Enron Corporation Essay

Enron tum began as a sm every last(predicate) in all born(p) squander distributor and, everyplace the course of 15 years, grew to become the seventh largest company in the join States. Soon after the federal deregulation of natural swagger pipelines in 1985, Enron was born by the merging of Houston Natural Gas and InterNorth, a neon pipeline company. Initially, Enron was merely involved in the distribution of gas, but it later on became a mart maker in facilitating the debaseing and make doing of incomings of natural gas, electricity, broadband, and other products. However, Enrons continuous growth ultimately came to an end as a complicated financial statement, fraud, and multiple scandals sent Enron through a downward spiral to bankruptcy.During the 1980s, several major national energy corporations began lobbying chapiter to deregulate the energy seam. Their claim was that the extra competition resulting from a deregulated securities industry would benefit both busi nesses and consumers. Consequently, the national government began to lift controls on who was allowed to give energy and how it was marketed and sold. However, as competition in the energy market increased, gas and energy prices began to fluctuate greatly. Over time, Enron incurred massive debts and no longer had easy lay rights to its pipelines. It demand some juvenile and innovative business strategies.Kenneth Lay, chairman and CEO, engage the consulting firm McKinsey & Company to assist in developing a new plan to help Enron get back on its feet. Jeffrey Skilling, a untested McKinsey consultant who had a background in banking and asset and liability management, was delegate to dissemble with Enron. He recommended that Enron create a gas bank to buy and sell gas. Skilling, who later became chief executive at Enron, recognized that Enron could take advantage on the fluctuating gas prices by acting as an intermediator and creating a futures market for buyers and sellers of gas it would buy and sell gas to be utilize tomorrow at a stable price today.Although brilliantly successful in theory, Skillings gas bank idea face up a major problem. The natural gas producers who agreed to supply Enrons gas bank desperately needed change and required cash as payment for their products. Enron as well as had insufficient cash levels. Therefore, management immovable to team up with banks and other financial institutions, establishing compacts that would provide the cash needed to complete the transactions with Enrons suppliers. Under the direction of Andrew Fastow, a impertinently hired financial genius, Enron also created several special-purpose entities (SPEs), which served as the vehicles through which capital was funneled from the banks to the gas suppliers, thus keeping these transactions off Enrons books. As Enrons business became more and more complicated, its vulnerability to fraud and eventual disaster also grew. Initially, the newly formed partners hips and SPEs worked to Enrons advantage. Yet in the end, it was the creation of these SPEs that culminated in Enrons death.Within just a some years of instituting its gas bank and the complicated financing system, Enron grew rapidly, controlling a large part of the U.S. energy market. At single point, it controlled as more than as a quarter of all of the nations gas business. It also began stretching to create markets for other types of products, including electricity, crude oil, coal, plastics, weather derivatives, and broadband. In addition, Enron act to expand its trading business and, with the introduction of Enron Online in the late 1990s, it became one of the largest trading companies on Wall Street, at one time generating 90% of its income through trades. Enron soon had more contracts than any of its competitors and, with market dominance, could predict future prices with great accuracy, thereby guaranteeing superior boodle.To continue enhanced growth and dominance, En ron began hiring the best(p) and brightest traders. However, Enron was just as quick in firing its employees as it was in hiring new ones. Management created the Performance Review Committee (PRC), which became known as the harshest employee ranking system in the country. Its method of evaluating employee performance was nicknamed rank and buck by Enron employees. Every 6 months, employees were ranked on a scale leaf of 15. Those ranked in the lowest category (1) were immediately yanked (fired) from their posture and replaced by new recruits. Surprisingly, during each employee review, management required that at least(prenominal) 15% of all the employees ranked were given a 1 and then yanked from their position and income. The employees ranked with a 2 or 3 were also given notice that they were liable to be released in the near future. These unkind performance reviews created fierce internal competition between fellow employees who face a strict ultimatum perform or be repla ced. Furthermore, it created a work environment where employees were unable to express opinions or valid concerns for fear of a low ranking score by their superiors.With so much twinge to succeed and maintain its position as the global energy market leader, Enron began to jeopardize its integrity by committing fraud. The SPEs, which originally were used for good business purposes, were now used illegally to hide bad investments, poorly execute assets, and debt to manipulate cash flows and eventually, to report more than $1 billion of imitation income. The following are examples of how specific SPEs were used