In: Accounting
Three-minute presentation about the cause of Enron's corporation collapse? according to Enron: smartest guys in the room?
Causes of Enron's Corporation collapse
Accounting Problems
The conventional wisdom is that it was "innovative" accounting practices and their consequences that started the tide of losses that brought the energy giant down. Enron collapsed not so much because it had gotten too big, but because it was perceived to be much bigger than it really was in the first place. By decentralizing its operations into numerous subsidiaries and shell corporations, Enron was able to hide huge derivative losses that would have halted its growth much sooner if widely understood. Publicly traded corporations are required to make their financial statements public, but Enron's finances were an impenetrable maze of carefully crafted imaginary transactions between itself and its subsidiaries that masked its true financial state. In other words, losses were held off the book by subsidiary companies, while assets were stated.
Fallout From Fraud
Taken at its word, this rosy scenario made the company the darling of Wall Street, and it was able to borrow almost endlessly and expand into e-commerce and other questionable ventures. Its stock literally soared, which made employee compensation and pensions in the form of stock options seem very attractive. But what were already considered accounting practices on the edge of acceptable standards were eventually revealed to be outright fraudulent. The disgrace drove so much business away from and created such liability for accounting firm Arthur Anderson that it was itself forced out of business. By this time, though, the true value of the company had been revealed and the stock price collapsed, leaving employees with worthless options and pension packages. Of course, executives that understood the real picture sold their shares in advance of the collapsed and waltzed away with billions.
Management Culture
Of course, the Enron fiasco did not happen by accident. It was facilitated by a corporate culture that encouraged greed and fraud, as exemplified by the energy traders who extorted California energy consumers. Rather than focus on creating real value, management's only goal was in maintaining the appearance of value, and therefore a rising stock price. This was exacerbated by a fiercely competitive corporate culture that rewarded results at any cost. Some divisions of Enron replaced as much as 15 percent of its work force annually, leaving employees to scramble for any advantage they could find to justify their continued employment.
Preferential Treatment
While the internal integrity of the company remained thusly challenged, the facade was the exact opposite. The company leveraged political connections in both the Clinton and Bush administrations, as well as on Wall Street, for preferential treatment and the air of legitimacy that allowed it to perpetrate its frauds. In this context, the accounting practices widely considered the cause of the Enron collapse can be seen as just a symptom of a larger management culture that exemplified the dark side of American capitalism.
CONSEQUENCES
Enron, as a company, completely fell apart after the collapse. It was forced to renounce earnings with multiple partnerships such as Chewco Investments and JEDI. Then the company was forced to recall earnings all the way back to 1997, which only summed to $586 million and was only 20% of what had been reported. The stock prices fell to mere pennies and all consumer and financial buoyancy was lost. Shortly after, Enron declared bankruptcy.
Enron’s shareholders did not benefit from the greed of the executives. Those that had their pension funds financed in the company lost almost everything. Consequently, the SEC and Congress worked swiftly to begin immediate restructuring to reduce losses like those experienced, in the future (Cunningham and Harris 29). A $40 billion lawsuit followed the collapse, demanding compensation for the shareholders’ worthless stock. The collapse destroyed more than $2 billion in pension plans.
The employees of Enron also greatly suffered and in most cases lost everything that they had invested in the company (McLean and Elkind “The Guiltiest”). One employee, Charles Prestwood, lost $1.3 million in the Enron collapse. Money entrusted in the company in retirement savings or investments disbanded overnight. After the collapse, the SEC stated that they would try and recover as much of the lost money as they could in their judicial system.
Enron executives also felt the consequences of the collapse. Paula Rieker was charged with insider trading when she sold just under $1 million worth of shares just a week before the collapse. Skilling was charged with 24 years in prison due to mostly charges of securities fraud. Lay was charged with 45 years in prison, but died before the sentence was scheduled. Fastow was sentenced to 10 years in prison with no parole (Wikipedia).
Creditors involved with Enron struggled to receive all of the money that was owed to them. Enron sold CrossCountry Energy for $2.45 billion in order to address some of the credit outstanding. When its last business was sold, it left Enron without any assets. In 2007, the company’s name was changed and set a goal to completely repay all creditors and end all its activities.
Enron: The Smartest Guys in the Room is a 2005 American documentary film based on the best-selling 2003 book of the same name by Fortune reporters Bethany McLean and Peter Elkind, a study of one of the largest business scandals in American history. McLean and Elkind are credited as writers of the film alongside the director, Alex Gibney.
The film examines the 2001 collapse of the Enron Corporation, which resulted in criminal trials for several of the company's top executives during the ensuing Enron scandal; it also shows the involvement of the Enron traders in theCalifornia electricity crisis. The film features interviews with McLean and Elkind, as well as former Enron executives and employees, stock analysts, reporters and the former Governor of California Gray Davis.
The film won the Independent Spirit Award for Best Documentary Feature and was nominated for Best Documentary Feature at the 78th Academy Awards in 2006.