The death of Kenneth Lay last spring and the recent 24-year sentence of Jeffrey Skilling have put an end to the darkest story of modern finance: the Enron case. Actually, this firm turned from a success model into a paradigm of all the problems of finance capitalism. With the giving up of the exploitation natural gas in order to focus on becoming a market maker, Enron increased its reported annual revenues from under $10 billion to $139 billion during times ruled by the dot-com bubble and electricity deregulation. But these results hid another reality: accounting fraud, nepotism, overstatement of profits.
The end of Enron Corp. was very sudden: division by 350 of the market value, mass redundancies, pension loss… and after that, Enron became emblematic of all that went wrong in the financial system. This scandal along with the WorldCom case and others has lead to a complete reform of corporate governance via the promulgation of the Sarbanes-Oxley Act.
In this article, we'll try to show how Enron's collapse has been a catalyst for a recasting of the financial regulation. First and foremost we'll have an overview of Enron's activities and explain what made this disaster possible. Then we'll look at the consequences of the scandal for people as well as for corporate governance.
Enron Corporation was formed in 1985 from a merger of Houston Natural Gas and Internorth, two natural gas pipeline companies. Originally, it was involved in the transmission and distribution of electricity and gas, and in the construction of power plants and pipeline throughout the United States. At this time, its reported annual revenues were under $10 billion.
But Enron decided to focus on unregulated energy trading market and became a financial trader and market maker in electricity and in other sectors following a strategy of diversification (it managed more than 30 product including natural gas, petrochemicals, steel, paper, water, plastics, credit derivatives, weather risk management). Moreover, Enron has launched EronOnline, the first web-based transaction site which allows users to buy, sell and trade commodities and finance tools. It can be considered as the first successful e-commerce website.
This transformation was seen as a real success: its reported annual revenues were of $139 billion in 2001 (fifth on the Fortune 500), its stock increased by 56% in 1999 and 87% in 2000, it was named "America's Most Innovative Company" by Fortune magazine for six consecutive years (from 1996 to 2001). Until late 2001, Enron was the model of the new America firm. But behind this success, reality was much grimmer.
Tags: Enron, unregulated energy trading market ,corporate accounting scandal
[...] Banks have played a dual role: bank executives helped Enron to move debt off its balance sheet while security analysts of the same banks lied to investors on Enron's financial health. Moreover banks executives took profit from their position to earn money from the "Ponzi scheme". The law firms have helped Enron by providing false certificates. As the result, Enron was able to mislead investors on its profitability and to inflate artificially the value of its shares. But nothing is eternal and the setback was bound to be severe. [...]
[...] All this will lead to the identification of the flaws of the financial system ) Rise and fall of Enron Movement of Enron's share price (USD) Enron Corp Enron Corporation was formed in 1985 from a merger of Houston Natural Gas and Internorth, two natural gas pipeline companies. Originally, it was involved in the transmission and distribution of electricity and gas, and in the construction of power plants and pipeline throughout the United States. At this time, its reported annual revenues were under $10 billion. [...]
[...] The capitalism system has succeeded in facing up to its financial drifts but a new problem is looming: the integration of ecology in economic regulation. And this problem is both more difficult and more hazardous for the survival of the economic system that Enron's little games but our ability to prepare the world for the future generations depends of it. Bibliography Wikipedia The Economist, A price worth paying? ( 05.19 .05) The Economist, Jail time for Jeffrey ( 10.28 .06) The Washington Post, Timeline of Enron's collapse ( 09.30 .04) Bassett, Richard & STORRIE, Mark, Accounting [...]
[...] Since this disaster, some leaders want to limit the part of the employer stock invested to 20 or 10% Accounting firms and banks: a discredited reputation The Enron scandal had some impact on other firms. The most important is Arthur Andersen, one of the world's five leading accounting firms ("The Big Five"). Andersen was the auditor of Enron and helped it to bring some accounting tricks into play. In 2002, Arthur Andersen was convicted of obstruction to justice for shredding documents related to Enron's audit. [...]
[...] All things considered, we can set up a connection between Enron's collapse and the nineties' situation of excessive deregulation, collusion between political and economic and an erratic financial capitalism only obsessed by profitability. that has called corporate governance into question In this part, we'll try to focus on the repercussions of Enron's collapse on people implicated (managers, bankers and accountants) in its fall and on people who suffered from this scandal (workers and investors). Then we will dwell on the impact of Enron on the corporate governance with a study of the SOX. [...]
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