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The Enron Collapse: A Look Back

Dec. 2, 2011 marks the 10-year anniversary of the Enron Corporation's filing for Chapter 11
bankruptcy protection in a New York court, a move that sparked one of the largest and most
complex bankruptcies in U.S. history. