Enron Energy : Its Rise and Fall

** All statistics taken from Journal of Accountancy **

Many people do not know the history of Enron - how it came to be, and how it came to be today. It's important to know how companies can evade reporting debt and what the government can do to stop it. Today, I'm here to tell you how Enron did it.

Enron was born from the merger of Houston Natural Gas and InterNorth, a pipeline company, in 1985. In the process, Enron incurred massive debt and lost the rights to its pipelines. As a result, the company CEO, Kenneth Lay, hired Jeffery Skilling to help develop a new business strategy to create cash flows. Skilling, a banker and consultant who had a background in asset and liability management, proposed that Enron create a "gas tank" where they would buy from suppliers and sell it to customers. Skilling's idea was so good that Lay made another division of Enron called Enron Finance Corporation. Business was booming, and Enron soon dominated the market for sales of natural gas.

A few years later, after much success, Skilling became COO of Enron. He convinced Kenneth Lay that that same model could work for the electric energy business. Well, it did. Enron's revenue grew from $2 million to a whopping $7 million in a year. By 1999, Enron had been named, multiple times, to Fortune Magazine's "Most Innovative Company in America," as well as one of the top 100 companies to work for. However, America didn't know that Enron was hiding billions of dollars in debt by using Special Purpose Entities. SPE's allow a company to increase leverage without having to report debt on the balance sheet. In addition, Enron transferred assets into SPE's to not have to include the devaluation of them in the books. In late 2000, the company included this in a confusing footnote at the end of their financial statements.

By Feburary 2001, the CEO had retired and named Skilling the new CEO. From this point on, the stock for Enron began quickly falling in value, falling from nearly $90 to a mere 26 cents by the end of 2001. After a lengthy inspection with the Securities and Exchange Committee, the company dissolved and merged with their competitor, Dynergy.

That is the story of Enron's demise. Unfortunately, the company has made a horrible dent for the accounting profession, but luckily for the new generation, the government has made a large amount of changes to how businesses report things on their financial statements and what companies can and cannot do. Personally, I think that although the Enron scandal has made many people question the accountability of companies, it made the business world much better and safer, and ethical standards have been raised substantially. What do you think?