Corporate Accounting at Its Worst 1
Running head: CORPORATE ACCOUNTING AT ITS WORST: THE ENRON STORY
Corporate Accounting At Its Worst:
The Enron Story
Kristy Lecorchick and Rich Banton
Accounting 211
Penn State, The Eberly Campus
April 5, 2008
Corporate Accounting at Its Worst 2
Late in the year of 2001, the corporate world endured financial devastation like never
before. Thousands were left hopeless and penniless. Some lost their jobs and security, some
lost their pensions, and some lost everything. The saddest fact remained: the more optimistic
ones were the ones to lose most. Enron, a multi-billion dollar industry, was now filing for the
largest bankruptcy case of its time (Time.com, 2002).
Just one year previous Enron was a thriving industry, banking on innovation and
resources. With more than 22,000 employees and $111 billion in revenue, Enron led the
world in energy and technology (Wikipedia, 2006 & BusinessWeek.com, 2008). The
company began it all in 1931, in which it operated under the name Northern Natural Gas
Company. By 1979 it had established the largest energy holding company of its time known
as InterNorth. As revenues and reputation continued to increase, so did the companies sights
(Time.com, 2002 & Wikipedia, 2006). In 1985 it acquired the Houston Natural Gas company
and began international business deals (Coomer, 2002). With greater success, the company
decided to rename itself, first to “HNG/InterNorth Inc.,” then, to “EnterOn”, and then finally
to “Enron.” EnterOn was decided against after one employee noted it was a Greek word that
referred to the intestine, only after the mass printing of stationary carrying that name
(Wikipedia, 2006). But still the famous logo of the capital, slanted “E” was born. By the mid
1990‟s Enron was a name known from coast to coast (BusinessWeek.com, 2008).
Enron now owned and/or operated 38 power plants, more than 25 business entities,
and sold more than 500 commodities worldwide. Enron had dealings in everything from
utility services to plastics and steel, to broadband services, to paper and wood products, to
grocery products such as sugars and coffees (Wikipedia, 2006). In 1995 it proudly launched
the newest and greatest innovation in the energy industry of the time, EnronOnline.
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EnronOnline was not just an online business. It also allowed buyers, sellers, and traders in
multiple businesses to watch prices rise and fall in real time on their computer screens
(Coomer, 2002). This made many friends for Enron in the business world, yet an enemy of
themselves. EnronOnline required huge cash amounts to operate, but through a new
accounting system, these huge operational expenses were being understated, or even
obliterated from the balance sheet (BusinessWeek.com, 2008).
All throughout the 1990‟s questions and suspicions from the public arose concerning
Enron‟s accounting principals. Many claims were made against their use of both legal and
ethical Generally Accepted Accounting Principals (GAAP). Some of their accounting
procedures were known to be irregular, but Enron was able to hide behind the great reputation
of its accountant, Author Andersen (BusinessWeek.com, 2008). The Author Anderson
accounting firm was consider one of the five largest and most reputable accounting firms in
the world (Wikipedia, 2006). Several analysts openly questioned Enron‟s financial
statements, particularly the balance sheet, which was never available for the review of
stockholders. Quotes such as “It‟s the only company that does not release a balance sheet
along with an earnings statement,” “It‟s really hard for analysts to determine where Enron is
making money in a given quarter and where they are losing money,” “There is an appearance
that you [Enron] are hiding something,” “Enron stock is trading under a cloud”
(BussinessWeek.com, 2008; Coomer, 2002; Time, 2002; WashingtonPost, 2005).
Andre Fastow, Chief Financial Officer for Enron, was the reason why the public could
not make sense of Enron‟s financial affairs. Due to a large number of overseas businesses
that Enron had either established or merged with, Enron was able to increase earnings and
hide losses (WashingtonPost, 2005). Because their offshore accounts allowed extra tax
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privileges, full anonymity, and free movement of money, Enron was able to take full
advantage of overstating the earning statements in order to increase the price of stock shares
(Wikipedia, 2005 & Time.com, 2002). At Enron‟s peek, a single stock share cost more than
$90.00 (BusinessWeek.com, 2008 & Time.com, 2002).
EnronOnline, used by almost every energy company in America, was another tool
utilized to boost their “invisible” earning. Jeffery Skilling, the president and COO, espoused
a new online account which paralleled with mark to market accounting (Wikipedia, 2006).
Simply put, Skilling inflated the price of stocks by recording any anticipated business revenue
of the future as if it had already been collected. The numbers were taken as factual and then
recorded on to the earning statement. Then, once the lists and values of assets were raised,
the price of the stock for the company was raised as well (BusinessWeek, 2008). As a result
the selling price of the stock, compared to the actual value of the stock, was at extremely
different ends of the spectrum (WashingtonPost.com, 2005 & Time.com, 2002).
In the midst of the devastation, Enron had one last hope to hold on to, and that was
Dynegy Inc. Dynegy is another major energy company with great resources who was
interested in acquiring Enron (WashingtonPost.com, 2005). Enron continued to reassure the
public, as well as Dynegy, that they were on the fast track to recovery and many assets still
remained (Time.com, 2002). They continued theses lies even as some of the largest credit-
rating agencies, such as Moody and S&P continued to lower their credit score, and decrease
stock values, eventually ending at just $0.61 per stock share (Coomer, 2002)! Negotiations
with Dynegy for a buy-out went back and forth for months, until the final numbers were
revealed. At that point Enron had no choice but to face, not only bankruptcy, but criminal
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charges of everyone involved in what was being called the biggest cooperate scandal of the
time (BusinessWeek, 2008).
Trails began January 2006 for Kenneth Lay and Jeffery Skilling. Charges included
bank fraud, making false statements to banks and auditors, securities fraud, wire fraud, money
laundering and conspiracy and insider trading (BussinessWeek.com, 2008). Despite their
pleas for an out-of-state trial, they were both found guilty and sentenced in Houston
(Time.com 2002). Skilling was sentenced to 24 years and 4 months, and Lay was sentenced
to a total of 45 years in prison and repayment of more than $90 million. However, Lay died
on an Aspen ski vacation after suffering a heart attack and all before he served a single day in
prison. Paula Rieker was also found guilty of insider trading and could have been sentenced to
10 years in prison. Instead, she merely had to repay $499,333 (WashingtonPost, 2005).
Greed had also spread outside the internal office, to players such as Mrs. Linda Lay,
Kenneth‟s wife, and even to the Enron lobbyist, William Roberts, as well Enron‟s accounting
firm. Mrs. Lay was found guilty of selling 500,000 shares, making more than a million
dollars, just minutes before Enron‟s demise was announced to the public (BusinessWeek,
2008). Mr. Roberts was found guilty of impersonating a member of the Senate staff in order
to assist Enron‟s position. Author Andersen, owner of Enron‟s major league accounting firm,
was found guilty of obstruction of justice and was forced to forfeit his license and had to face
more than 100 lawsuits. As a result the firm lost millions, and is never expected to fully
recover to it place in the “Big Five” (Time.com, 2002). Several other players were also
indicted and convicted in the Enron Scandal (BusinessWeek, 2008).
The movie „Smartest guys in the room‟ shows footage of conversations taking place
between Enron workers who „lost it all,‟ and it really puts into perspective the magnitude of
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this crime. The movie depicts the different sides of the players involved, how some were out
to get rich while they knew it meant putting others in poverty (Gibney, 2005). It is sad recalls
the sad fact that Enron was once a great place to work and could have gone on to great
success, enriching this country in many ways. It had really motivated and talented workers
from the installation crew up to the thinking outfits (Gibney, 2005). In fact, Enron was one of
Fortune’s “100 Best Companies to Work for in America” in 2000 and was named “America‟s
Most Innovative Company six years in a row (BusinessWeek, 2008).
In early 2007, Enron shamefully changed its legal name to “Enron Creditors Recovery
Corporation,” Doing Business As Enron Corporation. This now asset-less company exists
solely for tribute and retribution to those whose lives it destroyed (Time, 2002 &
WashingtonPost.com, 2005). The workers for Enron who had their life savings vaporized
before their very eyes are still in ruins. Many common people like you and I had Enron stock
consisting of more than 90% for their retirement. When the scandal started to unravel, the
common stock was at a freeze state. Meaning if we had a portfolio consisting of 300 shares of
Enron stock, for example, at a value price of $90 per share we were unable to sell them
(Gibney, 2005). Now the company functions only to repay those lost values through
liquidation of assets and any small profits generated. The company now has less than 40
employees working for this cause. The Pension Benefit Guaranty Corporation is also
assisting to recover some of the lost funds for those employees and stockholders (Coomer,
2002 & Wikipedia, 2006).
What made it possible for Enron to gain such a great competitive edge in the first
place? The answer is political advantage. Another scandal Enron greatly contributed to was
the energy crisis endured by California in 2000 (Time, 2002). Because of Enron extremely
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generous financial contributions to select political parties, legislations were passed to
deregulate the sale of gas and electricity. This made it possible for companies like Enron to
demand more and more money, and actually quadrupled its profits at one point
(WashingtonPost, 2005). Enron even played a part in refusing power to the state of
California, accounting for 38, Stage 3 rolling blackouts. Finally, in mid 2001, the government
was forced to intervene to restore power to major cities, homes, and businesses
(BusinessWeek.com, 2008 & Coomer, 2002).
For public protection from future corporate scandals, the „Sarbanes-Oxley Act‟ was
established and set into motion on July 30, 2002. It now regulates required financial
documents, loan management, and a company‟s ability to present false financial information
to the public (BusinessWeek.com, 2008). It also enforces harsher penalties for fraud. It is
considered to be the greatest legislation since the New Deal enacted in the 1930‟s by
President Roosevelt (Time.com, 2002).
The Enron scandal has illustrated the evil and ill willed characteristics that come out in
people of power in pursuit of more. More being money, respect, fame and fortune. Motives
for accumulating power and respect may vary drastically. But at the core, there are always
underlying issues that need to be regulated. Just as banks need to have a check and balance
system, as do we with our people in positions of power. Balance is the emotional thread that
can keep ones ethical decisions in check for the sake of everyone, particularly our great
nation.
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Works Cited
BusinessWeek.com (2008). The Enron Scandal. Retrieved April 4 from
http://www.businessweek.com/magazine/toc/02_04/B3767enron.htm.
Coomer, B. (2002). The Fall of Enron. Retrieved on April 4, 2008 from
http://www.chron.com/news/specials/enron/.
Gibney, A. (2005). The Smartest Guys in The Room. EnronMovie.com. Retrieved April 4,
2008 from http://www.pbs.org/independentlens/enron/.
Time.com (2002). Behind the Enron Scandal. Retrieved April 4, 2008 from
http://en.wikipedia.org/wiki/Enron.
WashingtonPost.com (2005). In the News. Retrieved April 4, 2007 from
http://www.washingtonpost.com/wp-dyn/business/specials/energy/enron/
Wikipedia (2006). Enron Scandal. Retrieved April 4, 2007 from
http://en.wikipedia.org/wiki/EnronScandal.