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Enron: The Worst Bankruptcy Case in History

Updated on April 18, 2019
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Rhylee Suyom has hopped in three different worlds: the academe, the corporate, and the media. He enjoys being with nature and his family.

Enron and its Scandalous Case

The Enron Scandal remains the worst case of bankruptcy in history
The Enron Scandal remains the worst case of bankruptcy in history | Source

ENRON: THE WORST BANKRUPTCY CASE IN HISTORY

Introduction

Companies and corporations are created for a variety of reasons. Some are made driven by a desire to help the poor and the need. Some are put up to gain profit and become the market leader. Some just want to have it all and become number one by any means necessary. There are numerous cases in history which prove such from sole proprietorship even to higher organized civilizations and empires. In modern history however, Enron is considered the worst of its kind and has epitomized a corporation’s embodiment of lust for greed, power, dominance, and manipulation. For this purpose, this short paper is written to show the rise and fall of a business empire known as Enron.

A. Formation and history of Enron

Enron Corporation is an energy Houston-based company which was a result of a merger between InterNorth and Houston Natural Gas (HNG) in 1985. InterNorth and Houston Natural Gas are two separate companies which share the same origin dating back to the 1920s. The merger was a result of a bid to save the InterNorth from corporate takeovers following an effort to compete with more dominant energy supplier Cooper Industries to acquire Crouse-Hinds Company to which it failed. As Cooper bought Crouse-Hinds Company, leaving it weaker than ever in the industry foothold. InterNorth was able to improve its standing in 1983 when it merged with Belco Petroleum Company thanks to its innovations in the plastics industry. Although still trying to stay competitive against larger corporations and fearing that it would soon be taken over by its competitors, InterNorth acquired HNG at a rate 40 percent higher than its current market value. The merger became the second largest pipeline system in the entire United States (US). The new company then adopted the name Enron in 1987 (Healy & Papelu, 2003).

B. Analysis of types of Enron businesses, from formation to the bankruptcy

From the onset of the merger, InterNorth had been known for gas transmission, production, marketing, and innovator in plastics while HNG has one of the largest distribution pipeline systems of gas in Houston. The merger initially combined the best practices and offerings of the two companies thereby expanding their market and easing marketing and distribution of their products to consumers. With acquisition of smaller companies, Enron was able to provide and offer electric power. Beginning in 1988, Enron began eyeing operations and markets overseas starting with a construction of an electric power plant in Teesside, Great Britain which later expanded to the Philippines and other Asian countries. The following year, Gas Bank was launched which allows wholesale buyers and gas producers to buy gas supplies hoping to make a profit by selling later when prices are higher. This was also the same year when Enron shifted from selling to just transporting gas in its Transwestern Pipeline Company since the move was perceived to be much profitable at the time. Through Gas Bank, Enron also initiated financing to gas and oil producers. By the turn of the decade, it began “trading futures and options on the New York Mercantile Exchange and over the counter market using financial instruments such as swaps and options using mark to market accounting practices, reporting income and value of assets at their replacement cost” (Cuong, 2011). In 1991, the first off-balance-sheet partnership was formed thanks to Andy Fastow allowing money-losing ventures to be concealed while presenting income to be accelerating.

By the turn of the century, Enron has adapted changes which have become integral to its make-believe success. First, it shifted its investments overseas specifically in the energy sector where there is little to no competition. Second, the shift from producer to an investment firm type of operations as Enron began pooling capitals from investors and invested them in some other businesses using the stocks and portfolio of Enron as bait. Lastly, shifting to financing through Gas Bank and Enron Finance Corporation by trading profit margins of the products it produces, markets, and sells. Another significant shift Enron did was the move from a producer/provider to retailer. In 1997 after acquiring Portland General Electric, Enron Energy was created “offering discounts to potential customers in California for switching their electric supplier to Enron from their previous supplier. It also expanded its market in Ohio selling natural gas and in Iowa selling wind power” (Markham, 2006). In the same year, FTV Communications LLC was acquired by Enron in a bid to not only cut network costs but also to take over the market leadership in Internet services in the US. It constructed 1,380-mile fiber optic network between Las Vegas and Portland. It was eyeing to market the services once operational to California, Nevada, and other neighboring states. It bought ‘dark fibers’ or inactive/less profitable smaller companies offering fiber optic Internet services hoping to centralize operations and sell broadband services as it sells natural gas and electricity. With its broadband service now ready, Enron eyed a partnership with Blockbuster Inc hoping to also take over movie streaming businesses. However, just as in almost all its early business startups, the new company did not make any profit and the telecommunications holdings of Enron was eventually sold for less than $1 million.

