The Enron Scandal
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The Enron Scandal
Enron was an “American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff and was one of the worlds major electricity, natural gas, communications, and pulp and paper companies, with claimed revenues of nearly $101 billion during 2000,” states Wikipedia (
Kenneth Lay, the CEO of Enron, and Jeffery Skilling, the Chief Operating Officer at Enron, were desperate for success. To ensure financial security, Lay and Skilling created accounting loopholes or “special purpose entities” (a business on the side of a business). The sole purpose for the creation of the SPEs was to transfer any bad transaction from Enron into the artificial company, which caused the SPE to suffer financially, but Enron to financially gain. “In a typical transaction, Enron would transfer its own stock to an SPE in exchange for a note or cash, and also directly or indirectly guarantee the SPEs value. The SPE, in turn, would hedge the value of a particular investment on Enrons balance sheet, using the transferred Enron stock as the principal source of payment,” Steven Schwarz, a lawyer who graduated from Duke, explains.(
During May 2001, Enron vice chair, Clifford Baxter complained of the inappropriateness of Enrons partnership deals, he was one of three executives to do so. Subsequent to that, he resigned. After Baxters resignation in August 2001, Sharron who was VP of corporate development, sent an anonymous (later her identity was discovered) letter to Enrons CEO, Kenneth Lay, of accounting irregularities. In the letter, Sharron stated, “I am incredibly nervous that we will implode in a wave of accounting scandals.”(
The second major event that occurred as part of this scandal was the fall out at the audit firm, Arther Andersen. An accounting firm is hired by a company to do an audit of their financial statements. These accountants who read over companys financial information gathered in the year and tell the companies what they are doing right or what they are doing wrong and look for any sort of flaw that could be resulting in bad business. Enron created a close relationship with Arther Andersen and in turn, Arther Andersen chose to ignore or “failed to see” these secret dealings and loopholes Enron was hiding. “A closer examination of the facts reveals otherwise; when the Enron scandal was investigated by auditors and law enforcement agencies, it was found that Andersen was negligent at best and at worst completely in conspiracy with Enron to create false earnings reports, thereby hiding huge amounts of debt and artificially inflating stock prices beyond the point of no return,” says Edward Raver of Yahoo Voices. (