International Trade Research
Report On Enron Company
Submitted to-Nicole Curling
Submitted by-Harpreet Singh
Company overview:
Enron Corporation was one of the largest integrated natural gas and electricity companies in the world. It
marketed natural gas liquids worldwide and operated one of the largest natural gas transmission systems
in the world, totalling more than 36,000 miles. It was also one of the largest independent developers and
producers of electricity in the world, serving both industrial and emerging markets. Enron was also a
major supplier of solar and wind renewable energy worldwide, managed the largest portfolio of natural
gas-related risk management contracts in the world, and was one of the world's biggest independent oil
and gas exploration companies. In North America, Enron was the largest wholesale marketer of natural
gas and electricity. Enron pioneered innovative trading products, such as gas futures and weather futures,
significantly modernizing the utilities industry. After a surge of growth in the early 1990s, the company
ran into difficulties. The magnitude of Enron's losses was hidden from stockholders. The company folded
after a failed merger deal with Dynegy Inc. in 2001 brought to light massive financial finagling. The
company had ranked number seven on the Fortune 500, and its failure was the biggest bankruptcy in
American history.
Enron scandal
The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation,
an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which
was one of the five largest audit and accountancy partnerships in the world. In addition to being the
largest bankruptcy reorganization in American history at that time, Enron was attributed as the biggest
audit failure. Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and
InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff of executives that,
through the use of accounting loopholes, special purpose entities, and poor financial reporting, were able
to hide billions in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other
executives not only misled Enron's board of directors and audit committee on high-risk accounting
practices, but also pressured Andersen to ignore the issues. Shareholders lost nearly $11 billion when
Enron's stock price, which hit a high of US$90 per share in mid-2000, plummeted to less than $1 by the
end of November 2001. The U.S. Securities and Exchange Commission (SEC) began an investigation,
and rival Houston competitor Dynegy offered to purchase the company at a fire sale price. The deal fell
through, and on December 2, 2001, Enron filed for bankruptcy under Chapter 11 of the United States
Bankruptcy Code. Enron's $63.4 billion in assets made it the largest corporate bankruptcy in U.S. history
until WorldCom's bankruptcy the following year.
Causes for the downfall
Enron's non transparent financial statements did not clearly depict its operations and finances with
shareholders and analysts. In addition, its complex business model and unethical practices required that
the company use accounting limitations to misrepresent earnings and modify the balance sheet to portray
a favourable depiction of its performance. According to McLean and Elkid in their book The Smartest
Guys in the Room, "The Enron scandal grew out of a steady accumulation of habits and values and
actions that began years before and finally spiralled out of control. In an article by James Bodurtha, Jr., he
argues that from 1997 until its demise, "the primary motivations for Enron's accounting and financial
transactions seem to have been to keep reported income and reported cash flow up, asset values inflated,
and liabilities off the books.
The combination of these issues later led to the bankruptcy of the company, and the majority of them
were perpetuated by the indirect knowledge or direct actions of Lay, Jeffrey Skilling, Andrew Fastow,
and other executives. Lay served as the chairman of the company in its last few years, and approved of
the actions of Skilling and Fastow although he did not always inquire about the details. Skilling,
constantly focused on meeting Wall Street expectations, pushed for the use of mark-to-market accounting
and pressured Enron executives to find new ways to hide its debt. Fastow and other executives created
off-balance-sheet vehicles, complex financing structures, and deals so bewildering that few people can
understand them even now.
Restructuring losses and SEC
Investigation Enron announced on October 16 that restatements to its financial statements for years 1997
to 2000 were necessary to correct accounting violations. The restatements for the period reduced earnings
by $613 million (or 23% of reported profits during the period), increased liabilities at the end of 2000 by
$628 million (6% of reported liabilities and 5.5% of reported equity), and reduced equity at the end of
2000 by $1.2 billion (10% of reported equity). Additionally, Enron asserted that the broadband unit alone
was worth $35 billion, a claim also mistrusted. An analyst at Standard & Poor's said "I don't think anyone
knows what the broadband operation is worth.
Enron's management team claimed the losses were mostly due to investment losses, along with charges
such as about $180 million in money spent restructuring the company's troubled broadband trading unit.
In a statement, Lay revealed, "After a thorough review of our businesses, we have decided to take these
charges to clear away issues that have clouded the performance and earnings potential of our core energy
businesses. Some analysts were unnerved. David Fleischer at Goldman Sachs, an analyst called
previously 'one of the company's strongest supporters' asserted that the Enron management lost credibility
and have to reprove themselves. They need to convince investors these earnings are real, that the
company is for real and that growth will be realized.
Sources:
www.enron.com
www.wikipedia.org
www.censorshipinamerica.com
