The Enron Scandal

Perhaps the most well-known collapse of any company in the late 20th century is the Enron Scandal. Enron Corp. was formed in 1985 as the result of a merger between Houston Natural Gas Co. and InterNorth Inc, based in Omaha. It was primarily an energy company, but its collapse had little to do with that market. Enron was able to grow rapidly in the 1990's, partly due to deregulation underway in many industries. Economic deregulation had been increasing in popularity ever since the Carter administration, and following the terms of Reagan and George H.W. Bush, lax government controls on business allowed Enron to flourish.

Enron rode on the dot-com boom of the 1990's, opening up Enron Online (EOL), an online website that allowed users to trade commodities. This expansion led to Enron being named "America's Most Innovative Company" by Fortune for six years between 1996 and 2001. EOL, however, was also the start of Enron's downfall. With the start of the 2000 recession, Enron found itself losing more and more money due to the stock market crash. In order to keep afloat, Enron utilized "mark-to-market accounting". Put simply, this meant that they measured the values of their assets in terms of their current market value, their historical value. For example, Enron would build a power plant, then claim the projected profits, long before those profits came in. While MTM accounting is not inherently fraudulent, Enron utilized it to cover up losses at its power plants.

Enron's fraudulent schemes didn't end with its crafty MTM accounting. Enron also utilized special purpose entities (SPEs) to hide debt from investors. These SPE's are also not inherently fraudulent, but Enron's use of them in order to hide their defecits was, and the entire scheme ultimately collapsed with the company.

After Enron's bankruptcy, they were found guilty of obstruction of justice after shredding important documents to keep them form the Securities and Exchange Commission (SEC). Enron's founder, Kenneth Lay, was convicted of six counts of fraud and conspiracy, in addition to four counts of bank fraud. He died of a heart attack shortly after. Former CEO Andrew Fastow was found guilty on two charges of wire fraud, and served a sentence of four years. Another former CEO, Jeffrey Skilling, received a 24-year sentence on similar grounds, which was later reduced by 10 years in 2013. He will be released in 2028.

As a consequence of the Enron Scandal, President George W. Bush signed the Sarbanes-Oxley Act, which protects investors from fraudulent business practices by corporations. It puts in place strict restrictions in order to prevent accounting fraud of the type that happened at Enron.


Sources:
http://www.investopedia.com/updates/enron-scandal-summary/
http://www.investopedia.com/terms/s/spv.asp
http://www.soxlaw.com/