The crash of Enron became the greatest bankruptcy ever. Within several months, shares cost of Enron (the seventh by size company in America according to “Fortune 500”¯ magazine) fell down from $80 billion almost to zero. Thousands of workers lost their jobs. Moreover, their retirement pensions were invested in the company’s stock, and therefore also disappeared. Realizing a forthcoming bankruptcy Enron’s owners hastily liquidated all the documents (Fusaro 17).
For many this could be the beginning of the end. For example, Arthur Andersen (AA) ”“ one of the world’s five greatest bookkeeping companies. AA used to receive from Enron $25 million annually. It was hush money. Commentators consider such payments bribes. In fact, Enron had overstated accounts. AA employees were warned, that their company could disappear within a year (Elkind 157).
The “infection”¯ can spread further in the financial world. Enron owed $126 million to Barclays Bank. But it is only a child’s play to the $3 billion debt to Citibank, or $2,5 billion to Bank of New York. It could have resulted in the heaviest strike to the whole US financial world.
Enron Corporation was founded in 1985 from merger of two gas companies from Texas and Nebraska. It became the first company possessing all American gas lines network. In the beginning the company was specialized on gas only, but in time it comprised electricity.
Gradually it spread its activity into the trade sphere (BBC News).
The corporation successfully entered the market of the power futures and derivative securities. Note that in the 90s the excessive government control over the power industry of the USA was canceled. Right after the abolition of the government control over the energy supply California faced disconnecting. Instead of a single network the market of electricity was created. In 2001 it became the largest trader at the electricity market. By that time the company had 22 thousand of employees in 40 countries of the world! As at the peak of consumption the electricity prices began to grow, its cost in California varied from $30 to $1 000 per megawatt-hour. Analysts stated that the government control abolition created the situation when everything depended on traders (Elkind 132).
As it turned out, crash of Enron it is not just an ordinary financial scandal. All the traces lead to the White House. Being the national scale corporation, it could not keep out of politics. When criminal proceedings of Enron began, Attorney General in Bush’s government was discharged because he used to receive money from Enron. And not only he did – 35 members of Bush’s administration used to get “support”¯ in form of the company’s shares (Slocum 13).
Enron made a $1,7 billion donation to Republicans during the electoral campaign. At the same time, they gave $700 million to Democrats.
Enron considered it the best type of investments. Especially because they could influence the government’s political decisions in this way.
Enron’s Board in the past included many high officials from the President’s administration.
Thus, Bush quitted the Kyoto Protocol directed on global warming prevention. He reduced the Environmental Protection Agency budget, appointed Enron’s candidate as the Federal Power Commission President. He suggested allowing the drilling in the Alaska National Park preserved areas, one of the last districts of virgin nature. Some experts consider that Bush and Chaney were the only the tools of oil and power companies (Armour 248).
Enron could enter the energy market only due to the corrupted political officials. Therefore, it is no wonder that the company got an unprecedented share in the state electric power supplying and large tax remissions.
Enron had never been a manufacturer. It was just a dealer, simply a trader, whose income was the result of enormous speculation.
Enron was an international company and controlled a quarter of Europe. This market was opened for Enron as a result of political lobbying from Washington. In India, Kuwait, Philippines, Argentina, Panama and everywhere in the “Third world”¯ Enron got everything through pressure from the White House (Fusaro 36).
However, the company’s swindle consisted in other thing ”“ in its accounting operations. Company’s board developed and implemented a very difficult scheme of certain data concealment not only from public but also from shareholders and investors. It was done in order to distort the corporation’s real financial state.
Thousands of legal entities, mainly off-shore companies and associations, were created. All these off-shore companies were created quite legally. Moreover, Enron’s off-shore activity was approved by its board, advocates and external auditors from Arthur Andersen (Jenkins 15).
Although the scheme seems extremely difficult, in fact, it was quite simple. On the one hand, electric power transactions conducted via subsidiaries enabled swelling a prime price and, accordingly, the selling price of electricity. On the other hand, the company’s secret debts were ascribed to the off-shore companies (Elkind 246).
It is noticeable that not incomes but losses were thrown to the off-shores. It allowed to improve considerably corporation’s financial indexes, and its shares’ prices were growing. The corporation took over the largest part of the market. It allowed the board and employees to get multimillion bonuses. Naturally, the share stock cost in their own company grew.
Simultaneously some workers managed to get income from the off-shores’ trading activities. Thus, Enron’s main financial administrator Andrew Fastow got more than $30 million from one of the off-shores, and his assistant Michael Kopper got $10 million. Thus, there was a conflict of interests of corporation and its office workers (Elkind 274).
One might think that such a powerful corporation was paying lots of taxes? Not at all. Because the data shown to the shareholders and to the tax authorities differed sharply.
All the debts and expenditures were shown to the tax authorities. Thus, for the tax authorities the corporation was absolutely unprofitable. Therefore, Enron did not pay the income tax at all. Moreover, they got large tax compensations from the treasury. For the period 1996-2000 they got $380 million (Fusaro 43).
