what was enron 
enron was an energy trading and utility company based in houston texas that perpetrated one of the biggest accounting frauds in history enron s executives employed accounting practices that falsely inflated the company s revenues and for a time made it the seventh largest corporation in the united states once the fraud came to light the company quickly unraveled filing for chapter 11 bankruptcy in december 2001 understanding enronenron was an energy company formed in 1986 following a merger between houston natural gas company and omaha based internorth incorporated after the merger kenneth lay who had been the chief executive officer ceo of houston natural gas became enron s ceo and chair lay quickly rebranded enron into an energy trader and supplier deregulation of the energy markets allowed companies to place bets on future prices in 1990 lay created the enron finance corporation and appointed jeffrey skilling whose work as a mckinsey company consultant had impressed lay to head the new corporation skilling was then one of the youngest partners at mckinsey enron provided a variety of energy and utility services around the world its company divided operations in several major departments including however by leveraging special purpose vehicles special purpose entities mark to market accounting and financial reporting loopholes enron became one of the most successful companies in the world upon discovery of the fraud the company subsequently collapsed enron shares traded as high as 90 75 before the fraud was discovered but plummeted to around 0 26 in the sell off after it was revealed the former wall street darling quickly became a symbol of modern corporate crime enron was one of the first big name accounting scandals but uncovered frauds at other companies such as worldcom and tyco international soon followed the enron scandalbefore coming to light enron was internally fabricating financial records and falsifying the success of its company though the entity did achieve operational success during the 1990s the company s misdeeds were finally exposed in 2001 leading up to the turn of the millennium enron s business appeared to be thriving the company became the largest natural gas provider in north america in 1992 and the company launched enrononline its trading website allowing for better contract management just months before 2000 the company also rapidly expanded into international markets led by the 1998 merger with wessex water enron s stock price mostly followed the s p 500 for most of the 1990 s however expectations for the company began to soar in 1999 the company s stock increased 56 in 2000 it increased an additional 87 both returns widely beat broad market returns and the company soon traded at a 70x price earnings ratio in february 2001 kenneth lay stepped down as chief executive officer and was replaced by jeffrey skilling a little more than six months later skilling stepped down as ceo in august 2001 with lay taking over the role again around this time enron broadband reported massive losses lay revealed in the company s q2 2001 earnings report that in contrast to our extremely strong energy results this was a difficult quarter in our broadband businesses in this quarter the broadband services department reported a financial loss of 102 million also around this time lay sold 93 000 shares of enron stock for roughly 2 million while telling employees via e mail to continue buying the stock and predicting significantly higher stock prices in total lay was eventually found to have sold over 350 000 enron shares for total proceeds greater than 20 million during this time sherron watkins had expressed concerns regarding enron s accounting practices a vice president for enron she wrote an anonymous letter to lay expressing her concerns watkins and lay eventually met to discuss the matters in which watkins delivered a six page report detailing her concerns the concerns were presented to an outside law firm in addition to enron s accounting firm both agreed there were no issues to be found by october 2001 enron had reported a third quarter loss of 618 million enron announced it would need to restate its financial statements from 1997 to 2000 to correct accounting violations enron s 63 4 billion bankruptcy was the biggest on record at the time on nov 28 2001 credit rating agencies reduced enron s credit rating to junk status effectively solidifying the company s path to bankruptcy on the same day dynegy a fellow energy company enron was attempting to merge with decided to nix all future conversations and opted against any merger agreement by the end of the day enron s stock price had dropped to 0 61 enron europe was the first domino filing for bankruptcy after close of business on nov 30 the rest of enron followed suit on dec 2 early the following year enron dismissed arthur andersen as its auditor citing that the auditor had yielded advice to shred evidence and destroy documents in 2006 the company sold its last business prisma energy the next year the company changed its name to enron creditors recovery corporation with the intention of repaying any remaining creditors and open liabilities as part of the bankruptcy process after emerging from bankruptcy in 2004 the new board of directors sued 11 financial institutions involved in helping conceal the fraudulent business practices of enron executives enron collected nearly 7 2 billion from these financial institutions as part of legal settlements the banks included the royal bank of scotland deutsche bank and citigroup kenneth lay pleaded not guilty to eleven criminal charges he was convicted of six counts of securities and wire fraud and was subject to a maximum of 45 years in prison however lay died on july 5 2006 before sentencing was to occur jeff skilling was convicted on 19 of the 28 counts of securities fraud he was charged