The Enron Scandal
Enron was an American energy, commodities, and service company formed by
Kenneth Lay t hrough the merging of two natural gas pipeline companies, H
ouston
Natural Gas and InterNorth. In the early 1990’s congress approved legislation
deregulating the sale of natural gas. This made it possible for traders such as Enron to
sell energy at high prices, which significantly increased its revenue. By 1992 Enron had
become the largest seller of natural gas. From the early 1990’s to 1998 Enron’s stock
had increased by 300 percent (William). By December 31, 2000 Enron’s stock was
priced at $83.13 and its market valuation was $60 billion, 70 times its earnings and six
times its book value (William). Shortly after the founding of Enron, Jeffrey Skilling was
hired. Skilling developed a staff of executives that was able to hide billions of dollars in
debt from failed deals and projects through accounting loopholes.
Skilling was constantly focused with meeting wall street expectations so he
adopted the Mark-to-Market accounting, a method based on market value which at the
time was inflated. While using this method, income from projects could be recorded
(even if the company never received the money) and in turn increase financial earnings
on the books. The problem with this, is that in the future years the profits could not be
included in financial statements so new and additional income had to be included from
more projects to develop additional growth to satisfy investors. An example of how this
works can be seen in Enron’s contract with Blockbuster Video. Enron and blockbuster
signed a 20-year agreement to introduce on-demand entertainment to various U.S
cities by year-end (william). Enron recognized estimated profits at more than $110
million from the deal. W
hen the network failed to work, Blockbuster withdrew from the
contract. Enron continued to recognize future profits thus inflating their market valuation
and...