The Enron Scandal

Enron was established in 1930 as Northern Natural Gas Company and joined with
three other companies to undertake this industry. The four companies eventually began
to break apart between 1941 and 1947 as a result of a public stock offering. In 1979,
Northern Natural Gas was placed under new management when it was bought by
InterNorth Inc. In 1985, Kenneth Lay, CEO of Houston Natural Gas Company devised a
transaction for InterNorth to purchase Houston Natural Gas. Lay was named CEO of the
new company and changed InterNorth's name to Enron Corporation. This newly
developed company originally was involved in distributing gas and electricity throughout
the United States, and operation of power plants and pipelines worldwide. In fifteen
short years Enron became the nation's seventh largest company, but the company's
growth was due to several illegal activities. During 2001, Enron shares fell from eighty-
five dollars to thirty cents. The devastating results occurred after it was revealed that
many of its profits and revenue were the result of deals with special purpose entities
(Carson, 7).
Arthur Anderson, Enron's accounting firm, turned their heads while Enron's
management created "special purpose entities" that kept hundreds of millions of dollars
of losses and debt off the balance sheet, which misled individual's investment decisions.
The lack of information led to an overstatement of profits of almost six hundred million
dollars and an understatement of debt of six hundred and thirty million dollars between
1997 and 2000. Arthur Anderson was not the only one releasing misleading information,
some of Enron's senior managers also misled investors into thinking the company was in
better shape than it was. During this time Kenneth Lay was cashing in his own Enron
stock, which sold for thirty seven million dollars (Thomas, 3).
The GOP also indirectly helped Enron conceal its illegal activities. The company
placed more than one-third of its subsidiaries in offshore accounts and slipped its
domestic assets in different tax shelters, which helped conceal Enron's financial situation.
The main reason that Enron escaped any detection of fraud is that it invested in a
particular type of derivatives. This was a complex financial arrangement that escaped all
regulatory provisions. There was no law that required the company to disclose its
derivative investments on their balance sheets (Calkins, 1).
The government was also lured in by Enron's executives. The company profited
from a relaxed regulatory system that it helped dictate. Lay and other top Enron
executives met on several occasions with Vice President Dick Cheney, who was heading
President Bush's energy task force. The company was also involved in making deals with
other politicians. Economic counselor Lawrence Lindsey had been a paid adviser.
Political strategist Karl Rove had been a big investor. Republican national chairman
Mark Raicicot had been a paid lobbyist. Over two-thirds of the Senate and nearly forty
percent of the House of Representatives benefited from Enron. The company donated
nearly six million dollars in campaign donations since 1989. These donations seemed to
help when the tax rebate provision of the House of Representatives passed, giving Enron
two hundred and fifty million dollars (Carson, 7).
The company was put under investigation and shortly after went to trial. Jeff
Skilling was arrested on February 11, 2004, by the Federal Bureau of Investigation. On
July 7, 2004, Kenneth Lay was indicted by a federal grand jury for his involvement in the
scandal. Former Enron CEO Andrew Fastow, the alleged mastermind behind Enron's
complex network of offshore partnerships and questionable accounting practices, was
indicted on November 1, 2002, by a federal grand jury in Houston on 78 counts. Andrew
Fastow will serve a ten-year prison sentence and forfeit US$23.8 million, while his wife
will serve a five-month prison sentence and a year of supervised release, including five
months of house arrest; in return, both will provide testimony against other Enron
corporate officers. John Formey, a former energy trader who invented various strategies
such as the "Death Star," was indicted in December 2002 on 11 counts of conspiracy and
wire fraud. Kenneth Lay was indicted by a federal grand jury for his involvement in the
scandal (Calkins, 2).
The Enron scandal shows the absolute requirement for boards of directors,
executives and everyone else in the business world to accept the moral responsibility for
honesty. While maximizing return for shareholders is the foundation of our economic
system and provides for generally efficient capitalism, the system can be easily corrupted
by the immorality and greed of a few. With this company's greed we see the suffering of
many hardworking people who have lost their life's savings.

Work Cited

Calkins, Laurel Brubaker. Enron Fraud Trial Ends in Five Convictions. Washington
Post; 11/04/2004.

Carson, Leigh. The Real Enron Scandal. New Republic; 01/28/2002, Volume 226 Issue
3, p7, 1p, 1bw.