with in addition to other charges of insider trading he was sentenced to 24 years and four months in prison though the u s department of justice reached a deal with skilling in 2013 the deal resulted in 10 years being cut off of his sentence andy fastow and his wife lea pleaded guilty to charges against them including money laundering insider trading fraud and conspiracy fastow was sentenced to 10 years without parole to testify against other enron executives fastow has since been released from prison causes of the enron scandalenron went to great lengths to enhance its financial statements hide its fraudulent activity and report complex organizational structures to both confuse investors and conceal facts the causes of the enron scandal include but are not limited to the factors below enron devised a complex organizational structure leveraging special purpose vehicles or special purpose entities these entities would transact with enron allowing enron to borrow money without disclosing the funds as debt on their balance sheet spvs provide a legitimate strategy that allows companies to temporarily shield a primary company by having a sponsoring company possess assets then the sponsor company can theoretically secure cheaper debt than the primary company assuming the primary company may have credit issues there are also legal protection and taxation benefits to this structure the primary issue with enron was the lack of transparency surrounding the use of spvs the company would transfer its own stock to the spv in exchange for cash or a note receivable the spv would then use the stock to hedge an asset against enron s balance sheet once the company s stock started losing its value it no longer provided sufficient collateral that could be exploited by being carried by an spv enron inaccurately depicted many contracts or relationships with customers by collaborating with external parties such as its auditing firm it was able to record transactions incorrectly not only in accordance with gaap but also not in accord with agreed upon contracts for example enron recorded one time sales as recurring revenue in addition the company would intentionally maintain an expired deal or contract through a specific period to avoid recording a write off during a given period many of enron s financial incentive agreements with employees were driven by short term sales and quantities of deals closed without consideration for the long term validity of the deal in addition many incentives did not factor in the actual cash flow from the sale employees also received compensation tied to the success of the company s stock price while upper management often received large bonuses tied to success in financial markets part of this issue was the rapid rise of enron s equity success on dec 31 1999 the stock closed at 44 38 just three months later it closed on march 31 2000 at 74 88 with the stock hitting 90 by the end of 2000 the massive profits some employees received only fueled further interest in obtaining equity positions in the company many external parties learned about enron s fraudulent practices but their financial involvement with the company likely caused them not to intervene enron s accounting firm arthur andersen received many jobs and financial compensation in return for their services investment bankers collected fees from enron s financial deals buy side analysts were often compensated to promote specific ratings in exchange for stronger relationships between enron and those institutions both enron energy services and enron broadband were poised to be successful due to the emergence of the internet and heightened retail demand however enron s over optimism resulted in the company over promising online services and timelines that were simply unrealistic the ultimate downfall of enron was the result of overall poor corporate leadership and corporate governance former vice president of corporate development sherron watkins is noted for speaking out about various financial treatments as they were occurring however top management and executives intentionally disregarded and ignored concerns this tone from the top set the precedent across accounting finance sales and operations in the early 1990s enron was the largest seller of natural gas in north america ten years later the company no longer existed due to its accounting scandal the role of mark to market accountingone additional cause of the enron collapse was mark to market accounting mark to market accounting is a method of evaluating a long term contract using fair market value at any point the long term contract or asset could fluctuate in value in this case the reporting company would simply mark its financial records up or down to reflect the prevailing market value there are two conceptual issues with mark to market accounting both of which enron took advantage of first mark to market accounting relies very heavily on management estimation consider long term complex contracts requiring the international distribution of several forms of energy because these contracts were not standardized it was easy for enron to artificially inflate the value of the contract because it was difficult to determine the market value appropriately second mark to market accounting requires companies to periodically evaluate the value and likelihood that revenue will be collected should companies fail to continually evaluate the value of the contract it may easily overstate the expected revenue to be collected for enron mark to market accounting allowed the firm to recognize its multi year contracts upfront and report 100 of income in the year the agreement was signed not when the service would be provided or cash collected this form of accounting allowed enron to report unrealized gains that inflated its income statement allowing the company to appear much more profitable than it was 