The Enron Scandal

The Enron Scandal Enron was established in 1930 as Northern Natural Gas Company and joined with three other companies to undertake this industry. The four companies eventually began to break apart between 1941 and 1947 as a result of a public stock offering. In 1979, Northern Natural Gas was placed under new management when it was bought by InterNorth Inc. In 1985, Kenneth Lay, CEO of Houston Natural Gas Company devised a transaction for InterNorth to purchase Houston Natural Gas. Lay was named CEO of the new company and changed InterNorth's name to Enron Corporation. This newly developed company originally was involved in distributing gas and electricity throughout the United States, and operation of power plants and pipelines worldwide. In fifteen short years Enron became the nation's seventh largest company, but the company's growth was due to several illegal activities. During 2001, Enron shares fell from eightyfive dollars to thirty cents. The devastating results occurred after it was revealed that many of its profits and revenue were the result of deals with special purpose entities (Carson, 7). Arthur Anderson, Enron's accounting firm, turned their heads while Enron's management created "special purpose entities" that kept hundreds of millions of dollars of losses and debt off the balance sheet, which misled individual's investment decisions. The lack of information led to an overstatement of profits of almost six hundred million dollars and an understatement of debt of six hundred and thirty million dollars between 1997 and 2000. Arthur Anderson was not the only one releasing misleading information, some of Enron's senior managers also misled investors into thinking the company was in better shape than it was. During this time Kenneth Lay was cashing in his own Enron stock, which sold for thirty seven million dollars (Thomas, 3). The GOP also indirectly helped Enron conceal its illegal activities. The company placed more than one-third of its subsidiaries in offshore accounts and slipped its domestic assets in different tax shelters, which helped conceal Enron's financial situation. The main reason that Enron escaped any detection of fraud is that it invested in a particular type of derivatives. This was a complex financial arrangement that escaped all regulatory provisions. There was no law that required the company to disclose its derivative investments on their balance sheets (Calkins, 1). The government was also lured in by Enron's executives. The company profited from a relaxed regulatory system that it helped dictate. Lay and other top Enron executives met on several occasions with Vice President Dick Cheney, who was heading President Bush's energy task force. The company was also involved in making deals with other politicians. Economic counselor Lawrence Lindsey had been a paid adviser. Political strategist Karl Rove had been a big investor. Republican national chairman Mark Raicicot had been a paid lobbyist. Over two-thirds of the Senate and nearly forty percent of the House of Representatives benefited from Enron. The company donated nearly six million dollars in campaign donations since 1989. These donations seemed to help when the tax rebate provision of the House of Representatives passed, giving Enron two hundred and fifty million dollars (Carson, 7). The company was put under investigation and shortly after went to trial. Jeff Skilling was arrested on February 11, 2004, by the Federal Bureau of Investigation. On July 7, 2004, Kenneth Lay was indicted by a federal grand jury for his involvement in the

scandal. Former Enron CEO Andrew Fastow, the alleged mastermind behind Enron's complex network of offshore partnerships and questionable accounting practices, was indicted on November 1, 2002, by a federal grand jury in Houston on 78 counts. Andrew Fastow will serve a ten-year prison sentence and forfeit US$23.8 million, while his wife will serve a five-month prison sentence and a year of supervised release, including five months of house arrest; in return, both will provide testimony against other Enron corporate officers. John Formey, a former energy trader who invented various strategies such as the "Death Star," was indicted in December 2002 on 11 counts of conspiracy and wire fraud. Kenneth Lay was indicted by a federal grand jury for his involvement in the scandal (Calkins, 2). The Enron scandal shows the absolute requirement for boards of directors, executives and everyone else in the business world to accept the moral responsibility for honesty. While maximizing return for shareholders is the foundation of our economic system and provides for generally efficient capitalism, the system can be easily corrupted by the immorality and greed of a few. With this company's greed we see the suffering of many hardworking people who have lost their life's savings. Work Cited Calkins, Laurel Brubaker. Enron Fraud Trial Ends in Five Convictions. Washington Post; 11/04/2004. Carson, Leigh. The Real Enron Scandal. New Republic; 01/28/2002, Volume 226 Issue 3, p7, 1p, 1bw.