Enron scandal explained

by Dr. Mary Harris

By Geri Lynn Utter | Published: Thursday, February 7, 2002

"The ultimate cause of Enron Corporation's brutal collapse was a culture of greed and arrogance that bred excessive secrecy," competitors and lawyers interviewed by Kurt Eichenwald of the New York Times said. Due to the alleged white-collar crime causing the fall of Enron Corporation, one of the world's largest energy traders, Congress has been forced to reevaluate the business ethics of the entire nation. Critics and members of Congress charge that Enron Corporation managed to violate basic accounting procedures and committed white-collar crime, that have not only effected its employees and shareholders, but its political status with the country.

"Dec. 2 Enron Corporation filed for a Chapter 11 bankruptcy, which is a form of bankruptcy that allows the company to operate while attempting to redeem itself," Dr. Mary Harris, assistant professor of finance, said. A Chapter 11 bankruptcy may not seem extremely detrimental to many businesses, but in Enron's situation it is a matter of $1.2 billion of debt and losses that were kept off the books, hidden in separate investment partnerships.

Investment partnerships can be best described as separate businesses that were partially owned by Enron Corporation; however, Enron failed to report the debt and losses of these small investment partnerships on the books because Enron did not claim to own more than half of these companies. According to a basic accounting principle, known as the Owner of Partnership, if a company/person (Enron) owns less than 50-percent of a company (investment partnerships) the loss and debt of that company does not have to be reported on the books. It was later discovered that Enron did have ownership in more than half of these so-called investment partnerships. What Enron essentially did, according to accusations from 1997 to 2000 was report all the investment partnerships revenue (gain) and disregarded their losses.

Arthur Anderson, a Big Five Accounting firm, is currently being investigated for signing financial statements and reports that contained false information involving the loss and gain of Enron's investment partnerships.

"As an accounting major seeking my CPA certification, it has been driven into me that the only companies worth working for are the Big Five Accounting Firms," Lisa Simonetti, a senior accounting major, said. "An occurrence such as Enron filing Chapter 11 shows how large firms are blinded by the almighty dollar, anything to make a buck. Enron should not have attempted to keep separate investment partnerships off the books, and Arthur Anderson should have had the ethical standing to refuse approval of financial statements."

Aside from charges of breaching accounting ethics, Enron also has been met head-on with three different charges of white-collar crime. The first charge brought against Enron is Security Fraud. Enron is accused with failing to give correct copies of a 10K report to potential investors and shareholders. A 10K is a financial report that shows the share-worth (earnings per-share), net income and the overall growth or decline of the corporation. The second charge brought against Enron is referred to as insider trading. Former Enron officers have been accused of making $1 billion in Enron stock before officially declaring bankruptcy. In plain terms, Enron executives sold their stock for $1 billion dollars before Enron stock value plunged by keeping their financial status under their hats. The final criminal charge brought against Enron is tax fraud. This offense is usually used when dealing with tax evasion. Enron has allegedly been charged with Federal Bank Fraud, which involves lending information between Enron and the said bank.

Even though Enron has officially declared a Chapter 11 bankruptcy, former Enron employees appear to be financially suffering the most. Enron employees invested much of their savings in Enron stock, which now is worthless. People lost much of their life savings for retirement.

When dealing with a typical 401K plan, it is standard procedure that an employee makes a contribution to his retirement plan that his place of employment usually matches in stock. Enron only supplied their employees with an equal contribution in Enron stock. Under legit circumstances, it is the duty of the employing company to supply its employees with diverse stock options; however, Enron stock was the only stock offered to Enron employees. For the most part, Enron employees were happy with their 401K plans because Enron stock was growing.

When Enron executives discovered that the financial collapse of their company was inevitable they put a "lock-out" on employee stock, which stopped employees from trading Enron. This "lock-out" forced employees to lose half of their retirement pension because of the company's failure.

It has been established that Enron has played a major role in dramatically disrupting the lives of its' employees and shareholders, but it has also displayed a negative effect from a political standpoint.

Prior to Enron's collapse, Enron representatives met Vice President Dick Cheney on several occasions to discuss new energy policy. Enron was a major contributor to politicians. Enron gave $1 million to President Bush and contributed heavily to many members of Congress. This is the same Congress that is now investigating Enron.

Two months after one of the world's largest energy traders, Enron Corporation, declared bankruptcy, 20,000 people are out of jobs and out of much of their retirement pension. Kenneth L. Lay, CEO of Enron, has refused to appear before Congress because he feels as though he has already been convicted of the crimes brought against him and another former Enron officer was found dead in his home last week of an alleged suicide.


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