ENRON

Until late 2001, Enron was one of America's, if not the world's biggest corporations. Started out as a gas company, it grew to become the world's largest trader in gas, electricity, water, and other post-modern commodities such as bandwidth. However, when Enron was forced to disclose that it had manipulated its books to manage results, its soaring profits were suddenly wiped out by losses and charges that were previously recorded incorrectly. As investors reacted, the share price of Enron plummeted.

Suddenly Enron found itself unable to raise financing from the capital markets, and the corporation imploded. To make things worse, it was discovered that many of Enron's executives were liquidating tens of millions of their shares at a time when the public was buying the same, assured by the same executives that the company was in the pink of health.

Anderson Inc., Enron's auditing firm, had difficulty explaining how it gave a clean bill of health to a company that had all sorts of hidden charges. The auditing firm, one of America's oldest, later was found guilty of shredding documents and computer files relating to Enron at the height of the investigation process.

While Enron's undoing may be a result of its overreaching itself-it wanted to become the world's largest trader for every sort of commodity-corruption was the greatest contributor to its demise. For example, its vaunted cash flow was all only on paper. It would sell a subsidiary that was losing money to another company-a shell company that Enron set up, owned, and financed. That way, the losses were erased from Enron's balance sheet, and in their place was a 'cash inflow from the shell company Enron had created. (The balance sheets never indicated that Enron had lent this money to the shell company in the first place, that it was repaying itself and counting the repayment as income.)

Why did Enron's management engage in such dishonest and ultimately disastrous practices? Greed comes quickly to mind. Further, a corporate culture which values results at all costs, and not ethics, created the environment that made the spurious practices possible, if not tacitly encouraged. On a second level, the Enron affair is a fiscal failure. How could the auditors not have seen the fraud and corrupt management of the company? Isn't it the job of accounting firms to make sure that management's figures are accurate and trustworthy? But Anderson was reportedly making as much money from consulting for Enron as it was for auditing its books.

Ironically, before its demise, Enron executives wined and dined the powers that be in Washington. Enron contributed heavily to the political system, for both sides of the aisle, and the system responded by providing what Enron wanted. Electricity was deregulated, transmission lines reorganized, and supervision eliminated. Perhaps without these political donations (dubbed as bribery American-style), many of the laws and regulations that favored Enron might never have been passed.

Below is the detailed timeline of how the events leading to the demise of Enron unfolded.

Dec. 2000 - Enron announces president and chief operating officer Jeffrey Skilling will take over as chief executive from Kenneth Lay in February. Lay will remain as chairman Stock hits a 52-week high of $84.87.

Aug. 2001 - Skilling resigns after six months; Lay named CEO again.

Oct. 16 - Enron reports $638 million third-quarter loss and discloses $1.2 billion reductions in stock value, partly related to partnerships run by chief financial officer Andrew Fastow.

Oct. 22 - Enron acknowledges Securities and Exchange Commission inquiry.

Oct. 24 -Enron ousts Fastow.

Oct. 31- Enron announces SEC inquiry has been upgraded to a formal investigation.

Nov. 8 - Enron revises financial statements for the past five years to account for $586 million in losses.

Dec. 2 - Enron files for Chapter 11 bankruptcy.

2002

Jan. 9 - Justice Department confirms it has begun a criminal investigation.

Jan. 23 - Lay resigns as Chairman and CEO.

Feb. 7 - Fastow and former top aide Michael Kopper invoke the Fifth Amendment before Congress; Skilling testifies, saying he knew of no problems at Enron when he resigned.

March 14 - Former Enron auditor Arthur Andersen LLP indicted for destroying Enron-related documents.

April 9 - David Duncan, Andersen's former top Enron auditor, pleads guilty to obstruction.

June 15 - Andersen convicted of obstruction.

Aug. 21 - Kopper pleads guilty to conspiracy, agrees to cooperate with investigators.

Oct. 16 - Andersen sentenced to probation and fined $500,000; the firm was already banned from auditing public companies and had only a few hundred employees left after its conviction.

Oct. 31- Fastow indicted on 78 charges of conspiracy, fraud, money laundering, and other counts.

2003

May 1 - Andrew Fastow's wife, Lea, and seven former executives charged. Lea Fastow accused of participating in some of the husband's deals.

Sept. 10 - Former Enron treasurer Ben Glisan Jr. pleads guilty to conspiracy, becomes the first former Enron executive put behind bars.

