Commencing with $10 billion in assets, Enron multiplied this volume six times over the course of a decade, (Texas Monthly, Swartz 2018). A lengthy history trails the Enron Scandal going as far back as The Great Depression. Enron was formerly known as Internorth, a natural gas company that was founded in 1931. By the late seventies and early eighties, Internorth boomed by successfully selling and trading natural gas. By the late 80’s they graduated to producing natural gas themselves and selling it for an unprecedented price on the market (Segal, 2018). They merged with smaller companies of the same trade and would buyout any potential competitor, thus marking their dominance. Samuel Segnar was their CEO in 1984 and was later fired and substituted with Kenneth Lay as chairman. Lay was a massive personality tangled with the subsequent scandal. Jeffrey Skilling, former COO and later CEO of Enron, purchased Britain Wessex Water to emerge as the core of their water unit (Segal, 2018). Successively, the company decided to move its chief scene of operations to Houston, Texas. Renaming Internorth Enron was one of Lay’s noteworthy major decisions executed as CEO. With the expansion of the company and its endeavors in overseas trading, Lay proposed that a short and attractive name must be in place to be remembered and recognized globally (Texas Monthly, Swartz 2018). Rebranding Internorth was a mark of considerable growth across their aggressive takeovers. More investments were demonstrated by Enron throughout obtaining and operating electrical/gas power plants towards the late 1980s. As a financial analyst, Jeffrey Skilling proposed the idea of the ‘Gas Bank’, according to PBS’s timeline of the documentary Enron: The Smartest Guys in the Room (2005). The Gas Bank was how Enron provided guaranteed large quantities of gas through long term contracts at a set price by buying it from suppliers and selling it to consumers (NPR, 2001). Skilling was placed soon afterwards as the head of the Gas Bank proposition due to its successful maneuvers (CNN Library, 2018). The gas bank made possible the purchase of gas production and operation supplies. Due to an unexpected rate of success, Enron instinctively purchased and invested in power plants globally, entering markets that have not been accessed such as Argentina and India (NPR, 2001). This allowed them inordinate flexibility in setting the price of gas in those markets. Investments began to yield returns from high profile individuals and firms viewed Enron as a golden opportunity for growth. Enron collected and utilized money from hedge funds based on false projections that entailed incoming profit based on bizarre investments such as power plant production in foreign countries and the future production of fiber optics (CNN Library, 2018). It is imperative to recall these investments were all prior to the 2007 financial crisis, thus regulations and restrictions towards investments and regulatory gaps were nonexistent. In the early 1990’s Enron developed and implemented a plan to trade and produce natural gas on a global level to gain additional financial support from their stakeholders (Texas Monthly, Swartz 2018).
Therefore, the question begs itself, who was responsible for Enron’s collapse? Partners and stakeholders praised the company as a innovative profit generator. Ken Lay and Jefferey Skilling both denied any wrongdoing at the time of allegation. Ken lay, however, earned over $300,000,000 in personal gain from Enron’s operations. Approximately 20,000 employees were no longer employed in the proceedings of uncovering Enron’s false reality (CNN Library, 2018). Documents and evidence pointing towards personal gain from executives were demolished instantly. There were up to 2 billion dollars in pensions and wages that were promised, all fabricated as well. Kenneth Lay, plead not guilty to 11 criminal charges that maxed out to 175 years in prison. He began by proposing deregulated ideas regarding the energy market and gas production. Deregulation, the process of lowering government regulations on private economies, is what motivated Kenneth Lay in the mid-eighties. The government allowed gas prices to fluctuate naturally, Lay took advantage of that. A relationship developed between the Bush family and Enron, specifically with Mr. Lay. George W. Bush aided Enron in acquiring enormous tax breaks and financial aid in the markets Enron was operating in. Bush arbitrarily named Lay as an adviser to his presidential transitional team. Enron Oil repeatedly engaged in bets with partners as to if oil prices would drop or increase. Continuously, these bets were won and their profit margins were unheard of. This raised suspicion with Mike Muckelroy, a fellow tradesman in that market and a former Enron executive. The almost outrageous amount of profit Enron Oil earned raised many questions to the validity and ethical behavior expressed by Mr. Lay and Enron Oil. The president of Enron Oil in 1987 was Lois Borget, (The New York Times, 2006). A private account of Lois Borget seemed to grow large at an unusual rate, with no explanation or evidence as to where the money came from. He also possessed hidden bank accounts and wrote out anonymous checks to unidentified individuals. Borget admitted presenting fake bank profits to Enron executives and to acquiring outrageous false amounts of personal gains from the oil market. Surprisingly, even after auditors were retrieved and proved these accusations, Mr. Lay decided not to substitute proceedings within these methods. No disciplinary action was taken whatsoever. Muckleroy decided to act in his own way by demanding the accounting records from Borget’s partner, Tom Mastroeni. The records, with no surprise, showed that much of Enron’s back up money was used to gamble in the Oil market, yielding personal gains alone, leaving Enron with very little. Responsibility now shifts back to Mr. Lay as to why he ignored all these facts with knowledge of their existence. This led to the conviction of both Borget and Mastroeni (Segal, 2018).
