Enron collapse
The Enron collapse refers to the dramatic downfall of Enron Corporation, a major American energy company that became synonymous with corporate fraud. Founded in 1985, Enron initially thrived as a natural gas supplier and expanded into various sectors, including electricity and commodities. Throughout the 1990s, the company enjoyed skyrocketing stock prices, peaking at over $90 per share by August 2000. However, hidden financial issues, including significant debt and unethical accounting practices facilitated by its auditing firm, Arthur Andersen, led to a sudden collapse in 2001.
As investigative reports began to raise concerns about Enron's financial integrity, the company’s stock plummeted, leading to its bankruptcy filing on November 30, 2001. This event resulted in thousands of employees losing their jobs and pensions, while investors faced massive financial losses. In the aftermath, several top executives faced criminal charges, and the scandal prompted significant regulatory reforms, including the Sarbanes-Oxley Act of 2002, aimed at improving corporate governance and accountability. The Enron collapse remains a pivotal example of the consequences of corporate malpractice and the importance of ethical financial practices.
Enron collapse
A scandal that caused the bankruptcy of Houston-based Enron Corporation, a leading energy company
A publicly traded natural gas and commodities company, Enron grew swiftly following its formation in 1985. Its stock rose dramatically through the 1990s. However, the company was riddled with fraud and relied on poor financial reporting to hide billions of dollars in debt. In 2001, stock values plunged, and Enron was forced to file bankruptcy. Thousands of Enron employees lost jobs and pensions, investors were bilked for billions, and several company executives were imprisoned.
Enron began in 1985 as an energy supplier via a network of North American natural gas pipelines following the merger of Houston Natural Gas and InterNorth. The company added capabilities by building or acquiring electric power plants around the globe and expanded into such enterprises as petrochemicals, plastics, pulp and paper, broadband, and water. The company lobbied successfully for natural gas trade deregulation, and it made enormous profits by supplying electricity at inflated prices. Throughout the 1990s, the value of Enron stock soared, topping more than $90 per share in August 2000.
How the Downfall Began
Not all Enron efforts were profitable. Many ventures—such as the massive Dabhol power project in India—were disastrous failures, incurring large amounts of debt. However, to present the false impression the company was booming and to keep investments pouring in, Enron engaged in dubious, unethical, or downright fraudulent business practices.
The company built a complicated web of special-purpose offshore shell companies to boost apparent income and asset value and to disguise significant losses. Arthur Andersen, a large and respected Chicago-based accounting firm, assisted Enron for years in altering their bookkeeping in exchange for multimillion-dollar auditing and consultation fees. Executives at Andersen were also found to have shredded documents to conceal the company’s involvement in Enron’s scheme. As a result of these deceptive accounting practices, investments rolled in, and top Enron officers collected enormous salaries and bonuses based on expected performances that never materialized.
A significant part of Enron’s plan involved the participation of important political figures. Enron was a major contributor to the campaigns of US president George W. Bush and US senator Phil Gramm, who streamlined legislation benefiting the company. Senator Gramm was husband of Wendy Gramm, chair of the Commodity Futures Trading Commission (CFTC), who in the early 1990s changed rules governing energy futures trading to Enron’s advantage. She later accepted a seat on Enron’s board of directors and served on its Audit Committee, both highly paid positions within the company. President Bush, the Gramms, Vice President Dick Cheney, Treasury Secretary Paul O’Neill and other influential individuals were instrumental in spearheading, at Enron’s urging, federal deregulation of energy markets in late 2000.
Policies that eliminated oversight allowed Enron to shift its emphasis to power brokerage and to freely manipulate the energy supply in major markets. In California, for example, the company engineered more than thirty-five rolling blackouts that interrupted or withheld power in the state. Hundreds of thousands of business and private customers were subsequently forced to pay inflated prices for electricity. Before tougher energy regulations were instituted in mid-2001, Enron gouged billions of dollars from customers and contributed to a national energy crisis. Once regulations were instituted, a massive revenue stream dried up, and Enron’s shaky financial situation was exposed.
The Crash and the Aftereffects
Enron came under scrutiny in early 2001 after a series of articles in respected financial publications raised questions about the company’s suspicious income, profits, and debt accounting practices. Enron’s empire was ready to collapse. In August of that year, Chief Executive Officer (CEO) Jeffrey Skilling resigned—after selling his shares of company stock for more than $30 million. Other top executives similarly divested themselves of their holdings for enormous sums of money as the company crumbled.
Enron received a brief reprieve on September 11, 2001, when terrorist attacks on the World Trade Center moved the spotlight away from the company’s practices. In the interim, the company sold some assets and issued “corrected” accounting reports for previous years of operation in a desperate attempt to support its financial profile and maintain investor confidence. The ploy did not work, and by late October 2001, the price of Enron stock had plunged to $20 per share. The company’s credit rating was downgraded, which further reduced investments. In November, the Securities and Exchange Commission (SEC), the federal stock market regulatory agency, announced it would begin a formal investigation of Enron.
After a proposed buyout fell through, further lowered credit ratings, and a flurry of negative media reports were printed, the end came quickly for Enron. With its stock worth just pennies per share, the company filed for bankruptcy on November 30, 2001, and applied for Chapter 11 protection two days later. Four thousand Enron employees immediately lost their jobs. Fifteen thousand other employees—whose pensions were based on the value of now-worthless Enron stock—lost everything they had saved.
Top Enron executives were subsequently tried for fraud, money laundering, conspiracy, and other crimes. More than a dozen received prison terms. Arthur Andersen lost its Certified Public Accountant (CPA) license, costing its eighty-five thousand employees their jobs. Enron founder Kenneth Lay, facing a long confinement for his role in the scandal, died in 2006 before being sentenced.
Impact
Enron’s bankruptcy, the largest in US history at the time, was soon surpassed when WorldCom folded in 2002 and was further dwarfed by the bankruptcies of Lehman Brothers and Washington Mutual Bank in 2008.
In a class action lawsuit, former Enron employees each received about $3,000 in compensation for lost pensions. Shareholders similarly recovered a fraction of nearly $75 billion they lost. In the wake of the scandal, new legislation—especially the Sarbanes-Oxley Act of 2002—was instituted to strengthen corporate accounting standards and practices.
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