The Enron Scandal:

the Crime, Scandal,

Tragedy and
Controversy of the
Century

Prepared by- Gaurav Swamy

BFIA 1A

Introduction
In 2001, the nation was rocked by the collapse of Enron, a multibillion dollar
corporation that employed thousands of people and had affiliations right up to
and including The White House itself.
Amid the financial chaos and destroyed lives and reputations the collapse left in
its wake, questions arose concerning exactly how the catastrophe occurred, why it
occurred, and who was involved. In this paper, these issues will be examined, as
will the various ways that Enron’s debacle heightened the awareness of corporate
ethics in the United States.

An Overview of the Scandal

It is important, in starting, to understand how Enron rose to power and later
imploded. Enron itself came to be born as the result of a 1985 merger of Houston
Natural Gas and Inter North-a Nebraska based gas pipeline company. From the
very beginning, Enron had shown some cracks in its façade, as the company took
on huge amounts of debt during its foundation and, as a result of deregulation of
gas pipelines, no longer had exclusive right to its own pipelines (Thomas, 2002).
In order to solve Enron’s credit and revenue problems, CEO Kenneth Lay enlisted
the help of Jeffrey Skilling-a young, sharp banking and finance consultant.
Ultimately, Lay was so impressed that he tapped Skilling to join the ranks of
Enron, which grew Enron into a major market middleman for energy that would
eventually dominate the trading of energy contracts. Skilling also recruited the
sharpest and most shrewd businesspeople he could find to join his newly formed
team. Ultimately, Skilling got Enron involved in the trading of electrical futures
and the creation of a Web-based commodities trading company that seemed to be
an overnight success-Enron’s stock value skyrocketed as well, increasing over
50% in one year (What Really Happened.com). After many years of seemingly
huge successes, more cracks began to appear in the Enron crown. In the final
analysis, the conspiracy of Lay, Skilling and others led to the collapse of the
company due to fraud, false reporting of revenue, shoddy accounting practices
and a general disregard for virtually every tenet of business ethics.

With all of the fraud and mismanagement that took place under the gilded roof of
Enron, the question arises as to the involvement of others in the scandal, not the
least of whom is the firm of Arthur Andersen.
Arthur Andersen’s Involvement
No discussion of the Enron Scandal would be complete without a discussion of
the involvement of Enron’s accountants, the firm Arthur Andersen, in the scandal
itself as well as the subsequent crash of the company from the inside out. In
asking officials of Andersen if they were guilty of any wrongdoing in the scandal,
they maintain that the crash and burn of Enron was the direct result of Enron’s
faulty business model rather than questionable or poor accounting practices
(Cable News Network, 2002). A closer examination of the facts reveals otherwise;
when the Enron scandal was investigated by auditors and law enforcement
agencies, it was found that Andersen was negligent at best and at worst
completely in conspiracy with Enron to create false earnings reports, thereby
hiding huge amounts of debt and artificially inflating stock prices beyond the
point of no return (Cable News Network, 2002). Among the ultimate findings of
the investigation into Andersen’s role in the whole conspiracy, it was determined
that the firm had either directed or personally shredded thousands of documents
that showed the true extent of Enron’s financial problems. With these documents
out of the way, the fraud was able to continue, and in this instance, Andersen’s
involvement in the fraud was firmly established. Ultimately, the conspiracy led to
a total scrutiny of the American accounting system itself.

Involvement of Government Employees

In addition to the involvement of private firms in Enron’s crimes, the question of
government involvement in the conspiracy and fraud inevitably emerges when
discussing Enron. This involvement is perhaps best summed up by a direct quote
from a government document generated as the result of an independent
government oversight investigation: "Many public officials have described
Enron's demise as the product of corporate misbehavior. This perspective ignores
a vital fact: Enron would not have scaled such grand global heights, nor fallen so
dramatically, without its close financial relationships with government agencies.
Since 1992, at least 21 agencies, representing the U.S. government, multilateral
development banks, and other national governments, helped leverage Enron's
global reach by approving $7.219 billion in public financing toward 38 projects in
29 countries”

The above quote and accompanying statistics speak volumes about the extent and
impact of government involvement in Enron’s shady dealings, but a much clearer
vision of the impact of Enron’s crimes is gained with this same government
report is quoted once again, in this instance in terms of citation of what occurred
in the outside world when Enron was at its criminal worst:

In the Dominican Republic, eight people were killed when police were brought in
to quell riots after blackouts lasting up to 20 hours followed a power price hike
that Enron and other private firms initiated. The local population was further
enraged by allegations that a local affiliate of Arthur Andersen had undervalued
the newly privatized utility by almost $1 billion, reaping enormous profits for
Enron.

