Billions stolen, bankruptcy, 29,000+ jobs lost, criminal charges, market manipulation, multiple accounting frauds, banking fraud and death; it's impossible to believe that the Enron financial scam is not a work of fiction.
This scandal is a cardinal example of corporate greed taking a distasteful form and shines directly on how the stock market isn't a money-making magic box. Once the 7th most giant corporation in America with a 6 billion market cap, Enron went bankrupt...almost instantly.
The story begins with Kenneth Lay starting Enron in 1985 as an Energy trader and supplier. This move made sense because the energy markets were deregulated, which allowed companies to place bets on future prices. And Enron was ready to take advantage.
In 1987, two Enron traders, one being the president of Enron oil trading unit, were found guilty of manipulating the oil trades and rerouting funds into personal bank accounts. Internal documentation revealed that Ken Lay asked these people to "keep making millions" for the firm instead of firing them.
Jeffery Skilling, (then) one of the youngest partners at McKinsey, impressed Ken Lay. In 1990, Lay created Enron Finance corporation and made Skilling the head of it. This seemed like a good decision, at least till it all disappeared into nothing.
Skilling introduced Mark-to-Market accounting at Enron. Essentially, this allowed Enron to write the profits in their books as soon as they signed a deal. For instance, they were adding 100 million in the company's papers even when those millions were to come over the next ten years. This meant that Enron's intrinsic value was, in reality, just a fraction of its balance sheet projection.
The company was an analysts' favourite. In 1995, Fortune declared Enron America's most innovative company. The firm won this title for the next six years straight. In 1998, Andrew Fastow became the CFO. He spearheaded the creation of "Special Purpose Vehicles" or off-balance-sheet untraceable companies that hid mountains of Enron's debt from the investors.
By 2000, Enron was the stock exchange's darling with its share trading above $90, and it did not look like it would stop. In July that year, Enron and Blockbuster entered a partnership to enter the Video On Demand market. The move was sensible, but Enron again logged "expected" earnings, which vastly inflated the numbers. However, when the recession hit, Enron had significant exposure to the most volatile parts of the market. At this point, Enron started to crumble under its weight.
Skilling, who became the CEO of Enron in February 2001, resigned in August that year stating personal reasons. In October 2001, Enron declared its first quarterly loss and closed one SPV (Special Purpose Vehicles). This caught the attention of the Securities and Exchange Commission(SEC).
With the SEC launching an investigation against Enron, which declared losses of $591 million and showed $690 million in debt, Enron was in a free-fall. By December 2, 2001, Enron filed for bankruptcy.
The purpose of an auditing firm is to provide an objective, independent examination of the financial statements, which increases the credibility of the financial statements produced by management. Suppose you had to name the biggest five auditing companies, Deloitte, PwC, Ernst and Young, KPMG, and Arthur Andersen. The last one does not exist (almost) anymore. Why, you ask?
In June 2002, the firm was found guilty of obstructing justice for shredding Enron's financial documents to conceal them from the SEC.
Enron's founder and former CEO, Kenneth Lay, was convicted of fraud and conspiracy. Before sentencing, he died of a heart attack in Colorado.
CFO Andrew Fastow pled guilty to wire fraud and securities fraud.
Former Enron CEO Jeffrey Skilling was convicted of conspiracy, fraud, and insider trading. Skilling originally received a 17½-year sentence, but in 2013 it was reduced by 14 years.
As big as Enron was in its time, by thinking ahead of their time when it came to running a successful business, the holes in the ship could not survive the drowning. The end came swift & now it is a lesson for all the others out there that even though the financial markets are the place to make big money, if you don't do it right, you will suffer losses more prominent than your principal investment.