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Enron: the story of a symbolic financial scandal

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  1. The major corporate accounting scandal
    1. Rise and fall of Enron
    2. Aggravating factors
  2. That has called corporate governance into question
    1. Consequences on Enron's staff
    2. Repercussions on corporate governance: an analysis of the SOX

The death of Kenneth Lay last spring and the recent 24-year sentence of Jeffrey Skilling have put an end to the darkest story of modern finance: the Enron case. Actually, this firm turned from a success model into a paradigm of all the problems of finance capitalism. With the giving up of the exploitation natural gas in order to focus on becoming a market maker, Enron increased its reported annual revenues from under $10 billion to $139 billion during times ruled by the dot-com bubble and electricity deregulation. But these results hid another reality: accounting fraud, nepotism, overstatement of profits.

The end of Enron Corp. was very sudden: division by 350 of the market value, mass redundancies, pension loss? and after that, Enron became emblematic of all that went wrong in the financial system. This scandal along with the WorldCom case and others has lead to a complete reform of corporate governance via the promulgation of the Sarbanes-Oxley Act.

In this article, we'll try to show how Enron's collapse has been a catalyst for a recasting of the financial regulation. First and foremost we'll have an overview of Enron's activities and explain what made this disaster possible. Then we'll look at the consequences of the scandal for people as well as for corporate governance.

Enron Corporation was formed in 1985 from a merger of Houston Natural Gas and Internorth, two natural gas pipeline companies. Originally, it was involved in the transmission and distribution of electricity and gas, and in the construction of power plants and pipeline throughout the United States. At this time, its reported annual revenues were under $10 billion.

But Enron decided to focus on unregulated energy trading market and became a financial trader and market maker in electricity and in other sectors following a strategy of diversification (it managed more than 30 product including natural gas, petrochemicals, steel, paper, water, plastics, credit derivatives, weather risk management). Moreover, Enron has launched EronOnline, the first web-based transaction site which allows users to buy, sell and trade commodities and finance tools. It can be considered as the first successful e-commerce website.

This transformation was seen as a real success: its reported annual revenues were of $139 billion in 2001 (fifth on the Fortune 500), its stock increased by 56% in 1999 and 87% in 2000, it was named "America's Most Innovative Company" by Fortune magazine for six consecutive years (from 1996 to 2001). Until late 2001, Enron was the model of the new America firm. But behind this success, reality was much grimmer.

Tags: Enron, unregulated energy trading market ,corporate accounting scandal

[...] Banks have played a dual role: bank executives helped Enron to move debt off its balance sheet while security analysts of the same banks lied to investors on Enron's financial health. Moreover banks executives took profit from their position to earn money from the "Ponzi scheme". The law firms have helped Enron by providing false certificates. As the result, Enron was able to mislead investors on its profitability and to inflate artificially the value of its shares. But nothing is eternal and the setback was bound to be severe. [...]


[...] All this will lead to the identification of the flaws of the financial system ) Rise and fall of Enron Movement of Enron's share price (USD) Enron Corp Enron Corporation was formed in 1985 from a merger of Houston Natural Gas and Internorth, two natural gas pipeline companies. Originally, it was involved in the transmission and distribution of electricity and gas, and in the construction of power plants and pipeline throughout the United States. At this time, its reported annual revenues were under $10 billion. [...]


[...] We can dwell on a symbolic rate: the Return on Equity (ROE). It's a measure of corporation profitability that reveals how much profit a company generates with the money shareholders have invested net income / shareholder's equity). A common concern is that firms have to do 15% of ROE whatever the economic conditions are. This requirement has many negative consequences: imitative comportments from the firms, non- productive activities (like buying its own stocks to increase shares), a short-term focus and mostly serious: illegal business like Enron did. [...]

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