Decoding Enron scandal

Enron was formed in 1985 following a merger between Houston Natural Gas Company and Omaha-based InterNorth Incorporated. Following the merger, Kenneth Lay, who had been the chief executive officer (CEO) of Houston Natural Gas, became Enron's CEO and chairman.

Enron Finance Corporation appointed Jeffrey Skilling, whose work as a McKinsey & Company consultant had impressed Lay, to head the new corporation. Skilling was then one of the youngest partners at McKinsey.

One of Skilling's early contributions was to transition Enron's accounting from a traditional historical cost accounting method to mark-to-market (MTM) accounting method, for which the company received official SEC approval. MTM is not based on "actual" cost but on "fair value" of the assets.

MTM was the beginning of the end for Enron as it essentially permitted the organization to log estimated profits as actual profits.

Enron created Enron Online (EOL), an electronic trading website that focused on commodities. Enron was named "America's Most Innovative Company" by Fortune for six consecutive years between 1996 and 2001.

In July 2000, Enron Broadband Services and Blockbuster entered a partnership to enter the  VOD( video on Demand ) market. Enron started logging expected earnings based on the expected growth of the VOD market, which largely inflated the numbers in the financial statement.

When the dot-com bubble began to burst, Enron decided to build high-speed broadband telecom networks. It was wrong time to enter the market and the company realised negative returns.

CEO Jeffrey Skilling hid the financial losses of the trading business and other operations of the company using mark-to-market accounting.
He arranged scheme, used off-balance-sheet special purpose vehicles (SPVs), also known as special purposes entities (SPEs), to hide its mountains of debt and toxic assets from investors and creditors.

The standard Enron-to-SPV transaction would be the following: Enron would transfer some of its rapidly rising stock to the SPV in exchange for cash or a note. The SPV would subsequently use the stock to hedge an asset listed on Enron's balance sheet. In turn, Enron would guarantee the SPV's value to reduce apparent counterparty risk.

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.

Now you will be surprised to know the fact that there was Big 5 accounting firms. As one of the five largest accounting firms in the United States at the time, Andersen had a reputation for high standards and quality risk management. The biggest corporate scandal of $74 billion eventually made the end for Andersen.

The conviction was overturned later, on appeal; however, the firm was deeply disgraced by the scandal and dwindled into a holding company. A group of former partners bought the name in 2014, creating a firm named Andersen Global.

Enron paid its creditors more than $21 billion. The price of Enron's shares went from $90.75 at its peak to $0.26 at bankruptcy.

In July 2002, President George W. Bush signed into law the Sarbanes-Oxley Act. The Act increased the consequences for  fabricating financial statements, and for trying to defraud shareholders.