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Overview

Enron Corporation, once the world’s largest energy company, has become synonymous with fraud and corruption. It is probably the most scandalous business story of our times. Its skyrocketing profits were followed by the largest bankruptcy case in US history. How did a respected company make it to the top of its industry only to crumble into economic tragedy?

In this article, you’ll learn about the people involved in the Enron scandal and how they were connected to it. You’ll also explore what went on behind closed doors at Enron, as well as how financial structures hid debts from creditors.

Big Idea #1: Enron, a company whose decades of deceit ended in bankruptcy, nearly met the same fate just two years after incorporating.

Does it feel like history is repeating itself? It sure seemed that way when Enron, a huge energy company, filed for bankruptcy in 2001. Back in 1987, two years after it was founded, Enron already had debt problems similar to the ones they faced later on. In fact, Ken Lay took over as CEO and renamed the company “Enron” only two years before filing for bankruptcy in 2001.

Unfortunately, Enron was not doing well financially by 1986. It had a loss of $14 million in the first year and its credit rating dropped to junk status in January 1987.

Enron was in trouble because of dishonest business practices. They were manipulating their earnings by using the Enron Oil subdivision to speculate on oil prices and not produce or sell any oil.

Furthermore, these business leaders would set up deals with fake companies that allowed for huge losses in order to offset these losses with other deals that earned equal amounts of profit.

Enron was trying to prove that it could make a profit. The stock market is quick to reward companies that are constantly profitable. However, Enron’s oil trading business had taken such a loss on high-risk bets by 1987 that the entire company was at risk of bankruptcy.

But Ken Lay was ready to act. He told analysts on Wall Street that this downturn was an anomaly and would never happen again. However, as we know now, Enron’s culture of deceit ran deep in its roots.

Big Idea #2: Enron was fundamentally transformed when they found their visionary.

Enron was in a lot of trouble. It had lost money for the past few years, and its stock price had plummeted to $1.50 per share from over $80 per share just two years earlier. The company decided to hire Jeffrey Skilling as CEO of Enron Finance, because he seemed like the right man for the job. He was very bright and went to Harvard Business School, so he must have been good at his job. He helped turn Enron around by turning it into what he called a ”Gas Bank.” They would sign contracts with gas producers who would then sell their product to Enron which would sell it on to customers at a markup. However, Skilling saw another way that they could make money: trading these contracts themselves instead of just selling them on as is.

The second step of Skilling’s plan was to convince Enron to use mark-to-market accounting.

While businesses traditionally use accounting techniques that record their income when they receive it, mark-to-market accounting records the total value of a deal as soon as it’s signed. This can make companies appear like they’re growing more quickly, which pleases Wall Street investors and makes stock prices go up.

Skilling also created a corporate environment where management skills and experience weren’t valued as much as an ability to think. He hired people with special talents, or spikes, regardless of their shortcomings.