Instruct: Given a question, retrieve relevant passages that can help answer the question.
Query: What caused the Enron scandal?
Enron's complex financial statements were confusing to shareholders and analysts.[13][14] In addition, its complex business model and unethical practices required that the company use accounting limitations to misrepresent earnings and modify the balance sheet to indicate favorable performance.[15]
Lou Pai has not been charged with any criminal wrongdoing in the Enron scandal and has exercised his 5th Amendment right in regard to the subsequent Enron class action. However, as a result of the lawsuit, Pai forfeited $6 million due to him from Enron's insurance policy for company officers to a fund for Enron shareholders.
Commentators attributed the mismanagement behind Enron's fall to a variety of ethical and political-economic causes. Ethical explanations centered on executive greed and hubris, a lack of corporate social responsibility, situation ethics, and get-it-done business pragmatism.[65][66][67][68][69] Political-economic explanations cited post-1970s deregulation, and inadequate staff and funding for regulatory oversight.[70][71] A more libertarian analysis maintained that Enron's collapse resulted from the company's reliance on political lobbying, rent-seeking, and the gaming of regulations.[72]
In addition to being the largest bankruptcy reorganization in American history, the Enron scandal undoubtedly is the biggest audit failure. It involved a financial scandal of Enron Corporation and their auditors Arthur Andersen, which was revealed in late 2001. The scandal caused the dissolution of Arthur Andersen, which at the time was one of the five largest accounting firms in the world. After a series of revelations involving irregular accounting procedures conducted throughout the 1990s, Enron filed for Chapter 11 bankruptcy protection in December 2001.
The company was constantly emphasizing its stock price. Management was compensated extensively using stock options, similar to other U.S. companies. This policy of stock option awards caused management to create expectations of rapid growth in efforts to give the appearance of reported earnings to meet Wall Street's expectations.[45] The stock ticker was located in lobbies, elevators, and on company computers.[46] At budget meetings, Skilling would develop target earnings by asking "What earnings do you need to keep our stock price up?" and that number would be used, even if it was not feasible.[25] On December 31, 2000, Enron had 96 million shares outstanding as stock option plans (approximately 13% of common shares outstanding). Enron's proxy statement stated that, within three years, these awards were expected to be exercised.[47] Using Enron's January 2001 stock price of $83.13 and the directors' beneficial ownership reported in the 2001 proxy, the value of director stock ownership was $659 million for Lay, and $174 million for Skilling.[42]
Enron's aggressive accounting practices were not hidden from the board of directors, as later learned by a Senate subcommittee. The board was informed of the rationale for using the Whitewing, LJM, and Raptor transactions, and after approving them, received status updates on the entities' operations. Although not all of Enron's widespread improper accounting practices were revealed to the board, the practices were dependent on board decisions.[54] Even though Enron extensively relied on derivatives for its business, the company's Finance Committee and board did not have enough experience with derivatives to understand what they were being told. The Senate subcommittee argued that had there been a detailed understanding of how the derivatives were organized, the board would have prevented their use.[55]
The Crooked E: The Unshredded Truth About Enron – television film about the rise and fall of Enron, based on Anatomy of Greed, a 2002 book by an ex-employee Enron: The Smartest Guys in the Room – 2005 documentary based on the eponymous 2003 book about the scandal Law and Order: Criminal Intent episode "Tuxedo Hill" – 2002 television episode inspired by the Enron Scandal ENRON – 2009 play by British playwright Lucy Prebble about the scandal Arthur Andersen LLP v. United States – conviction in United States District Court subsequently overturned by United States Supreme Court The Enron Corpus – a database of more than 600,000 emails between Enron executives, made public and used extensively in social networking research
The film examines the 2001 collapse of the Enron Corporation, which resulted in criminal trials for several of the company's top executives during the ensuing Enron scandal; it also shows the involvement of the Enron traders in the California electricity crisis. The film features interviews with McLean and Elkind, as well as former Enron executives and employees, stock analysts, reporters and the former Governor of California Gray Davis.