2004

Jan. 14 - Andrew Fastow pleads guilty to two counts of conspiracy to commit fraud and agrees to cooperate with prosecutors. He faces 10 years in prison and will forfeit

$23.8 million in assets. His wife, Lea, pleads guilty to one count of filing a false tax return.

Feb. 19 - Skilling is charged with 42 counts of fraud and other crimes in an indictment alleging he misled government regulators and investors about the company's financial condition. Skilling pleads not guilty and is released on $5 million bonds.

April 7 - Lea Fastow, the wife of former Enron finance chief Andrew Fastow, withdrew a plea agreement after a federal judge balked at a sentencing deal that would have sent her to prison for five months and confined her at home for another five months.

May 6 - Lea Fastow, former Enron assistant treasurer, and wife of former financial chief Andrew Fastow were sentenced to 12 months in jail after pleading guilty to a misdemeanor charge of filing a false tax form.

July 8 - Lay surrenders to the FBI. The indictment unsealed, accusing him of participating in a conspiracy to manipulate Enron's quarterly financial results, making false and misleading public statements about the company's financial performance, and omitting facts necessary to make financial statements accurate and fair. Lay pleads innocent.

July 30 - Former Enron Broadband CEO Kenneth Rice pleads guilty to securities fraud, and forfeits $13.7 million in cash and property that includes jewelry and a pair of exotic sports cars.

Aug. 5 - Former top Enron trader John Forey pleads guilty in San Francisco to manipulating energy prices during California's power crisis in 2000-2001.

Aug. 31 - Former Enron Broadband chief operating officer Kevin Hannon pleads guilty to one count of conspiracy.

Oct. 7- Former Enron assistant treasurer Timothy Despain pleads guilty to conspiracy and agrees to cooperate with prosecutors.

Oct. 15 - A British judge rules that three British bankers indicted in the United States on Enron-related fraud charges could be extradited to stand trial in Texas. They continue

to fight the ruling.

Nov. 3 - Jurors convict four former Merrill Lynch & Co. executives, including the former head of investment banking Daniel Bayly, and a former midlevel Enron Corp. finance executive of conspiracy and fraud in the barge case. A former in-house Enron accountant is acquitted.

2005

Feb. 24 - A federal judge schedules the Lay, Skilling, and Causey trial for Jan 17, 2006.

May 31 - U.S. Supreme Court overturns former Andersen conviction, ruling unanimously that vague jury instructions allowed jurors to convict without finding criminal intent

behind mass document destruction. The government said in November 2005 that prosecutors will not retry the firm, reduced to about 200 workers from 28,000 who mainly handle pending lawsuits.

July 15 - Former Enron accounting executive Christopher Calger pleads guilty to conspiracy for participating in a scheme to recognize earnings prematurely and improperly.

July 20 - Jury in Enron broadband trial acquits three of five defendants on some charges but deadlocks on most of the 164 counts. The five defendants will be retried on fewer

counts in three separate trials in May, June, and September of 2006.

Dec. 12 - A judge approves David Duncan's withdrawal of his guilty plea.

Dec. 28 - Causey pleads guilty to securities fraud and agrees to serve seven years in prison in exchange for cooperating with the government. U.S. District Judge Sim Lake

reschedules the Lay/Skilling trial for Jan. 30.

2006

May 25 - Lay is convicted of all six counts against him, including conspiracy to commit securities and wire fraud, and he is convicted in a separate bank fraud case. Skilling is convicted on 19 of the 28 counts against him and acquitted on the remaining nine.

July 5 - Lay dies of a heart attack.

Sept. 26 - Fastow sentenced to 6 years in prison.

Oct. 23 - Skilling sentenced to 24 years, four months in prison.

Nov. 15 - Former accounting chief Richard Causeey sentenced to five-and-a-half-years on securities fraud.

Nov. 17 - Two former executives are given reduced sentences for helping convict Lay and Skilling. Michael Kopper, a top lieutenant to Fastow, received three years and one month. Mark Koenig, the company's former investor relations chief, receives 18-months.

Direction:Answer the following questions. Explain.

1)What were the main factors that contributed to the demise of Enron?

2)What do you think are some of the ways to avoid this type of systemic failure?

3)Do you think that political clout contributed to the ensuring corrupt practices that followed in Enron? Why or why not?