fraudulently.Chewco In 1993, Enron and the California normal Employees Retirement System (CalPERS) formed a 50/50 partnership called Joint Energy Development Investments Limited (JEDI). In 1997, Enrons Andrew Fastow realised the Chewco SPE, which was designed to repurchase CalPERSs share of equity in JEDI at a large profit. However, Chewco crossed the bounds of legality in deuce ways.First, it skint the 3% equity rule, which allowed corporations such(prenominal) as Enron to not unite if discoversiders contributed even 3% of the capital, but the other 97% could come from the company. When Chewco bought out JEDI, however, half of the $11.4 million that bought the 3% equity involved cash validating provided by Enronmeaning that only 1.5% was owned by outsiders. Therefore, the debts and losses incurred at Chewco were not listed where they belonged, on Enrons financial reports, but remained only on Chewcos key financial records.Second, because Fastow was an Enron officer, he was, therefore, un certain to personally outpouring Chewco without direct approval from Enrons board of directors and domain disclosure with the SEC. In an effort to secretly bypass these restrictions, Fastow appointed one of his subordinates, Michael Kopper, to run Chewco, to a lower place Fastows close supervision and influence. Fastow continually applied pressure to Kopper t o save Enron from getting the best possible deals from Chewco and, therefore, giving Michael Kopper huge profits.Chewco was eventually laboured to consolidate its financial statements with Enron. By doing so, however, it caused large losses on Enrons balance sheet and other financial statements. The Chewco SPE accounted for 80% (approximately $400 million) of all of Enrons SPE restatements. Moreover, Chewco set the stage for Andrew Fastow as he continued to expand his personal profiting SPE empire.LJM 1 and 2 The LJM SPEs (LJM1 and LJM2) were two organizations sponsored by Enron that also participated intemperately in fraudulent deal making. LJM1 and its successor, LJM2, were similar to the Chewco SPE in that they also broke the two important rules set forth by the SEC. First, although less than 3% of the SPE equity was owned by outside investors, LJMs books were kept separate from Enrons. An error in judgment by Arthur Andersen allowed LJMs financial statements to go unconsolidat ed. Furthermore, Andrew Fastow (at that time CFO at Enron) was appointed to personally oversee all operations at LJM. Without the governing controls in place, fraud became inevitable.LJM1 was first created by Fastow as a result of a deal Enron make with a high-speed Internet service provider called Rhythms NetConnections. In March 1998, Enron purchased $10 million price of shares in Rhythms and agreed to hold the shares until the end of 1999, when it was authorized to sell those shares. Rhythms released its first IPO in April 1999 and Enrons share of Rhythms neckcloth immediately jumped to a net worth of $300 million.Fearing that the value of the storehouse might drop again before they could sell it, Enron searched for an investor from whom it would purchase a put option (i.e., insurance against a falling stock price). However, because Enron had such a large share and because Rhythms was such a risky company, Enron could not find an investor at the price Enron was seeking. So, wit h the approval of the board of directors and a liberation of Enrons code of conduct, Fastow created LJM1, which used Enron stock as its capital to sell the Rhythms stock put options to Enron. In effect, Enron was insuring itself against a plummeting Rhythms stock price. However, because Enron was basically insuring itself and salaried Fastow and his subordinates millions of dollars to run the deal, Enron really had no insurance. With all of its actions independent of Enrons financial records, LJM1 was able to provide a hedge against a profitable investment.LJM2 was the posteriority to LJM1 and is infamous for its involvement in its four major deals known as the Raptors. The Raptors were deals made between Enron and LJM2, which enabled Enron to hide losses from Enrons unprofitable investments. In total, the LJM2 hid approximately $1.1 billion worth of losses from Enrons balance sheet.LJM1 and LJM2 were used by Enron to alter its actual financial statements and by Fastow for person al profits. Enrons books took a hard hit when LJM finally consolidated its financial statements, a $100 million SPE restatement. In the end, Fastow pocketed millions of dollars from his involvement with the LJM SPEs.Through complicated news report schemes, Enron was able to fool the public for a time into thinking that its profits were continually growing. The energy giant cooked its books by hiding significant liabilities and losses from bad investments and poor assets, by not recognizing declines in the value of its ripening assets, by reporting more than $1 billion of false income, and by manipulating its cash flows, often during fourth quarters. However, as soon as the public became aware of Enrons fraudulent acts, both investors and the company suffered. As investor trustingness in Enron dropped because of its fraudulent deal making, so did Enrons stock price. In just 1 year, Enron stock plummeted from a high of about $95 per share to below $1 per share. The decrease in equi ty made it impossible for Enron to cover its expenses and liabilities and it was forced to declare bankruptcy on celestial latitude 2, 2001. Enron had been reduced from a company claiming almost $62 billion worth of assets to nearly nothing.