CASE 1.1 ENRON CORPORATION Synopsis Arthur Edward Andersen built his firm, Arthur Andersen & Company, into one of the largest and most respected accounting firms in the world through his reputation for honesty and integrity. “Think straight, talk straight” was his motto and he insisted that his clients adopt that same attitude when preparing and issuing their periodic financial statements. Arthur Andersen’s auditing philosophy was not rule-based, that is, he did not stress the importance of clients complying with specific accounting rules because in the early days of the U.S. accounting profession there were few formal …show more content…
4. When Spacek retired in 1973, Arthur Andersen & Co. was one of the largest and, arguably, the most prominent accounting firm worldwide 5. The predecessor of Enron Corporation was an Omaha-based natural gas company created in 1930; steady growth in profits and sales and numerous acquisitions allowed Enron to become the largest natural gas company in the United States by the mid-1980s. 6. During the 1990s, Kenneth Lay, Enron’s CEO, and his top subordinate, Jeffrey Skilling, transformed the company from a conventional natural gas supplier into an energy trading company. 7. Lay and Skilling placed a heavy emphasis on “strong earnings performance” and on increasing Enron’s stature in the business world. 8. Enron executives used hundreds of SPE’s (special purpose entities) to arrange large and complex related party transactions that served to strengthen Enron’s reported financial condition and operating results. 9. During 2001, Enron’s financial condition deteriorated rapidly after many of the company’s SPE transactions unraveled; in December 2001, Enron filed for bankruptcy. 10. Following Enron’s collapse, the business press and other critics began searching for parties to hold responsible for what, at the time, was the nation’s largest corporate bankruptcy. 11. Criticism of Andersen’s role in the Enron debacle focused on three key issues: the large amount of consulting revenue the firm earned from Enron, the
Enron became a giant middleman that worked like a hybrid of traditional exchanges. But instead of simply bringing buyers and sellers together, Enron entered the contract with the seller and signed a contract with the buyer, making money on the
CEO Kenneth Lay was a very smart man who always thought ahead of the curve. In his search for new opportunities, he started thinking about the deregulation of energy markets, particularly the natural gas market. Then in 1985, Lay eventually founded Enron in Houston, Texas. This was the result of merging two relatively small regional natural gas pipeline companies: Houston Natural Gas and InterNorth.
The company Enron was formed in 1985 after two natural gas companies, Houston Natural Gas and InterNorth merged together. Kenneth Lay, former chief executive officer of Houston Natural Gas was named CEO of Enron and a year later, Lay was assigned to the chairman of Enron. A few years later, Enron launched a website to allow customers to buy stock for Enron, making it the largest business site in the world. The growth of Enron was rapid; it was even named seventh largest company on the Fortune 500 list; however things began to fall apart in 2001. (News, 2006). In the third quarter of that same year, Enron posted an enormous loss of over $600 million in four years. This is one of the reasons why one of the top executive resigned even though he had only after six months on the job. The stock prices of Enron fell dramatically.
Enron incurred massive debt as a result of the merger which led to it losing exclusive rights to its pipelines. Enron at this point had to come up with a new innovative business strategy in order to survive. CEO, Kenneth Lay hired services of McKinsey & Co. to aid in the process of developing a business strategy. Jeffrey Skilling, a young consultant was assigned with the responsibility. Skilling proposed a revolutionary solution to convert operations from energy supply to energy trading.
In 1990, a man named Jeffery Skilling joined Enron Corporation and in 1997, he was appointed as the company 's Chief Executive Officer. Mr. Skilling demanded to change Enron 's accounting system from a straight forward kind of accounting were Enron had listed actual revenue and costs of supplying and selling gas to the mark-to-market accounting system.
As the management of Enron continued with their fake growth, Enron’s financial contracts started to became more and more complicated.
