Loading the player...

What was 'Enron '

Enron was a U.S. energy-trading and utilities company that perpetuated 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.

Enron shares traded as high as $90.56 before the fraud was discovered but plummeted to below $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 one of the first big-name accounting scandals, but it was soon followed by the uncovering of frauds at other companies such as WorldCom and Tyco International. What was once a Wall Street darling has now become a symbol of modern corporate crime.

BREAKING DOWN 'Enron '

The Enron bankruptcy, at $63 billion in assets, was the largest on record at the time. Its collapse shook the markets and nearly crippled the energy industry. While those responsible for 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. As a result of negligent oversight by the Securities and Exchange Commission (SEC), the credit rating agencies and the investment banks, Enron was 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 enormous 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.

Enronomics

In light of the Enron scandal, the term "Enronomics" was coined to describe a creative and often fraudulent accounting technique that involves a parent company making artificial paper-only transactions with its subsidiaries to hide losses the parent company has incurred through business activities.

Transferring debt in this way creates an artificial distance between the debt and the company that incurred it. Parent company Enron continued to hide debt by transferring it (on paper) to wholly-owned subsidiaries—many of which were named after Star Wars characters—but still recognized revenue from the subsidiaries, giving the impression that Enron was performing much better than it was.

Enroned

Another term inspired by Enron's demise is "Enroned," a slang term for having been negatively affected by senior management's inappropriate actions or decisions. Being "Enroned" can happen to any stakeholder, such as employees, shareholders or even suppliers. For example, if someone has lost their job because their employer was shut down due to illegal activities that they had nothing to do with, they have been "Enroned."

Can Enron Happen Again?

As a result of the Enron catastrophe, certain protective measures have been put in place. The Enron scandal gave us the Sarbanes-Oxley Act of 2002, which serves to enhance transparency and criminalize financial manipulation. Further, as a result of Enron's wrongdoings, 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.

RELATED TERMS
  1. Enroned

    Enroned is a slang term for a person that has been negatively ...
  2. Outside Director

    An outside director is a member of a company's board of directors ...
  3. Global Crossing

    Global Crossing is a company that filed for bankruptcy protection ...
  4. FASIT

    A financial asset securitization investment trust (FASIT) was ...
  5. Fraud

    Fraud, in a general sense, is an intentionally deceptive action ...
  6. Certified Public Accountant - CPA

    A Certified Public Accountant (CPA) is a designation given to ...
Related Articles
  1. Insights

    5 Company Names That Could Damage Your Resume

    These companies have a negative aura around their names that may be detrimental to your application.
  2. Investing

    The Big Merger Fell Through – Now What?

    Employees who own stock or stock options at their employer need to be aware of these pitfalls if a merger or acquisition falls through.
  3. Investing

    Why You Shouldn't Trust Ratings From Rating Agencies

    When the U.S. debt was downgraded, what does that really mean?
  4. Insurance

    How The Sarbanes-Oxley Era Affected IPOs

    After the infamous collapse of companies like Tyco, Enron and WorldCom, the government responded to try and prevent it from happening again.
  5. Insights

    5 Most Publicized Ethics Violations by CEOs

    High-profile downfalls of corporate CEOs are not a new phenomenon. Here are five of the most public and egregious CEO ethics failures.
  6. Insights

    3 Notorious American White Collar Criminals

    Learn about the crimes and punishments of some of the most infamous convicted white-collar crooks.
  7. Investing

    3 Keys to Successful Long-Term Investing

    These three steps are essential to achieve a healthy and growing portfolio.
  8. Investing

    Top 8 Ways Companies Cook the Books

    Find out more about the fraudulent accounting methods some companies use to fool investors.
  9. Investing

    Off-Balance-Sheet Entities: An Introduction

    The theory and practice of these entities varies greatly. Investors need to learn what they're getting into.
  10. Small Business

    Sarbanes-Oxley Act Of 2002 – SOX

    The Sarbanes-Oxley Act of 2002 is a legislative response to a number of corporate scandals that sent shockwaves through the world financial markets.
RELATED FAQS
  1. These famous scandals demonstrate the agency problem

    The agency problem occurs when agents do not appropriately represent the best interests of principals. Here you'll learn ... Read Answer >>
  2. What is the difference between principles-based accounting and rules-based accounting?

    Almost all companies are required to prepare their financial statements as set out by the Financial Accounting Standards ... Read Answer >>
  3. What did Warren Buffett mean when he said, “Diversification is protection against ...

    Learn what Warren Buffett meant when he stated that diversification is for ignorant investors and does not help those who ... Read Answer >>
  4. What impact does government regulation have on the financial services sector?

    Learn about how the financial services industry is affected by government regulation, and the different types of regulations ... Read Answer >>
Hot Definitions
  1. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  2. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  3. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  6. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
Trading Center