Enron Scandal And Its Impact On The Livelihood Of Thousands Of People

The corporation that had started committing fraud dating back to the 1990s when they lost the exclusive rights to their natural gas pipeline, which lead to a more competitive market for a while. This changed when a man known as Jeffery Skilling began to work with the company and changed its mode of operation. Enron began to make sales much more aggressively, and over time his methods began to show results, earning him the position of CEO in the Enron Finance Corporation. But, as time went on, profits began to slow again, and due to pressure from shareholders, more ways to make money were needed. One of those ways was to use “Mark to Market Accounting” (MMA), which is considered a highly illegal practice now. MMA is when an accountant marks unearned future incomes as a current source of income, even though no sales had been made, and no assets have been collected. This may appear harmless at first, but it is incredibly problematic since it implies that all products will be sold at the exact same price, without any thought of market price change or the possibility of having left over inventory. As shown, that is a very much impossible goal to meet since the market is constantly changing, with prices rising and falling constantly.

Another problem with this form of accounting is that inventory needs to be constantly ordered since on the income statement, the previous order had already been sold off. If a company wants to keep using this method for a long time, they would likely need to file for some type of loan, which would temporarily show that the company was actually receiving money instead of losing it. Enron did not just apply this business practice to its own companies either. In the year 2000, Enron Broadband Services and Blockbusters began to work together, and “Enron started logging expected earnings based on the expected growth of the VOD market, which vastly inflated the numbers. ” Enron helped to bring the fall of another company by marking in profits early instead of when they received them, thus greatly marking up the listed revenues, and inflating the books of another company. Those were only one of the ways that Enron had committed fraud. There are actually a few more ways that fraud was committed at Enron. Another example is that Enron committed fraud was through the use of Special Purpose Entities, also known as SPEs. Enron was able to transfer the failing assets that they made from doing business into these SPEs, while at the same time they transferred loans and desirable assets made by the SPEs to Enron. This has four main effects on the accounting books of Enron, such as hiding the loses that Enron had by transferring failing assets to the SPEs, borrowing money from banks through the SPEs to keep them alive, selling leveraged assets to the SPEs, and even paying Fastow money.

The reason why Enron was able to use SPEs to such a high degree was because “FASB guidelines require that only 3% of the SPE be owned by an outside investor”, which meant that Enron can exhibit a great amount of control over the companies that they had a connection to. Fastow was the main controller of these operations, which let him do some incredibly illegal business practices. SPEs have the ability to take the risk and debt of its partners upon itself in exchange for something of interest, such as stocks or cash. Enron also had to “compensate partnership investors for downside risk, Enron promised issuance of additional shares of its stock” for that reason Enron had to increase the amount of stocks that they had on the stock market. The SPEs were able to stay afloat by borrowing money from banks and performing whatever business they had set up for themselves. The advantage of being a separate entity from Enron, was that they could borrow money and go bankrupt with it ever affecting Enron. This allowed the SPEs to last longer than they should have, which provided Enron steady income, a place to dump their unwanted assets, and a place to sell services and stocks to. On the topic of selling stocks, the SPEs often sold stocks to Enron when they are performing well to receive dividends, and have the option to sell the stocks before they believe the stock price will fall. There was likely insider trading being involved in these cases since Jeff Skilling had been indicted for doing insider trading on multiple counts. Another person of interest in Enron’s case is Andrew Fastow, the former CFO of the company. Fastow owned many of the SPEs that Enron was connected to, so the amount of control that he had over them was very high.

By using his power as an owner, Fastow was able to collect revenue as they ran, putting more money into his own pockets and out of the companies that he had ownership of. He likely did not care for the SPEs due to them being made to support Enron, and if they do fall go bankrupt, they would not affect Fastow much because his main source of income in Enron was still safe, and he could simply make more SPEs. This creates a conflict of interest, because the owner of a company should do their best to help the company that they own prosper, but Fastow did not care. He purposely opened up shaky companies that were not expected to last long, to take the pressure off of Enron. This practice can lead to hundreds of people ending up hurt and jobless because they signed up with a company that was not going to last long, and would be unable to keep paying them when they went bankrupt and had to dissolve. Enron could have handled the situation very differently, in a way that would not have caused the livelihood of thousands of people to be constantly at risk, as well as avoid being charged by the law and jail time. The first signs that Enron was going to have issues were when it was first being founded in 1985, where the corporate merger between Houston Natural Gas and InterNorth cost both companies the exclusive right to their own pipelines and a massive debt was put upon them. The simplest way for this to have been avoided was to not have tried to do the merger between the two companies. The reason why both of them wanted to merge together was for the exclusive rights of their pipelines, which would have let them drive up the price of energy and increase their profits. This backfired completely since they lost the ability to achieve their goal, as well as incur a massive debt. If both companies have simply decided to not merge, they both could have survived by being competitors in different areas.

The less cost efficient strategy that could have been done if the merger went through and after Enron found themselves with a massive debt that they could not afford to manage, was apply for bankruptcy. This would have let them avoid all the troubles of running a scandal and the issues of being caught. It would have been much more responsible for Enron to announce that they were having financial problems, apply for bankruptcy, and pay off their shareholders what they were due. Instead they decided to take on more shareholders, have them invest large amounts of money in the company, then give them little in return because Enron had very little to give them when they did go under. This is incredibly irresponsible of them, and shows a great lack of respect and care for their investors. Enron cheated and stole the money and livelihood of thousands of people due to corporate greed and there is very little excuse that the higher ups of the company can say that would make them less responsible for what happened.