Author : Peter Elkind, Bethany McLean
Effect : Bankrupcy of the US energy, commodities and services company “Enron corporation” and the dissolution of Arthur Andersen (audit + accounting).
Founded in 1985 by Kenneth Lay : Merger of two natural gas transmission companies : Houston Natural Gas corporation and InterNorth inc, renamed Enron in 1986
Deregulation of sales of natural gas ealry 90’s, the company lost its exclusive right to pipelines.
Jeff Skilling, ex McKinsey, transformed the company to a trader of energy derivatives contracts, intermediary between natural gas producers and the customers.
Allowed producers to mitigate the risk of price fluctuation by fixing the selling price of their product, negotiated by Enron for a fee.
With Skilling, Enron dominated the market for NG contracts, company generated huge profits.
Skilling also changed the culture, emphasize on aggressive trading. He hired plenty of MBAs, and created a very competitive environment within the company : closing maximum number of deals in record time.
He hired Andrew Fastow (soon CFO) who rose through the ranks. Fastow oversaw the financing of the company through investments in increasingly complex instruments.
Bull market of the 90’s contributed to its rapid growth.
Enron expended its activities to trading electricity, coal, paper, steel, weather. Enron Online was built, invested in broadband telecomunnication networks and partnership with blockbuster for video on demand. International development as well with Dahbol in india, which was a gigantic failure as the power was to expensive for the indians.
As boom years came to an end, pressure from investors was high to meet financial earnings goals and keep the stock price rising. New tricks were put in place in order to meet objectives.
Mark to market accouting : write unrealized future gains from eals into current income statements, giving the illusion of higher current profits. One of the consequences was that bonuses were paid based on those figures but not on actual cash getting in, the projectrs were often left to rot after being sold.
Special purpose entities were used to book losses of the company and dump sites for troubled assets (off enron’s books). Those could be called Raptors for instance.
Special funds (LJM) created by Fastow, the aim of those funds was to buy stuff from Enron to boost profits artificially for quarter ends, those were then sold back to Enron for a higher price granting huge profits to fastow and investors in the LJM funds.
Mid 2001 analysts started to notice the problems and the SEC launched an inquiry. Stock plummeted from 90$ to less than 1$ by end of november 2001.
Enron tried to Merge with another gas company but failed and collapsed.
Sarbanes-Oxley act prohibited autiting firms from doing concurrent audit + consulting services for their clients
