Question

Can someone please explain ENRON SCANDAL. Why was it one of the biggest scandal? What banks were involved and what happened in this scandal? What fraud was committed and what was the motivation for bank managers to commit this scandal.

Answer 1

Enron Scandal

The merger of Houston Natural Gas and InterNorth led to the formation of Enron in the year 1985. In this scandal, the executives were involved in the poor financial reporting and hid huge debt amount of project failures. Andrew Fastow who was the CFO was mainly involved in the fraud along with other executives and befooled Enron’s Board of Directors.

Biggest Scandal

Enron filed the bankruptcy in 2001 after the shareholders filed the lawsuit. Enron had $63 billion of assets and hence it was the biggest bankruptcy due to fraudulent activities.

Banks Involved

The banks involved were Deutsche Bank AG, Credit Suisse Group AG, and Bank of America’s Merill Lynch.

About Scandal

The company filed the bankruptcy due to series of events which were financially hazardous to the Company. It was the biggest failure of the Energy and Services Company and largest auditing company in the world.

Banks Involvement

Enron took new loans to payoff the existing loans and the new loans were utilized for expansion of investments in new business areas.

Also, the banks were involved by sending cash to third party for future delivery of the product. Then the third party was involved in the similar process with Enron. The use of pre pays by the banks led to the pass of funds to Enron.