In India, police hired by the power consortium of which Enron was a part beat
non-violent protesters who challenged the $30 billion agreement-the largest deal
in Indian history-struck between local politicians and Enron.

The president of Guatemala tried to dissolve the Congress and declare martial
law after rioting ensued, following a price hike that the government deemed
necessary after selling the power sector to Enron.

In Panama, the man who negotiated the asking price for Enron's stake in power
production was the brother-in-law of the head of the country's state-owned
power company. Rioting followed suspicions of corruption and Enron's price
hikes and power outages there, too.

In Colombia, two politicians resigned amid accusations that one was trying to
push a cut-rate deal for Enron on the state-owned power company.

Enron, with the help of government resources, was able to wreak a great deal of
havoc in an incredibly short period of time; this havoc, as can be clearly seen, was
not limited to the United States either, but extended to other nations and
continents. The lives that this affected must surely number in the millions. Along
with these total strangers, Enron also had a negative impact, to say the least, on
its very own employees- the people who helped to make the company as strong as
it was in the first place-right or wrong.

Impact on the Enron Employees and Their Pensions

For Enron’s employees, their downfall came both as a result of the collapse of the
company for which they worked as well as their own misinformation,
assumptions and greed. As was stated earlier, Enron’s stock values nearly
doubled in one year, albeit through illegal and unethical activities. This falsely
valued stock was bought in huge amounts by Enron’s very own employees, who
either on purpose or through deception, did not ask any questions about how the
stock was growing so quickly in value or what would happen when the price fell
(What Really Happened.com, 2002). Moreover, many employees had their entire
pensions vested in Enron stock, which any financial analyst will tell you is a
recipe for disaster in itself.
Of course, the major event that changed everything for Enron’s employees was
the collapse of the company in a hail of legal problems, alleged crimes, and finger
pointing. When Enron crashed, employees were affected in several ways. Most
obvious is the loss of employment for thousands of highly skilled and well paid
employees, who were forced to try to find work elsewhere virtually overnight. To
add insult to injury, many of these employees also had their life savings totally
invested in Enron stock which was now worthless. Unemployed and bankrupt,
many Enron employees saw their whole life come undone when it came to light
exactly what Lay, Skilling and their minions had in fact done. Likewise, the
collapse of Enron had implications for the United States as a whole

How the United States was Affected

Enron affected the United States in several important ways, in addition to the
individual employees themselves. If anything positive can be said about the
Enron scandal, it is that the scandal itself heightened awareness of the
importance of integrity in Accounting and business in general, and led to the
creation of new safeguards to make sure that something like this would not
happen again, or at least not to the full extent of the Enron damage.

Ethically speaking, the scandal led to what is perhaps one of the most significant
pieces of legislation associated with the oversight of corporate ethics- The
Sarbanes/Oxley Act which sets guidelines and requirements for Accounting,
financial disclosure, the ethical behavior of corporations, and the like (McCrie,
2001). With this legislation in place, the promise exists for the elimination, if not
total eradication of corporate fraud was so blatantly practiced by the Enron team.
The Scandal’s Influence on the Stock Market
The Stock Market was also highly influenced by the Enron scandal; while it was
too late for the Enron investors, the crash of Enron’s stock sent out a loud
message to all stock investors that it was extremely important to take a closer
look at the stocks that one already owned, as well as any that they were
considering purchasing from that point forward. On the enforcement side of the
Stock Market, the Securities and Exchange Commission tightened its grip on
publicly traded stocks as well as the companies that issue them, effectively raising
the bar for the conduct of stock trades from that point forward (Thomas, 2002).
Net effect, it can be said that in yet another irony, Enron did in fact lead to the
protection of more stock investors than it originally hurt, although those who
were hurt can never be made totally whole once again after the terrible
experiences of Enron.

Summary
Having the luxury of looking at the Enron scandal from the retrospective
viewpoint of history, the scandal changed the lives of everyone in America, and
elsewhere, in one way or another, for better or for worse. Perhaps just as
importantly, it forced everyone to look at themselves and fully realize the
consequences of reckless greed and the breakage of laws on a whim. In closing,
let it be understood that it is the responsibility of every American to be vigilant,
lest another Enron emerge from the shadows to claim yet more victims in the
future.