Case Study 1- Enron Scandal.docx - Enron Scandal: The Fall...

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Enron Scandal: The Fall of a Wall Street DarlingEnron's Energy OriginsMark-to-MarketEnron Hailed for its InnovationBlockbuster Video's RoleThe Wall Street Darling CrumblesHow Did Enron Hide Its Debt?Arthur Andersen and EnronThe Shock Felt Around Wall StreetBankruptcyCriminal ChargesNew Regulations After ScandalThe Bottom LineThe story of Enron Corporation depicts a company that reached dramatic heights only to face a dizzying fall. The fated company'scollapse affected thousands of employees and shook Wall Street to its core. At Enron's peak, its shares were worth $90.75; when thefirm declared bankruptcy on December 2, 2001, they were trading at $0.26. To this day, many wonder how such a powerful business, atthe time one of the largest companies in the United States, disintegrated almost overnight. Also difficult to fathom is how its leadershipmanaged to foolWhy Enron CollapsedEnron's Energy OriginsEnron was formed in 1985 following a merger between Houston Natural Gas Company and Omaha-based InterNorth Incorporated.Following the merger, Kenneth Lay, who had been the chief executive officer (CEO) of Houston Natural Gas, became Enron's CEO andchairman. Lay quickly rebranded Enron into an energy trader and supplier. Deregulation of the energy markets allowed companies toplace bets on future prices, and Enron was poised to take advantage. In 1990, Lay created the Enron Finance Corporation andappointed Jeffrey Skilling, whose work as a McKinsey & Company consultant had impressed Lay, to head the new corporation. Skillingwas then one of the youngest partners at McKinsey.Skilling joined Enron at an auspicious time. The era's minimal regulatory environment allowed Enron to flourish. At the end of the1990s, the dot-com bubble was in full swing, and the Nasdaq hit 5,000. Revolutionary internet stocks were being valued atpreposterous levels and, consequently, most investors and regulators simply accepted spiking share prices as the new normal.KEY TAKEAWAYSEnron's leadership fooled regulators with fake holdings and off-the-books accounting practices.Enron used special purpose vehicles (SPVs), or special purposes entities (SPEs), to hide its mountains of debt and toxicassets from investors and creditors.The price of Enron's shares went from $90.75 at their peak to $0.26 at bankruptcy.The company paid its creditors more than $21.7 billion from 2004 to 2011.Mark-to-MarketOne of Skilling's early contributions was to transition Enron's accounting from a traditional historical cost accounting method tomark-to-market(MTM) accounting method, for which the company received official SEC approval in 1992. MTM is a measure of the fair value ofaccounts that can change over time, such as assets and liabilities. Mark-to-market aims to provide a realistic appraisal of an institution'sor company's current financial situation, and it is a legitimate and widely used practice. However, in some cases, the method can be

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Term
Spring
Professor
Dr Ali Shan
Tags
Enron scandal, Enron Corporation

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