In its overseas operations, the Teesside power plant in the UK afforded much success for Enron that it decided to expand further by making its business presence felt in the following countries: Japan, the Philippines, India, Indonesia, China, Australia, Argentina, Brazil, Bolivia, the Caribbean, Colombia, England, France, Germany, Guatemala, Norway, and Poland. Reports claim that it was making a steady 25 percent profit from its offshore operations from 1996. Hoping to find more business ventures, it acquired Wessex Water in 1998 believing that it will be the next big money-making arm of Enron. However, bad forecasts and errors in the viability of the plan in acquiring Wessex Water with Azurix, its core water distribution facility, the high cost of repairs, debts, and operating cost of the fledgling company left Enron with no choice but to sell the new company in less than two years after of purchase (McLean & Elkind, 2003).

Undoubtedly, the problem with Enron could be traced in numerous activities coupled with bad decisions. While trying to continually acquire more and more companies and expanding its products and services offerings, Enron forgot to consider its own growth and capability to finance the growth and expansion it wanted. Another sticky point was its leaders’ lack of transparency and honestly in the corporation’s financial accounts. To continually lure in more and more investors and stock buyers, misleading financial accounts were found Andrew Fastow, Enron’s Chief Operating Officer, “began establishing numerous limited liability special purpose entities; however, it also allowed Enron to transfer liability so that it would not appear in its accounts, allowing it to maintain a robust and generally increasing stock price and thus keeping its critical investment grade credit ratings” (Eichenwald, 2005).

C. Enron innovations and market successes

EnronOnline was a pioneer in the Internet-based trade investment which then was used in the US. This portal was very effective in promoting and selling Enron’s products and services to the point that it was making $27 billion quarterly through wholesale electricity and gas selling alone.

Under Jeffrey Skilling, Enron was able to adopt the market-to-market accounting strategy which showed potential profits as real leading investors to buy more and more stocks. Note that this was back in 1999 when the Internet and computer technology was still unregulated thus Skilling was able to use the EnronOnline platform along with this strategy to entice many investors.

D. Questionable, unethical, and illegal Enron business practices

In 1999, Enron asked Merrill Lynch & Company to do something about its books showing that it has profits. The job was to conceal losses and debts by putting them into ‘offshore entities’ which were not part of the Enron corporation; these debts and losses were not included in the company’s financial statements. Similarly, other business transactions which were deemed negative were also removed from the books thereby showing Enron to be positively and constantly making profit.

In 2001, energy market expert Daniel Scotto questioned Enron’s success and encouraged investors and stock holders to sell their stocks because Enron ‘is all stressed up and no place to go” (English, 2001). With all the real financial revelations of the corporation becoming public knowledge, Enron decided to file for bankruptcy also after a failed rescue attempt by a smaller energy company Dynergy. Perhaps one of the biggest shocks to the business world was the action of Arthur Andersen LLP for its willful destruction of implicating financial documents of Enron which obstructed justice in 2002. The charade was a systematic deception to keep the image of Enron and its financial information safe from prying eyes. What it did was its business entities which were used to hide the bad investments, decision blunders, and wrong acquisitions which were riddled with debts and losses. The investors were fooled and lured in knowing that its stock was highly profitable, and that Enron was continually expanding and acquiring more and more performing assets. The sad part of this was that the executives knew all along about what was really happening yet no one especially the investors had no idea of the fraud and bad investments. Also, the Ponzi scheme was at play as more and more investors buy out Enron stocks hoping for some other investors to buy out theirs at a higher price later. It must also be noted that Skilling, representing Enron, never released a balance sheet with Enron’s corporation’s earning statements (McLean & Elkind, 2003).

Perhaps the last nail in the coffin can be traced in 2000 when Enron’s stock was at its peak, the public was lured to buy out more stocks while the Enron executives began selling theirs. This insider trading scandal would picture Enron as a corporation of thieves and hardcore conmen who devised systems to cheat investors at any means necessary. What was highly unacceptable was that even family members of the executives joined in the fiasco selling stocks then systematically hiding the losses but after all stocks were sold went public to file the bankruptcy.

Lastly, Enron was also manipulative as it used political clout in having the California Deregulation Plan enacted in 2000 allowing Enron to have a direct hand and without regulation in selling its products leading to a quadrupled revenue in 2001’s first quarter alone. This sinister yet systematic approach allowed for rolling blackouts in California disrupting business but increased the demand thereof giving Enron the opportunity to continually increase the price. (Egan, 2005). In fact, Time magazine claims that there are numerous politicians who benefited and received campaign and inaugural funds with former US president George W. Bush and his vice president Dick Cheney among the recipients.

E. Factors and business events leading to Enron’s demise

The snowball effects of the fraud, deception, conspiracy, and insider trading in Enron could not be hidden anymore. Some notable people had been instrumental in the public knowledge of what was really happening inside Enron. One of them is Wall Street Analyst Richard Grubman. Grubman was ridiculed and shouted at by Jeffrey Skilling in a telephone conference when the former questioned unusual accounting practices of Enron. This was also in relation to Skilling’s not showing any earnings statements in Enron’s balance sheets.

