Enron scandal
Chief Financial Officer Andrew Fastow and other executives misled Enron's board of directors and audit committee on high-risk accounting practices and pressured Arthur Andersen to ignore the issues.
Arthur Andersen LLC was found guilty of illegally destroying documents relevant to the SEC investigation, which voided its license to audit public companies and effectively closed the firm.
Enron changed from being a natural gas producer and supplier to a trader of energy derivative contracts with the assistance of Jeffrey Skilling, who joined the company as a consultant before rising to the position of chief operating officer.
[1]: 6 [10] When speculative business ventures proved disastrous, it used unethical practices to use accounting limitations to misrepresent earnings and modify the balance sheet to indicate favorable performance.
[6]: 9 The combination of these issues later resulted in the bankruptcy of Enron, and the majority of them were perpetuated by the indirect knowledge or direct actions of Lay, Skilling, Andrew Fastow, and other executives such as Rebecca Mark.
"[11]: 132–133 Enron earned profits by providing services such as wholesale trading and risk management in addition to building and maintaining electric power plants, natural gas pipelines, storage, and processing facilities.
[13]: 97–100 Enron also used creative accounting tricks and purposefully misclassified loan transactions as sales close to quarterly reporting deadlines, similar to the Lehman Brothers Repo 105 scheme in the 2008 financial crisis, or the currency swap concealment of Greek debt by Goldman Sachs.
"[18] Despite potential pitfalls, the U.S. Securities and Exchange Commission (SEC) approved the accounting method for Enron in its trading of natural gas futures contracts on January 30, 1992.
Chief Financial Officer (CFO) Fastow developed the special purpose entity Chewco Investments, a limited partnership (L.P.) that raised debt guaranteed by Enron and was used to acquire CalPERS's joint venture stake for $383 million.
[28]: 21 Even with its complex corporate governance and network of intermediaries, Enron was still able to "attract large sums of capital to fund a questionable business model, conceal its true performance through a series of accounting and financing maneuvers, and hype its stock to unsustainable levels.
The auditor's methods were questioned as either being completed solely to receive its annual fees or for its lack of expertise in properly reviewing Enron's revenue recognition, special entities, derivatives, and other accounting practices.
In addition, after news of SEC investigations of Enron were made public, Andersen would later shred several tons of relevant documents and delete nearly 30,000 e-mails and computer files, leading to accusations of a cover-up.
[6]: 14 The United States Senate Permanent Subcommittee on Investigations of the Committee on Governmental Affairs' report accused the board members of allowing conflicts of interest to impede their duties as monitoring the company's accounting practices.
questioned how Enron could maintain its high stock value, which was trading at 55 times its earnings, arguing that analysts and investors did not know exactly how the company made money.
[citation needed] On August 15, Sherron Watkins, vice president for corporate development, sent an anonymous letter to Lay warning him about the company's accounting practices.
[58] Lay's efforts seemed to meet with limited success; by September 9, one prominent hedge fund manager noted that "[Enron] stock is trading under a cloud.
[62] Attempting to explain the billion-dollar charge and calm investors, Enron's disclosures spoke of "share settled costless collar arrangements", "derivative instruments which eliminated the contingent nature of existing restricted forward contracts," and strategies that served "to hedge certain merchant investments and other assets."
In announcing Fastow's ouster, Lay said, "In my continued discussions with the financial community, it became clear to me that restoring investor confidence would require us to replace Andy as CFO.
[43] On October 27 the company began buying back all its commercial paper, valued at around $3.3 billion, in an effort to calm investor fears about Enron's supply of cash.
McMahon and a "financial SWAT team" put together to find a way out of the cash crisis discovered that under Fastow's watch, Enron only operated on a quarterly basis.
[65] Industry analysts feared that Enron was the new Long-Term Capital Management, the hedge fund whose bankruptcy in 1998 threatened systemic failure of the international financial markets.
[75] By November, Enron was asserting that the billion-plus "one-time charges" disclosed in October should in reality have been $200 million, with the rest of the amount simply corrections of dormant accounting mistakes.
[76] Both companies were said to be anxious to receive an official assessment of the proposed sale from Moody's and S&P presumably to understand the effect the completion of any buyout transaction would have on Dynegy and Enron's credit rating.
In addition, concerns were raised regarding antitrust regulatory restrictions resulting in possible divestiture, along with what to some observers were the radically different corporate cultures of Enron and Dynegy.
[82] On November 19 Enron disclosed to the public further evidence of its critical state of affairs, most pressingly that the company had debt repayment obligations in the range of $9 billion by the end of 2002.
"[11]: 403 Although they had seemingly ironed out a number of outstanding issues at a meeting in New York over the previous weekend, ultimately Dynegy's concerns about Enron's liquidity and dwindling business proved insurmountable.
Additionally, many of Enron's major assets were pledged to lenders in order to secure loans, causing doubt about what, if anything, unsecured creditors and eventually stockholders might receive in bankruptcy proceedings.
[116] Arthur Andersen was found guilty of obstruction of justice for shredding the thousands of documents and deleting emails and company files that tied the firm to its audit of Enron.
[117] Although only a small number of Arthur Andersen's employees were involved with the scandal, the firm was effectively put out of business; the SEC is not allowed to accept audits from convicted felons.
As Pellegrini wrote, "The Democrats will have the company-he-keeps, guilt-by-association thing on their side, and with all the ... general whiff of rich man's cover-up about the whole affair, they'll have a class warfare card to play this spring.