It was extremely difficult to catch the swindlers red-handed. The most skillful lawyers and accountants in the world used to work for them. Noticable, that every separate operation, contract or tax calculation of Enron was legal. But it could not last forever. The hidden debts were accumulating and growing. They must have been revealed some day.
And it happened in 2001. Realizing that a disaster is inevitable, the company’s president Kenneth Lay sold Enron’s shares he possessed (for more than $20 million) and continued to convince shareholders that business ran brilliantly. Many other directors did so. Therefore, they are accused of illegal use of insider information (BBC News).
In October 2001, when the time of quarter data reporting came, the further debts concealment was impossible. Enron announced about the losses of $638 million and about diminishing of its own capital by $1,2 billion. Losses were written-off to the off-shore machinations of the chief accountant Andrew Fastow, who was fired at once. In October 2002 he was accused of swindle, white-washing, and criminal conspiracy, etc (Armour 326).
The immediate fall of corporate stocks followed. In November Enron was forced to revise the accounting once again. And the income for the last five years was reduced by $586 million, and debts increased by $2,5 billion. Corporate stocks from the level of $80 for a unit in the beginning of the year fell to less than $1 (Jenkins 17).
In December 2001 the corporation declared bankruptcy which became the largest bankruptcy in American history. More than 4 thousand employees were discharged in the USA and more than a thousand in Europe (BBC News).
Then the criminal investigation followed. In January 2002 the corporation’s former vice-president Clifford Baxter committed suicide. And in August the New York Times economic department editor Allen Myerson, author of revelation articles about Enron’s financial machinations, jumped out of the window of his office on 11th floor (Elkind 305).
Several authorities at a time were engaged in the investigation of Enron’s bankruptcy – FBI, Justice Department, Labor Department. Certainly, Congress did not stay aside.
The crash of Enron Company caused a chain reaction in the American economy. Hundreds of companies applying analogical practice appeared under the threat and were forced to inspect their accounting. Many of them had fatal consequences (Slocum 16).
In July 2002 the US President George Bush signed the legislation fighting against corporate swindle. It suggests a rougher government and shareholders control over companies, their officials and auditors. The law also obligates companies to create independent audit committees. The law requires that company’s board must sign accounting reports personally (Armour 376).
The law facilitates for shareholders the procedures of prosecution of companies’ directors and their auditors. And prison terms for directors-swindlers grew to 20-25 years. The law also controls foreign companies, which irritates even of the nearest allies of the USA, for example, Germany which has its own legislation against swindlers. Foreign businessmen are displeased with the US interference in the matters of their companies and characterize such one-sided actions as “economic imperialism”¯ (Elkind 365).
But the main thing is that Enron’s bankruptcy exposed serious problems, connected with Generally accepted accounting principles.
Efficiency of the system called to provide investors, creditors and business partners with the reliable information remains doubtful. It is possible to suppose that the standards of information disclosure, especially in part of off-balance-sheet operations and management transactions, will be toughened in other countries as well.
Now Enron is bankrupt. Enron’s President Kenneth Lay rejected all the accusations presented. He surrendered to the authorities and counted, therefore, on leniency. He might be sentenced to “only”¯ 175 years of prison term (Armour 382).
Some members of the President’s administration appeared in an awkward situation. It turned out that in 2001 vice-president R. Chaney and his advisers met with Enron’s board six times. The last meeting took place less than a month before the announcement of its bankruptcy.
George Bush himself was forced to make an official statement denying the fact that the administration had known about financial difficulties and forthcoming bankruptcy of Enron and promised to conduct a thorough investigation.
A number of leading American and foreign banks was engaged in the investigation (including Citigroup and J. P. Morgan Chase). However, experts consider that it will be difficult for the deceived depositors to prove their accusations against bankers in court (Armour 391).
But were there any actions that could have been taken to prevent the company’s failure?
Well, perhaps the conflict of interest should have been prevented from the start. Auditors should have researched better the complicated transactions in which the company was working. Fastow should have informed the Board of Kooper’s connection with Chewco (which contributed much to the bankruptcy) and demanded a waiver as he violated the Code of Conduct. Fastow should have also been more honest notifying the management regarding his companies LJM1 and LJM2. The directors should have been more informed about all the financial activities rather than signing something unclear. Lay and Skilling should have introduced proper regulations forcing Fastow to present the information about any changes in transactions. All the approvals should have been appropriately recorded and approvers should have had certain responsibilities for any obedience violations (Jenkins 20).
In my opinion, if Enron’s senior security professional was aware of what was happening, he should have found the way to inform the proper authorities like the Police, Department for Economic Crimes, Serious Fraud Office, etc. (That is what I would do). Another questions is would it be possible if even the White House was involved in the machinations?
One of the workers discharged from Enron commenting upon the situation told that it was not the consequence of activity of separate swindlers, but the problem within the whole system”¯.