Another is Berthany McLean’s 2001 article in the Fortune magazine questioning whether Enron’s stocks are overvalued or not. However, the bulk of Enron’s demise can be traced in the short business lifespan it had. Kenneth Lay admitted to falsifying accounting reports and documents for more than five years while the corporation continued its effort to expand, acquire more businesses, engage in new ventures, and try to dominate new and existing markets. The continued efforts to expand while living off the cash flow from investors based on bloated projections, Ponzi scheme, market-to-market strategy would obviously lead to certain death eventually (Gerth & Oppel, 2001). The fraud, deception, insider trading, and conspiracy among the executives only mean one thing --- Enron is out to cheat the people and would want to get away with it but failed.

F. A critical analysis of Enron’s business model and practices: how (historically) did it succeed, how (ultimately) did it fail, and what has been or can be done to avoid similar occurrences in other businesses

The first few attempts of Enron were great and at least positively making profits. Even the move to go overseas such as the case of the Teesside power plant was one of its biggest success opening wider doors of opportunities in the overseas market. However, it was the greed or uncontrollable desire to continually acquire more businesses, become the market leader, and hide the debts and losses which made it bankrupt. If it continued its slow and steady acquisition and merging overseas while being honest and true to its financial reports and was transparent to the public, it would still be around these days since its original companies InterNorth and HNG were both near centennial companies. Again, it was the desire to have an Anticipated Upsell of stocks by luring investors into believing that Enron was making and will continue to make profits thereby increasing its stock value. It also tried employing direct sales using its online platform to have a network effect which translates to higher value in the stock market exchange.

G. What can we learn from Enron about professional ethics, regulation, and compliance?

There are many important issues and lessons to be learned from the Enron case. For the benefit of proper presentation and discussion, the following are presented:

First, it is not expedient to run faster that one’s strength. The greed and envy of the executives in Enron made them want to continually expand while hiding the debts and losses attributed to their bad business decisions. It is a matter of time before the public gets to know; nothing can be left uncovered.

Second, transparency is equal to trust. While businesses may be selling mostly products such as Enron, consumers and investors favor the honest people. In this case, the false accounting reports and unyielding attitude to present a balance sheet showing the public Enron’s earnings and financial statements served as the corporation’s biggest lie or masquerade. Eventually, with the continued lowering of stack value, the people and the investors had to dig deep and know the reality that was the Enron case.

Third, no amount of political influence can shield Enron from its corporate, socio-economic, and ethical responsibilities especially to its workers, partners, and stockholders. While it may have enjoyed specific privileges afford by its political clout, its responsibilities are primarily business and industry – oriented, stating that its loyalty should be to its consumers and stockholders.

Lastly, there is redemption in the acceptance of an honest mistake and there is restitution of character dependent on one’s sincerity to accept one’s error and positively change. In the case of the Enron executives, they all went down almost unwillingly accepting responsibility for the unethical activities and crimes they had done. Such gross misconduct is unbecoming and truly unacceptable for CEOs and corporate industry leaders. With great power comes great responsibility, and with this responsibility comes the need to rise above the natural man and become a role model to the world to follow.


References

Cuong, Nguyen Huu. (2011). Factors Causing Enron's Collapse: An Investigation into Corporate Governance and Company Culture. Vietnam: University of Danang. Pp. 585 – 593. Web. www.researchgate.com. Retrieved from https://www.researchgate.net/publication/228318972_Factors_Causing_Enron's_Collapse_An_Investigation_into_Corporate_Governance_and_Company_Culture

Egan, Timothy (February 4, 2005). "Tapes Show Enron Arranged Plant Shutdown". The New York Times. Web. N.p. Retrieved from https://www.nytimes.com/2005/02/04/us/tapes-show-enron-arranged-plant-shutdown.html

Eichenwald, Kurt. Conspiracy of Fools: A True Story. Random House, 2005. pp. 362–364. https://www.c-span.org/video/?185977-1/conspiracy-fools-true-story

English, Simon (20 January 2001). "Whistle-blower sent off". The Daily Telegraph. Web. N.p. Retrieved from https://www.telegraph.co.uk/finance/2751205/Whistle-blower-sent-off.html

Gerth, Jeff; Richard A. Oppel, Jr. (2001). "Regulators struggle with a marketplace created by Enron". The New York Times. Web. Pp. 1 – 4. Retrieved from: < http://www.webcitation.org/5tZ0jjwFo>

Healy, Paul M.; Krishna G. Palepu (2003). "The Fall of Enron". Journal of Economic Perspectives. 17 (2): 1. Web. Retrieved from: < http://www.webcitation.org/5tZ0YEF6T>

McLean, Bethany; Elkind, Peter (2003). The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. Portfolio.

Markham, Jerry W. (2006). A Financial History of Modern U.S. Corporate Scandals from Enron to Reform. Routledge. Web. Retrieved from https://www.scribd.com/document/49708919/A-Financial-History-of-Modern-U-S-Corporate-Scandals-From-Enron-to-Reform

Pasha, Shaheen (April 10, 2006). "Skilling comes out swinging". Money/CNN. Retrieved from https://money.cnn.com/2006/04/10/news/newsmakers/enron_trial/index.htm

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