Enron and Worldcom Scandals
ENRON
Q1. Summary of Enron Scandal.
Enron, a Houston-based energy firm founded by Kenneth Lay, transformed itself into the world’s largest energy-trading company over its sixteen years of lifespan. In 2001, Enron was one of the world’s largest energy groups, operating mainly in the USA. Though Kenneth played a smaller role in management, following the takeover, he soon became chief executive officer (CEO) and moved the headquarters from Omaha to Houston.
During 2001, it had become apparent that a number of special purpose entities were not consolidated in the balance sheet and the company admitted that there had been a number of financial reporting irregularities over the period 1997 to 2000. This made a lot of people suspicious about the company when they heard about it. One of Enron’s employees, Sherron Watkins, raised suspicions about the company’s balance sheets and financial statements. And finally became the whistleblower of the Enron scandal. After the exposure, Enron was trapped in a severe cash crisis.
Dynegy was trying to takeover Enron, but eventually the takeover was withdrawn, which meant that they no longer had any protection against bankruptcy. Consequently, profits were substantially overstated and in late 2001 the company had to file for bankruptcy.
Corporate Governance Issues in Enron: -
There were a number of issues in Enron such as-
a) SPECIAL PURPOSE VEHICLES (SPVs): Andrew Faslow (CFO) and Micheal Kopper had made partnerships creating a trading concern known as Special Purpose Vehicle (SPV). Enron then sold an asset to the SPV. The type of asset sold to the SPV was irrelevant and in fact the asset did not even have to be moved. The SPV would pay cash for the asset and Enron could show the transaction as a sale, which would inflate the profits. However, in reality the cash received from the SPV was in form of a loan, but by treating it as a sale, Enron benefited in two ways: firstly, by increasing its revenues and
Q1. Summary of Enron Scandal.
Enron, a Houston-based energy firm founded by Kenneth Lay, transformed itself into the world’s largest energy-trading company over its sixteen years of lifespan. In 2001, Enron was one of the world’s largest energy groups, operating mainly in the USA. Though Kenneth played a smaller role in management, following the takeover, he soon became chief executive officer (CEO) and moved the headquarters from Omaha to Houston.
During 2001, it had become apparent that a number of special purpose entities were not consolidated in the balance sheet and the company admitted that there had been a number of financial reporting irregularities over the period 1997 to 2000. This made a lot of people suspicious about the company when they heard about it. One of Enron’s employees, Sherron Watkins, raised suspicions about the company’s balance sheets and financial statements. And finally became the whistleblower of the Enron scandal. After the exposure, Enron was trapped in a severe cash crisis.
Dynegy was trying to takeover Enron, but eventually the takeover was withdrawn, which meant that they no longer had any protection against bankruptcy. Consequently, profits were substantially overstated and in late 2001 the company had to file for bankruptcy.
Corporate Governance Issues in Enron: -
There were a number of issues in Enron such as-
a) SPECIAL PURPOSE VEHICLES (SPVs): Andrew Faslow (CFO) and Micheal Kopper had made partnerships creating a trading concern known as Special Purpose Vehicle (SPV). Enron then sold an asset to the SPV. The type of asset sold to the SPV was irrelevant and in fact the asset did not even have to be moved. The SPV would pay cash for the asset and Enron could show the transaction as a sale, which would inflate the profits. However, in reality the cash received from the SPV was in form of a loan, but by treating it as a sale, Enron benefited in two ways: firstly, by increasing its revenues and
References: WorldCom profits scandal shakes stock markets, The Telegraph, 27 Jun 2002 (http://www.telegraph.co.uk/news/worldnews/northamerica/usa/1398577/WorldCom-profits-scandal-shakes-stock-markets.html) Haywood, Elizabeth M., Dorothy A. McMullen, and Donal E. Wygal, 2004, Behind closed doors at WorldCom: 2001, Accounting Education, 19, 101-118. Wearing R., Cases in Corporate governance (2005), Sage Publications Enron Scandal at a Glance, BBC news, Thursday, 22 August, 2002, http://news.bbc.co.uk/1/hi/business/1780075.stm Enron: The real scandal, The Economist, Jan 17th 2002 http://www.economist.com/node/940091 (New York Times, 2 May 2002: 1) (New York Times, 26 June 2002: 1)