Kenneth Lee Lay (April 15, 1942 – July 5, 2006) was an American businessman best known for his involvement in the Enron scandal. He was founder, CEO and Chairman of Enron Corporation for most of its existence which reached a value of $63 billion. Enron used misleading and illegal practices to hide, embezzle and mislead funds from its auditor Arthur Andersen, which was the fifth largest such company in the world. When the deception was discovered in 2000, the Enron scandal was the largest bankruptcy in the world and destroyed Arthur Andersen for not having discovered the fraud. Lay was indicted by a grand jury and was found guilty of 10 counts of securities fraud. Lay died while vacationing, three months before his October 23 sentencing. A preliminary autopsy reported Lay had died of a heart attack caused by coronary artery disease and his conviction was vacated.
Andrew Fastow's interest in LJM2 was purchased in 2001 and many of LJM1's and LJM2's "hedges" and the debt they caused would later be handled in part by another Enron vehicle, the Raptor SPEs. LJM, along with Chewco, played a major role in the downfall of Enron (see Timeline of the Enron scandal) and was the primary vehicle by which Fastow and others siphoned off at least $42 million while ruining Enron. Its debt-concealing transactions with Enron effectively pushed liabilities off balance sheets and led to Enron's perceived success.
Andersen's auditors were pressured by Enron's management to defer recognizing the charges from the special purpose entities as its credit risks became known. Since the entities would never return a profit, accounting guidelines required that Enron should take a write-off, where the value of the entity was removed from the balance sheet at a loss. To pressure Andersen into meeting Enron's earnings expectations, Enron would occasionally allow accounting companies Ernst & Young or PricewaterhouseCoopers to complete accounting tasks to create the illusion of hiring a new company to replace Andersen.[58] Although Andersen was equipped with internal controls to protect against conflicted incentives of local partners, it failed to prevent conflict of interest. In one case, Andersen's Houston office, which performed the Enron audit, was able to overrule any critical reviews of Enron's accounting decisions by Andersen's Chicago partner. In addition, after news of U.S. Securities and Exchange Commission (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, causing accusations of a cover-up.[56][59][60]
Another major correction of Enron's earnings was announced on November 9, with a reduction of $591 million of the stated revenue of years 1997–2000. The charges were said to come largely from two special purpose partnerships (JEDI and Chewco). The corrections resulted in the virtual elimination of profit for fiscal year 1997, with significant reductions for the other years. Despite this disclosure, Dynegy declared it still intended to purchase Enron.[114] 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.[112]
The Enron scandal turned in the indictment and criminal conviction of Big Five auditor Arthur Andersen on June 15, 2002. Although the conviction was overturned on May 31, 2005, by the Supreme Court of the United States, the firm ceased performing audits and split into multiple entities. The Enron scandal was defined as being one of the biggest audit failures of all time. The scandal included utilizing loopholes that were found within the GAAP (General Accepted Accounting Principles). For auditing a large-sized company such as Enron, the auditors were criticized for having brief meetings a few times a year that covered large amounts of material. By January 17, 2002, Enron decided to discontinue its business with Arthur Andersen, claiming they had failed in accounting advice and related documents. Arthur Andersen was judged guilty of obstruction of justice for disposing of many emails and documents that were related to auditing Enron. Since the SEC is not allowed to accept audits from convicted felons, the firm was forced to give up its CPA licenses later in 2002, costing over 113,000 employees their jobs. Although the ruling was later overturned by the U.S. Supreme Court, the once-proud firm's image was tarnished beyond repair, and it has not returned as a viable business even on a limited scale.
On June 15, 2002, Andersen was convicted of obstruction of justice for shredding documents related to its audit of Enron, resulting in the Enron scandal. Although the Supreme Court reversed the firm's conviction, the impact of the scandal combined with the findings of criminal complicity ultimately destroyed the firm. Nancy Temple (in the firm's legal department) and David Duncan (lead partner for the Enron account) were cited as the responsible managers in this scandal because they ordered subordinates to shred relevant documents.