Maintaining the EPS brought Enron huge pressure to find new projects to invest. The chosen solution was to get some of the assets and related debt off the balance sheet. After Enron took series of actions, problems emerged
To the outside world, the company seemed prosperous. Stock prices rose dramatically and reported profits exceeded expectations yearly. Fortune magazine even called Enron the “country’s most innovative company.” In reality, it was all an elaborate illusion to hide the fact that Enron was drowning in debt. The chief financial officer, Andy Fastow was tasked with covering up Enron’s financial crisis. Fastow established hundreds of fake limited liability companies to create the illusion that Enron was earning profits by conducting business with these entities. They
Before going bankrupt in 2001 Enron Corporation was one of the biggest incorporated natural gas and electricity companies on earth. It dealt with selling natural gas liquids worldwide, and operated one of the biggest natural gas transmission systems in the world. They had become one of the largest developers and producers of electricity in the world, and supplied industrial and evolving markets including individual consumers. Enron was a major dealer of solar and wind renewable energy globally, had a strong risk management service for a large collection of its natural gases contracts, and was one of the biggest oil and gas exploring companies around the world. They were the leading wholesale marketer of natural gas and electricity in the
Enron was an admired company prior to 2000 because at that time it surfaced as a frontrunner in the deregulated energy market, making it possible to sell energy at higher prices, thus significantly increasing its revenue. The company, through efficient management team, has built leading businesses in energy trading and international energy asset construction. The company has managed to maintain high return from its investments through ideal placement of resources by creating long term and fixed price contracts with clients that guaranteed stable
The Enron Corporation started in 1985 when Houston Natural Gas merged with InterNorth, a Nebraska based Company. Enron was known as the ‘Americas Most Innovative company’ for 6 consecutive years.”(Folger). The reason Enron was so innovative is because it completely changed the way the energy industry was run. Kenneth Lay, Enron’s CEO hired consultant Jeffrey Skilling to completely change the business strategy that the company was run on. They started taking advantage of the fact that energy industry because deregulated and “created a ‘gas bank’ in which Enron would buy gas from a network of suppliers and sell it to a network of consumers, contractually guaranteeing both the supply and the price, charging fees for
As competition increased and the economy started to plunge in the early 2000s, Enron struggled to maintain their profit margins. Executives determined that in order to keep their debt ratio low, they would need to transfer debt from their balance sheet. “Reducing hard assets while earning increasing paper profits served to increase Enron’s return on assets (ROA) and reduce its debt-to-total-assets ratio, making the company more attractive to credit rating agencies and investors” (Thomas, 2002). Executives developed Structured Financing and Special Purpose Entities (SPE), which they used to transfer the majority of Enron’s debt to the SPEs. Enron also failed to appropriately disclose information regarding the related party transactions in the notes to the financial statements.Andersen performed audit work for Enron and rendered an unqualified opinion of their financial statements while this activity occurred. The seriousness and amount of misstatement has led some to believe that Andersen must have known what was going on inside Enron, but decided to overlook it. Assets and equities were overstated by over $1.2 billion, which can clearly be considered a material amount (Cunningham & Harris, 2006). These are a few of several practices that spiraled out of control in an effort to meet forecasted quarterly earnings. As competition grew against the energy giant and their
When Enron's stock price subsequently fell, the SPE's value also fell, triggering the Enron guarantees, which guarantee payments in turn apparently further reduced Enron stock value, triggering additional guarantees.
Most of the world has heard of Enron, the American, mega-energy company that “cooked their books” ( ) and cost their investors billions of dollars in lost earnings and retirement funds. While much of the controversy surrounding the Enron scandal focused on the losses of investors, unethical practices of executives and questionable accounting tactics, there were many others within close proximity to the turmoil. It begs the question- who was really at fault and what has been done to prevent it from happening again?
Enron Corporation was formed as the result of the July 1985 merger of Houston National Gas and InterNorth of Omaha, Nebraska. Their headquarters were located in Houston, TX. In its earlier years, Enron was a