The Enron Scandal and its Impact on Corporate Governance

Enron Corporation's journey from a top energy company to its collapse due to an accounting scandal is a tale of corporate malfeasance. The company's aggressive culture under CEO Jeffrey Skilling and the use of dubious financial practices like SPEs led to its downfall. The scandal prompted the Sarbanes-Oxley Act, aiming to prevent similar corporate fraud.

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The Formation of Enron Corporation

Enron Corporation was established in 1985 through the merger of two natural gas companies, Houston Natural Gas Corporation and InterNorth Inc. It rapidly grew to become one of the largest suppliers of natural gas and electricity in the United States. The company's trajectory changed when the U.S. Congress passed legislation deregulating the natural gas market, which previously allowed Enron to operate with limited competition due to its pipeline network. Deregulation, which refers to the removal or simplification of government rules and regulations that constrain the operation of market forces, compelled Enron to adapt its business model to stay competitive. Jeffrey Skilling, an ambitious former McKinsey & Company consultant, was hired as a top executive and later became CEO, tasked with leading Enron's strategic transformation in this new regulatory landscape.
Elegant boardroom with a polished mahogany table, burgundy leather chairs, crystal water glasses, and sheer-curtained windows casting soft light.

The Unraveling of Enron's Accounting Scandal

The Enron scandal, exposed in 2001, is one of the most infamous examples of corporate fraud and corruption. The company's downfall was precipitated by the revelation of systematic and planned accounting fraud designed to hide its financial liabilities and inflate its profitability. Enron's use of mark-to-market (MTM) accounting allowed it to record potential future profits as current income, creating an illusion of financial health and growth. However, when projected earnings failed to materialize, the company resorted to creating special purpose entities (SPEs)—independent legal entities created to carry out specific financial transactions or to possess certain assets or liabilities—to keep substantial amounts of debt off its balance sheet, thereby misleading investors and regulators about the company's true financial condition.

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1

Enron once ranked as one of the top ______ and ______ suppliers in the U.S.

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natural gas electricity

2

______ was appointed as Enron's CEO to guide the company after the deregulation of the ______ market.

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Jeffrey Skilling natural gas

3

Enron scandal exposure year

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2001

4

Enron's financial illusion technique

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Used MTM accounting to book future profits as current income

5

Enron's method for hiding debt

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Created SPEs to keep debt off balance sheet

6

At ______, the aggressive evaluation system called the ______ (PRC) became a tool that prioritized profit over ethics.

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Enron Performance Review Committee

7

Under CEO ______, about ______% of the workforce at Enron was routinely laid off, fostering a culture of fear and greed.

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Jeffrey Skilling 15

8

Enron's hidden debt exposure

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Enron concealed billions in debt using SPEs, misleading shareholders and the public.

9

SEC's role in Enron scandal

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The SEC investigated Enron's accounting, particularly SPE usage, leading to executive indictments.

10

Enron's stock value decline

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Enron's stock plummeted from over $90 to pennies post-scandal, erasing significant investor wealth.

11

Post-Enron reforms by the ______ and other bodies stressed ethical behavior in financial reporting to enhance transparency and regain ______ trust.

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Financial Accounting Standards Board (FASB) investor

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