Enron

What was 'Enron'

Enron was a U.S. energy-trading and utilities company that housed one of the biggest accounting frauds in history. Enron's executives employed accounting practices that falsely inflated the company's revenues, which, at the height of the scandal, made the firm become the seventh largest corporation in the United States. Once the fraud came to light, the company quickly unraveled and filed for Chapter 11 bankruptcy on Dec. 2, 2001.

BREAKING DOWN 'Enron'

Enron shares traded as high as $85 before the fraud was discovered, but plummeted to $0.30 in the sell-off after the fraud was revealed. Shareholders received company payouts as compensation for their losses, but former company executives also settled to pay shareholders out of their own pockets. Enron was the first big-name account scandal, but it was soon followed by the uncovering of frauds at other companies such as WorldCom and Tyco International, and has become a symbol of modern corporate crime.

How did Enron Happen?

The Enron bankruptcy, at $63 billion in assets, was the largest on record at the time. Its collapse shook the markets and nearly crippled energy industry. While the obvious perpetrators of the scandal were the senior executives, who concocted the accounting schemes, financial and legal experts determined that none of it would have been possible without help. Between the Securities and Exchange Commission (SEC), the credit rating agencies and the investment banks, Enron was allowed to operate unscathed and enabled by failed oversight, manipulation, and deceptive practices of these organizations.

Initially, much of the finger pointing was directed at the SEC, which the U.S. Senate found complicit for its systemic and catastrophic failure of oversight. It was determined that, had the SEC reviewed any of Enron’s post-1997 annual reports, it would have seen the red flags and possibly prevented the huge losses suffered by employees and investors. The credit rating agencies were found to be equally complicit in their failure to conduct proper due diligence before issuing an investment grade rating on Enron’s bonds just before its bankruptcy filing. However, it was the investment banks, through their manipulation or outright deception that allowed Enron to continue to receive positive research analysis, promoting its stock and bringing billions of dollars of investment into the company. It was a quid pro quo in which Enron paid the investment banks millions of dollars for their services in return for their backing.

Can Enron Happen Again?

About the only positive that came out of the Enron catastrophe has been the protective measures put in place to prevent a similar occurrence. The Enron scandal gave us the Sarbanes-Oxley Act of 2002, which did serve to enhance transparency and criminalize financial manipulation. The Financial Accounting Standards Board (FASB) standards were strengthened to curtail the use of questionable accounting practices, and more accountability was imposed upon corporate boards in their role as management watchdogs.

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