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In Enron's case, the company would build an asset, such as a power plant,
and immediately claim the projected profit on its books, even though it
hadn't made one dime from it. If the revenue from the power plant was less
than the projected amount, instead of taking the loss, the company would
then transfer these assets to an off-the-books corporation, where the loss
would go unreported. This type of accounting created the attitude that the
company did not need profits, and that, by using the mark-to-market
method, Enron could basically write off any loss without hurting the
company's bottom line. (Read more about the disastrous implications of
mark-to-market accounting in Mark-To-Market Mayhem.)
Part of the reason the company was able to pull off its shady business for so
long, is that Skilling also competed with the top Wall Street firms for the best
business school graduates, and would shower them with luxuries and
corporate benefits. One of Skilling's top recruits was Andrew Fastow, who
joined the company in 1990. Fastow was the CFO of Enron until the SEC
started investigating his role in the scandal. (Read more in Are Your Stocks
Doomed?)
after, the SEC announced it was investigating Enron and the SPEs created by
Fastow. Fastow was fired from the company that day. In addition, the
company restated earnings going back to 1997. Enron had losses of $591
million and had $628 million in debt, by the end of 2000. The final blow was
dealt when Dynegy (NYSE:DYN), a company that had previously announced
would merge with the Enron, backed out of its offer on Nov. 28. By Dec. 2,
2001, Enron had filed for bankruptcy. (Learn more about finding fraud in
Playing The Sleuth In A Scandal Stock.)
Lasting Effects
Enron shows us what a company and its leadership are capable of, when
they are obsessed with making profits at any cost. One of Enron's lasting
effects was the creation of the Sarbanes-Oxley Act of 2002, which tightened
disclosure and increased the penalties for financial manipulation. Second, the
Financial Accounting Standards Board (FASB) substantially raised its levels of
ethical conduct. Third, boards of directors became more independent,
monitoring the audit companies and quickly replacing bad managers. While
these effects are reactive, they are important to spot and close the loopholes
that companies have used, as a way to avoid accountability.