of the United States. After a failed recovery, Enron officially went bankrupt on December 2nd, 2001. The share price collapsed from 90 to 0,3 dollars.

Inquiries revealed that Enron had committed numerous frauds. For example, the company recorded at once credit sales of gas or electricity for which the delivery was postponed, but did not record the expenses related to these transactions. In this way, cost-free income was generated, which only lead to enormous profits...

Using a second cheating technique, Enron also began to be sell gas itself by creating thousands of shell corporations. Enron sold gas which it committed itself to buying back. By making a commitment to buy back the gas, Enron built up a potential debt which it did not record in the balance sheet, nor did it record the expenses which were going to be necessary in the purchase and in the delivery of gas.

In respecting the accounting rules during the consolidation of the accounts, Enron would have had to eliminate all the operations made with its subsidiaries (these being considered as intra-group operations.)

This book-keeping gymnastics of Enron was made easier by the coming of an progressively immaterial economy. Classic book-keeping caused more apprehension because it was based on material assets which one knew how to estimate, depreciate, record with a very good estimate even if not perfect. In an immaterial economy, it is necessary to estimate a company?s intangible assets; brands, certificates, goodwill... One must take into account financial transactions which can be very complex.

A growing difficulty for the company partners was to analyse the accounting information presented in the financial status. Enron was helped by its auditor Arthur Anderson, to whom the the company paid several millions of dollars every year for statutory auditor and consulting assignments. The affair had disastrous consequences for the worlds biggest auditing firm as it was simply crossed off the map. A reputation built up over almost a century had collapsed overnight.

Thousands of employees who had invested in company shares lost their retirement savings, the savings for their children’s education, funds invested in a company in which they believed.

The fall of Enron also led to important legislative changes as well the implementation of the Sarbanes-Oxley ( SOX) laws in July 2002, the repercussions of which were felt among all multinational companies listed on Wall-Street.

On October 23rd 2006, Jeffrey Skilling, ex-CEO of the group, was condemned to 24 years and 4 months of prison. In May he had been found guilty of 19 previous charges. Kenneth Lay, founder of Enron, died in July, 2006 following a cardiac arrest.

Paul Monthe , November 2006

Article also available in : English EN | français FR

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