At the end of 2001, it was revealed that Enron's reported financial condition was sustained by institutionalized, systematic, and creatively planned accounting fraud, known since as the Enron scandal. Enron has since become a well-known example of willful corporate fraud and corruption. The scandal also brought into question the accounting practices and activities of many corporations in the United States and was a factor in the enactment of the Sarbanes–Oxley Act of 2002. The scandal also affected the greater business world by causing the dissolution of the Arthur Andersen accounting firm, which had been Enron's main auditor for years.
Upon release, "Enron: The Smartest Guys in the Room" was met with strongly positive reviews. The film has a "Certified Fresh" rating of 97% on Rotten Tomatoes, based on 117 reviews, with an average rating of 8.1/10. The site's consensus states: "A concise, entertaining documentary about the spectacular failure of Enron." On Metacritic, it has a "Universal Acclaim" rating of 82%, based on 37 reviews. Film critic Roger Ebert, writing in the "Chicago Sun-Times", gave the documentary three-and-a-half out of four stars, commenting that, "This is not a political documentary. It is a crime story. No matter what your politics, "Enron: The Smartest Guys in the Room" will make you mad". Ebert's co-host on the television program "Ebert & Roeper", "Chicago Tribune" critic Richard Roeper, said that the documentary was "a brilliantly executed, brutally entertaining dissection of what one observer called the greatest corporate fraud in American history." A. O. Scott of "The New York Times" called the film a "sober, informative chronicle of the biggest business scandal of the decade is almost indecently entertaining." Owen Gleiberman wrote: "A nimble investigative workout that leaves you with the exhilarated sensation of understanding the defining financial scandal of the virtual era."
On May 10, 2002, following the Enron scandal, General Electric acquired the assets of Enron Wind Systems; it has continued as GE Wind Energy. The empty shell of Enron Wind ceased to exist.
Enron (stylised as ENRON) is a 2009 play by the British playwright Lucy Prebble, based on the Enron scandal.
In the Enron scandal, Enron used FASITs to avoid Subpart F rules on foreign income. The United States Congress Joint Committee on Taxation staff, in their investigation of the Enron scandal, recommended that FASIT rules be repealed as they were "not widely used in the manner envisioned by the Congress and thus have failed to further their intended purposes" and because of the "abuse potential inherent in the FASIT vehicle".
"Power Play" was a 2-part drama about Enron commissioned and broadcast by the BBC. The first play dramatized the scandal of fixing energy prices in California, while the second play postulated that the death of Ken Lay, after being found guilty but before being sentenced, was caused by his recognition that he had been willfully blind to the corruption at the heart of Enron.
Before its scandal, Enron was lauded for its sophisticated financial risk management tools.[51] Risk management was crucial to Enron not only because of its regulatory environment, but also because of its business plan. Enron established long-term fixed commitments which needed to be hedged to prepare for the invariable fluctuation of future energy prices.[52] Enron's bankruptcy downfall was attributed to its reckless use of derivatives and special purpose entities. By hedging its risks with special purpose entities which it owned, Enron retained the risks associated with the transactions. This arrangement had Enron implementing hedges with itself.[53]
Prior to the Enron scandal, McKinsey helped it shift from an oil and gas production company into an electric commodities trader, which led to significant growth in profits and revenues. According to "The Independent", there was "no suggestion that McKinsey was complicit in the subsequent scandal, [but] critics say the arrogance of Enron's leaders is emblematic of the McKinsey culture." The government did not investigate McKinsey, who said they did not provide advice on Enron's accounting, but some questioned whether McKinsey knew about Enron's accounting problems or ignored warning signs.
Enron was estimated to have about $23 billion in liabilities from both debt outstanding and guaranteed loans. Citigroup and JP Morgan Chase in particular appeared to have significant amounts to lose with Enron's bankruptcy. 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.[131]
Michael W. Krautz, a former Enron accountant, was among the accused who was acquitted[151] of charges related to the scandal. Represented by Barry Pollack,[152] Krautz was acquitted of federal criminal fraud charges after a month-long jury trial.
In autumn 2001, CalPERS and Enron's arrangement was discovered, which required the discontinuation of Enron's prior accounting method for Chewco and JEDI. This disqualification revealed that Enron's reported earnings from 1997 to mid-2001 would need to be reduced by $405 million and that the company's indebtedness would increase by $628 million.[31]