Case Study: Enron Corporation Accounting Scandal
Case Study: Enron Corporation Accounting Scandal
1. What is Enron Scandal?
Formed in 1985 from a merger of Houston Natural Gas and Internorth, Enron Corp. was the first nationwide natural gas pipeline network. Over time, the firm’s business focus shifted from the regulated transportation of natural gas to unregulated energy trading markets. The guiding principle seems to have been that there was more money to be made in buying and selling financial contracts linked to the value of energy assets (and to other economic variables) than in actual ownership of physical assets. Until late 2001, nearly all observers – including Wall Street professional – regarded this transformation as an outstanding success. Enron’s reported annual revenues grew from under $10 billion in the early 1990s to $139 billion in 2001, placing it fifth on the Fortune 500. Enron’s problems did not arise in its core energy operations, but in other ventures, particularly “dot com” investments in Internet and high-tech communications businesses. Like many other firms, Enron saw an unlimited future in the Internet. [15] During the late 1990s, it purchased on-line marketers and service providers, constructed a fiber optic communications network, and attempted to create a market for trading broadband communications capacity. Enron entered these markets near the peak of the boom and paid high prices, taking on a heavy debt load to finance its purchases. When the dot com crash came in 2000, revenues from these investments dried up, but the debt remained. Enron also recorded significant losses in certain foreign operations. The firm made major investments in public utilities in India, South America, and the U.K., hoping to profit in newly-deregulated markets. In these three cases, local politics blocked the sharp price increases that Enron anticipated. [16] By contrast, Enron’s energy trading businesses appear to have made money, although that trading was probably less extensive and
1. What is Enron Scandal?
Formed in 1985 from a merger of Houston Natural Gas and Internorth, Enron Corp. was the first nationwide natural gas pipeline network. Over time, the firm’s business focus shifted from the regulated transportation of natural gas to unregulated energy trading markets. The guiding principle seems to have been that there was more money to be made in buying and selling financial contracts linked to the value of energy assets (and to other economic variables) than in actual ownership of physical assets. Until late 2001, nearly all observers – including Wall Street professional – regarded this transformation as an outstanding success. Enron’s reported annual revenues grew from under $10 billion in the early 1990s to $139 billion in 2001, placing it fifth on the Fortune 500. Enron’s problems did not arise in its core energy operations, but in other ventures, particularly “dot com” investments in Internet and high-tech communications businesses. Like many other firms, Enron saw an unlimited future in the Internet. [15] During the late 1990s, it purchased on-line marketers and service providers, constructed a fiber optic communications network, and attempted to create a market for trading broadband communications capacity. Enron entered these markets near the peak of the boom and paid high prices, taking on a heavy debt load to finance its purchases. When the dot com crash came in 2000, revenues from these investments dried up, but the debt remained. Enron also recorded significant losses in certain foreign operations. The firm made major investments in public utilities in India, South America, and the U.K., hoping to profit in newly-deregulated markets. In these three cases, local politics blocked the sharp price increases that Enron anticipated. [16] By contrast, Enron’s energy trading businesses appear to have made money, although that trading was probably less extensive and
References: 1. Healy, Paul M.; Krishna G. Palepu (Spring 2003). "The Fall of Enron" (PDF). Journal of Economic Perspectives 17 (2): 11. 2. Healy, Paul M.; Krishna G. Palepu (Spring 2003). "The Fall of Enron" (PDF). Journal of Economic Perspectives 17 (2): 10 3 4. Healy, Paul M.; Krishna G. Palepu (Spring 2003). "The Fall of Enron" (PDF). Journal of Economic Perspectives 17 (2): 11. 7. Eric Roston, The Enron Players. Time Magazine. Jan. 27, 2002. Retrieved from: http://www.time.com/time/magazine/article/0,9171,1101020204-197668,00.html 8 11. Peter Elkind and Beth McLean, Judgment day: guilty, guilty, guilty. Fortune. Jan.13, 2006. Retrieved from: http://www.crawfordsworld.com/rob/AP%20Macro%20Year/Enron/EnronVerdict.htm 12 15. Mark Jickling, CRS Report RS21401, Regulation of Energy Derivatives. Apr. 21, 2006. PDF file. Retrieved from http://www.policyarchive.org/handle/10207/bitstreams/3682.pdf 16 17. Kleckner, P.K., & C. Jackson (2005) Sarbanes-Oxley Creates a New Beginning for Accountants. CPA Journal, 75, 14. 19. A. Feldman (September 2005). Surviving Sarbanes-Oxley, Inc. Magazine, 132-138. 21. Deakin, Simon; Suzanne J. Konzelmann (September 2003). "Learning from Enron" (PDF). ESRC Centre for Business Research (University of Cambridge) (Working Paper No 274): 1. Archived from the original on 2010-10-17. Retrieved 2010-10-17.