The Enron Case Study (Essay Sample)

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The Enron Case Study
Introduction
The Enron scandal which came to light in October 2001 was one of the major frauds in the United States involving a multibillion dollar corporation with thousands of employees and affiliations right up to the White House. It is a scandal that led to Enron Corporation, a giant Houston, Texas-based energy company, to file for bankruptcy and the dissolution of Arthur Andersen, a leading audit and accountancy firm in the US. The fall of Enron represents one of the biggest audit failures in the world (Benston 12). It is a clear-cut example of how mismanagement, conflict of interests, and accounting fraud can result in financial chaos, loss of jobs, and destruction of livelihoods for thousands. The fall of Enron provides concrete lessons in the moral responsibility of individuals and corporations to the general public. This paper examines how the fraud occurred, who was responsible, the reasons for the debacle, an analysis of the court proceedings of the case, and the implications the matter had on corporate ethics and accounting practices in the US.
Case background: the rise and fall of Enron
Before its self-instigated implosion, Enron was a leading giant in the energy sector throughout the 1990s. The company came into being after the 1985 merger of Houston Natural Gas and a Nebraska-based gas pipeline firm formerly known as Inter-North. Enron Corporation was universally recognized as one of the most innovative companies in the new e-commerce economy and trading practices. It was involved in a variety of business activities ranging from trading in gas and electricity futures, advertisers’ broadcast time and Internet bandwidth among others. Before its bankruptcy in 2001, the company had ventured into communications and pulp paper industries with an annual rise in revenues from $9 billion in 1985 to more than $100 billion by the end of the 2000 financial year (Thomas). However, revelations of institutionalized and creatively planned accounting frauds by Enron’s top executives reached the public domain at the end of the year 2001. It also emerged that Enron had taken heavy debts since its inception and had lost its exclusive rights after deregulation of gas pipelines.
In an effort to find a fast solution to the company’s revenue and credit problem, Enron’s CEO, Kenneth Lay, sought the help of a young sharp minded banking and financial consultant, Jeffrey Skilling. Little did he know that Skilling would turn out to be the company’s Achilles’ heel. Skilling assembled a team of the sharpest and most shrewd talents in the business world who made Enron an overnight success in electrical futures and Web based commodities trading. When cracks began appearing in the company’s financial crown, Lay, Skilling, and the company’s contracted auditing firm, Arthur Andersen, resorted to accounting fraud, misrepresentation of revenue, and a general disregard of business ethics to stay afloat. Revisions of the company’s financial statement revealed that it had made losses totaling $586 million for the five years preceding 2001. Enron’s stock price dropped from $90 per share in 2000 to less than one dollar at the end of 2001 (Thomas). In December 2001, Enron which was at one time the seventh largest firm in the US, declared bankruptcy leaving over 4,000 employees jobless and losses totaling billions of dollars for its investors.
A discussion of the Enron scandal can not be completed without the mention of the role played by its accountants, the Arthur Andersen firm. Officials of the audit firm maintained that the fall of Enron was not due to accounting malpractices but rather as a result of the company’s faulty business model. However, investigations by external auditors and law enforcements agencies found Andersen liable to negligence in its accounting practices and having worked in conspiracy with Enron to create and present false information about the company’s earnings reports (Fox 23). Andersen was also found culpable of assisting Enron’s CEO to hide large sums of debts in order to artificially inflate stock prices. Investigations revealed that the firm had either misdirected or actually shredded thousands of incriminating documents about the true extent of Enron’s financial woes. The absence of the documents allowed the fraud to continue unabated firmly establishing Arthur Andersen’s responsibility in the fraud. The accounting firm’s involvement in the scandal raised questions about the ethical standards of the American accounting system.
Enron’s fraud and conspiracy trial
The trial involved federal prosecutors led by Sean Berkowitz presenting their case against Enron’s former executives Kenneth Lay, Jeffrey Skilling and others for lying to investors and the public and for gross accounting malpractices. There were video and audio exhibits showing Jeff Skilling talking to top executives and employees about the good health of the company’s broadband division and the bright prospects the division had in the near future. It was further demonstrated that Skilling had intentionally misled investors on the stability of the broadband department with full knowledge of the company’s inability to sustain its operations. The prosecution presented 53 counts against the company’s executives in a 65-page indictment that included financial crimes, bank fraud, falsified statements, securities and wire frauds, insider trading, and money laundering.
For more than eight weeks the government presented a total of 22 witnesses to demonstrate that the former Enron executives were actually the architects of the biggest corporate fraud in the history of the United States. Major witnesses included Enron’s former chief of finance, Andrew Fastow, who admitted to two counts of irregular wire and securities fraud perpetrated in 2004. Ben Glisan, the former Enron treasurer, was another witness for the prosecution who pleaded guilty to a single count of conspiracy in 2001. He was sentenced to a five year prison term (Mulligan). Both Fastow and Glisan testified that the two top executives, Lay and Skilling had full knowledge of the company’s dire financial status when they misled investors and employees about the fictitious financial stability of the company. For close to sixteen weeks, teams of high-priced defense attorneys battled to discredit the testimonies given by the cooperating witnesses and the admissibility of each piece of evidence presented. Notably, Skilling’s lawyer, Dan Petrocelli implored the jury to take a keen look at Skilling and decide if he was a criminal. The defense side accused the prosecution of presenting a Hollywood style conspiracy case by forcing innocent Enron employees to plead to crimes they never committed with the sole intention of making them testify against their former bosses.
Enron’s former CEO, Jeffrey K. Skilling, was sentenced to serve more than 24 years in prison for his role in the collapse of the company. He was further forced to forfeit $45 million which was a big blow to his personal fortune. While passing the judgment, Judge Simeon T. Lake III stated that Skilling’s c...