Enron’s collapse surprised the world at large. Enron serves communities across the nation and world, products and services including natural gas, electricity, and communications. Through its large acquisition of subsidiaries the firm had become a global giant. The company is divided into several divisions: transportation, distribution, wholesale services, retail energy services, and broadband services. Located across North America, South America, Australia, Japan and Europe Enron was an established international power, whose demise surprised the masses.
In the peek of Enron’s success revenue entering into the company was split into four categories: 93% in wholesale services, 4% retail energy services, 3% transportation and distribution and less than 1% in broadband services. This global company was basking in its vast economic growth watching stocks flourish to an all time high. As Enron’s stock traded on the New York Stock Exchange under the ticker ENE, investors marveled as the stock rose over $70+ in January of 2001. Until, this unbelievable growth was stunted by the truth.
Suspicions began to arise as some Anderson officials looked to drop Enron as a client. In mid February Jeffery Skilling became the CEO and Kenneth Lay moved onto the chairman of the board of directors. Soon many Enron officials reshuffled positions and left the company in order to cover up of financial blunders that would lead to the company’s downfall. Deliberate manipulations of income and balance sheets that helped portray Enron as much more profitable than its actuality. May of 2001 began with vice chair Clifford Baxter resigning, calling attention to Enron’s inappropriate behavior in partnership deals.
When Sharon Watkin’s sent Enron officials a warning letter, calling attention to discrepancies, the market pounced on the global monster. On September 26, 2001, the stock dropped to $25. While investors were left confused they would find out when the third quarter number were released the Enron had experienced a $618M net loss. As word spread of Enron’s criminal activity many affiliated companies soon felt the heated pressure. Much respected accounting firm Arthur Anderson started to accelerate disposal of many Enron documents that showed any criminal affiliation.
But in the first week of November the SEC served Arthur Anderson a subpoena to stop all shredding of Enron documents. Enron was forced to restate earnings for the period between 1997-2001 leading to the Chapter 11 Bankruptcy filed by Enron and 13 other subsidiaries. Loss Exposures and Management Manipulation Stunned, Shocked and Dumbfounded Investors watched there life earnings vanish in a mater of months. Investors were confused as to how such an enormous mistake could be overlooked. The mistakes were not overlooked but planed by the greed of the company’s own corporate leaders.
The greed of Enron’s corporate leaders, Kenneth Lay and Jeffery Skilling, showed how some people are only after personal gain. Both cashed in stocks while stocks were at its peak and made millions. The abrupt fall in Enron’s stock materialized as Enron executives cashed out their stock positions, while fallaciously encouraging shareholders that the business was thriving amongst the market. Many top executives and directors of the corporation sold about $1. 1 billion in stock, as falsified documents overstating profits of Enron to approximately $600 million. Manipulated numbers showed stockholder equity of the company by $1.1 billion.
Company Chair Kenneth Lay reportedly cashed in $123 million worth of stock options in 2000 and got his hands on another $25 million in 2001. Nearly 600 employees of Enron received more than $100 million in bonuses in November 2001. Enron’s ability to use subsidiaries or companies to hide lost income was an extremely ingenious but criminal maneuver. One subsidiary created partnership came from the acquisition of a company called LJM. Enron hid hundreds of millions of dollars of losses on it speculative investments in various technology-oriented firms, such as Rhythms Net Connections, Inc., a start-up telecommunications company.
When Enron invested in Rhythm Net Connections, the company had a large amount of monetary value on paper Enron was not allowed to sell it until later on. Jeffrey Skilling created a scheme to put the profit on paper, knowing it was vulnerable to market change. By devising LJM in the Cayman Islands with the aid of CFO Andrew Fastow, the two created a partnership linked to Enron. Using outsider investments and Enron’s stock Fastow and Skilling created LJM, a partnership that handled many “underground” positions and deals.
By creating companies partnered to the firm the Enron executives disguised poor profits through manipulation of financial states by creating companies like LJM, Rhythms Net Connections, and Chewco. Enron executives have been charged with fraud, including securities, wire, and mail fraud. There have also been accusations of money laundering and conspiracy. Michael Kopper was the first Enron executive to be convicted. After pleading guilty to charges of money laundering and wire fraud, Kopper began to assisted investigators to uncover the details of the Enron scandal.
Kopper’s admission, along with evidence gathered by authorities, points to an elaborate system that covered Enron’s shady financial debt disposal. While Enron deserves the majority of blame, Arthur Anderson, LLP, also engaged in criminal actions as they hid company losses and destroyed documents that would be helpful to investigations. The accounting firm, responsible for auditing Enron, lost their reputation and was convicted of obstructing justice. Arthur Anderson was fined $500,000 and was placed on five years probation, but the loss of integrity will be the demise of industry dependant on honesty and veracity of financial statements.