Jefferey Skilling was then appointed by Mr. Lay as a replacement for the convicted felons. Skilling’s new proposal was to operate gas production and trade in the form of stock exchange, and Skilling’s first major role was to acquire and secure mark to market accounting. Enron could seize, sell, and trade assets or liabilities, based on expected changes in the price of that entity in the market, disregarding the actual cost of that entity. Not a wise decision considering Enron’s previous actions such as Lois Borget’s unusual bank activity, gambling, and the presentation of fake bank profits. Skilling, through that deal, acquired the power to yield profits based on estimations. As one would expect, this act multiplied profits and encouraged traders to engage with Enron even more frequently than before. This may have been perceived by Mr. Skilling as a triumph (CNN Library 2018); however, claiming potential profits, as well as selling and trading based on these projected profits did not seem too ethical and if at all truthful. Mr. Skilling’s personality and history must be considered. His goals were to better himself through appearance and he defined success through monetary acquisition. Ego played a huge role in Skilling’s decision making. His friend Ken West was hired as the sales manager for Enron’s energy production plans. All this stock that was being purchased at arbitrarily prearranged prices provided boundless advantages for the executives of Enron. A Mr. Lou Pai netted well over 200 million personally. Mr. Pai was responsible for Enron Energy Services, a subsidiary that formed in 1997 (Texas Monthly, Swartz 2018). He sold approximately 400,000 shares for an estimated $50 a share as well as placed more than that number of shares open for sale. No one could prove the reality of this and the prices were set based on future predicted success set by Enron themselves. Founded on their huge success, the stakeholders trusted them. Enron used traditional accounting methods prior to Skilling’s ‘accomplishment’. Pai subsequently mysteriously disappeared and was no longer a part of Enron. It is important to note, that Ken Lay was overseeing all these actions unfold. Executives would raise the stock prices, sell them, and propose even furthermore generous options for whoever was interested. Enron’s gas investments were not doing well globally. Their first failure occurred in India where the Indian market could not support the power plant production, leading the project to its demise. Enron still decided to pay out the profits that never existed to their executives and officials. As a backup plan, Enron thought they could make up for their losses by entering the electrical production market through another acquisition. From this point on, Enron began creating an illusion of success, motivating people to invest more in their stock. Their stocks continuously skyrocketed while their businesses became destined to fail, (NPR 2001).
Fiber optics were discovered as an opportunity to invest in. It was a technology that enhanced internet speed and was Enron’s answer to any skeptics. A pattern was developing. Bogus claims were proposed to shareholders to yield greater sums of invested money into their company. Again, Enron used future revenue projections to generate income even though their development in fiber optics never launched. The executives foresaw Enron’s collapse. The lies had compiled to create a false reality. This caused many of the executives to begin selling their stock. The last straw, so to speak, was their fictional proposition to trade weather. By late 2000, many internet investing companies had stocks plummeting, except Enron. Skepticism touched reporters of Fortune 500 magazine. No answers could be provided to anyone that raised questions regarding Enron’s unceasing increase in stock price. Blame began to fall on Andrew Fastow, who was the hired CFO. Enron was over 25 billion in debt without the executive’s knowledge due to Fastow’s decision to stay quiet. He hid debt through accounting methods that distributed the debt to his personal businesses. However, he could not be single handedly responsible. Andrew Fastow generated enormous amounts of investment money based on false claims from the largest banks in the world. The banks were providing loans in hopes of allowing Enron to procure assets and maximize profit through investing. This aided in erasing some debt off Enron’s accounting records (Swartz, 2018). People began demanding balance sheets, or some form of proof as to where Enron’s profits were coming from in late 2001. Enron traders disregarded all ethical aspects of energy trading. A major shift into electricity trading began to save what remained of Enron. California state electricity was traded predominantly. Trading wildly in California electrical energy led to catastrophic events, including blackouts, and almost a depletion of sufficient power due to Enron controlling the power plants. When George Walker Bush was appointed president, he refused to eliminate government deregulation, which paved the way for Enron to continue doing what they were doing. Kenneth Lay and Bush were close friends (Gibney, 2005). Gray Davis, the former governor of California seemed to be the only one trying to uphold ethical values in California and genuinely attempted to save the state. There was a hidden motive behind Skilling and Lay’s continuous acts of unethical behavior. If the traders found out about the earlier fabrications that were concealed and that Enron was in huge debt, their lives would be at stake. By the middle of 2001, Jefferey Skilling unexpectedly announced his resignation due to the constant decline in Enron’s stock prices. The lie was nearing its culmination, the company was about to implode. For the first time in years, their stock had decreased dramatically by the end of 2001. That’s when there was a collapse of accounting scandals uncovered, (Enron: the smartest Guys in The Room Gibney, 2005). Enron admitted to the inflation of their profits and the destruction of significant accounting documents. (2018, Segal) In 2002, a criminal investigation was launched against Enron and its executives. Their accounting firm, Arthur Andersen, was charged and convicted of obstructing justice (2018, Segal).
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Image: fortune.com
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Visionary Writing 