What was enrons business

As such, the general public and, most importantly, shareholders were led to believe that Enron was doing better than it actually was, despite the severe violation of GAAP rules.

Skilling abruptly quit in August after less than a year as chief executive—and four months before the Enron scandal unraveled.

But, of course, it was related. Both Skilling and Kenneth Lay were tried and found guilty of fraud and conspiracy in Other executives plead guilty. Lay died in prison shortly after sentencing and Skilling served twelve years, by far the longest sentence of any of the Enron defendants. In the wake of the Enron scandal, the term " Enronomics " came to describe creative and often fraudulent accounting techniques that involve a parent company making artificial, paper-only transactions with its subsidiaries to hide losses the parent company has suffered through other business activities.

Parent company Enron had hidden its debt by transferring it on paper to wholly-owned subsidiaries —many of which were named after Star Wars characters—but it still recognized revenue from the subsidiaries, giving the impression that Enron was performing much better than it was. Another term inspired by Enron's demise was "Enroned," slang for having been negatively affected by senior management's inappropriate actions or decisions.

Being "Enroned" can happen to any stakeholder, such as employees, shareholders, or suppliers. For example, if someone has lost their job because their employer was shut down due to illegal activities that they had nothing to do with, they have been "Enroned. As a result of Enron, lawmakers put several new protective measures in place. One was the Sarbanes-Oxley Act of , which serves to enhance corporate transparency and criminalize financial manipulation.

The rules of the Financial Accounting Standards Board FASB were also strengthened to curtail the use of questionable accounting practices, and corporate boards were required to take on more responsibility as management watchdogs.

At the time, Enron's collapse was the biggest corporate bankruptcy to ever hit the financial world since then, the failures of WorldCom, Lehman Brothers, and Washington Mutual have surpassed it. The Enron scandal drew attention to accounting and corporate fraud as its shareholders lost tens of billions of dollars in the years leading up to its bankruptcy, and its employees lost billions more in pension benefits. Increased regulation and oversight have been enacted to help prevent corporate scandals of Enron's magnitude.

However, some companies are still reeling from the damage caused by Enron. Joint Committee on Taxation. Accessed Aug. George Benston. The New York Times. Business Essentials. Fiscal Policy. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.

Arthur Andersen was one of the first casualties of Enron's notorious demise. In June , the firm was found guilty of obstructing justice for shredding Enron's financial documents to conceal them from the SEC.

Several of Enron's executives were charged with conspiracy, insider trading, and securities fraud. Enron's founder and former CEO Kenneth Lay were convicted on six counts of fraud and conspiracy and four counts of bank fraud.

Prior to sentencing, he died of a heart attack in Colorado. Enron's former star CFO Andrew Fastow pled guilty to two counts of wire fraud and securities fraud for facilitating Enron's corrupt business practices.

He ultimately cut a deal for cooperating with federal authorities and served more than five years in prison. He was released from prison in In , Skilling was convicted of conspiracy, fraud, and insider trading. Enron's collapse and the financial havoc it wreaked on its shareholders and employees led to new regulations and legislation to promote the accuracy of financial reporting for publicly held companies.

In July , President George W. Bush signed into law the Sarbanes-Oxley Act. The act heightened the consequences for destroying, altering, or fabricating financial statements and for trying to defraud shareholders.

As one researcher states, the Sarbanes-Oxley Act is a "mirror image of Enron: the company's perceived corporate governance failings are matched virtually point for point in the principal provisions of the act. The Enron scandal resulted in other new compliance measures.

Moreover, company boards of directors became more independent, monitoring the audit companies, and quickly replacing poor managers. These new measures are important mechanisms to spot and close loopholes that companies have used to avoid accountability. At the time, Enron's collapse was the biggest corporate bankruptcy to ever hit the financial world since then, the failures of WorldCom, Lehman Brothers, and Washington Mutual have surpassed it.

Increased regulation and oversight have been enacted to help prevent corporate scandals of Enron's magnitude. However, some companies are still reeling from the damage caused by Enron. Joint Committee on Taxation. Accessed Jan.

Securities and Exchange Commission. Andrew S. Texas State Historical Association. Federal Reserve Bank of St. Committee on Governmental Affairs. Commodities Futures and Trading Commission.

Department of Justice. Skilling, Richard A. Federal Bureau of Investigation. University of Cincinnati Law Review. General Accounting Office. David B. Duncan, Civil Action No. January 28, H ," Pages Enron Creditors Recovery Corporation.

United Sates U. Supreme Court because of faulty instructions given by the judge to the jury. A number of financial institutions, including Citigroup and J. Morgan, paid hundreds of millions in fines and penalties for the roles they played in financing and setting up the independent partnerships that contributed to Enron's collapse.

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The Enron case is a dream for academics who conduct research and teach. The exact causes and details of the disaster may not be known for months. The purpose of this article is to summarize preliminary observations about the collapse, as well as changes in financial reporting, auditing and corporate governance that are being proposed in response by Big Five accounting firms, the AICPA and the SEC.

Hardly anyone—the company, its employees, analysts or individual investors—wanted to believe the company was too good to be true. So, for a while, hardly anyone did. Many kept on buying the stock, the corporate mantra and the dream. Methods the company used to disclose or creatively obscure its complicated financial dealings were erroneous and, in the view of some, downright deceptive.

The whole affair happened under the watchful eye of Arthur Andersen LLP, which kept a whole floor of auditors assigned at Enron year-round. In , after federal deregulation of natural gas pipelines, Enron was born from the merger of Houston Natural Gas and InterNorth, a Nebraska pipeline company. In the process of the merger, Enron incurred massive debt and, as the result of deregulation, no longer had exclusive rights to its pipelines. In order to survive, the company had to come up with a new and innovative business strategy to generate profits and cash flow.

It assigned a young consultant named Jeffrey Skilling to the engagement. Thanks to the young consultant, the company created both a new product and a new paradigm for the industry—the energy derivative. With its market power, Enron could predict future prices with great accuracy, thereby guaranteeing superior profits.

He set out on a quest to hire the best and brightest traders, recruiting associates from the top MBA schools in the country and competing with the largest and most prestigious investment banks for talent.

In exchange for grueling schedules, Enron pampered its associates with a long list of corporate perks, including concierge services and a company gym.

Fastow moved swiftly through the ranks and was promoted to chief financial officer in Skilling instituted the performance review committee PRC , which became known as the harshest employee-ranking system in the country. However, associates came to feel that the only real performance measure was the amount of profits they could produce.

Employees were regularly rated on a scale of 1 to 5, with 5s usually being fired within six months. Fierce internal competition prevailed and immediate gratification was prized above long-term potential. Paranoia flourished and trading contracts began to contain highly restrictive confidentiality clauses. Coincidentally, but not inconsequentially, the U.

New investment opportunities were opening up everywhere, including markets in energy futures. Wall Street demanded double-digit growth from practically every venture, and Enron was determined to deliver.

He convinced Lay the gas bank model could be applied to the market for electric energy as well. Skilling and Lay traveled widely across the country, selling the concept to the heads of power companies and to energy regulators.

The company became a major political player in the United States, lobbying for deregulation of electric utilities. Using the same concept that had been so successful with the gas bank, they were ready to create a market for anything that anyone was willing to trade: futures contracts in coal, paper, steel, water and even weather.

EOL, an electronic commodities trading Web site, was significant for at least two reasons. First, Enron was a counterparty to every transaction conducted on the platform.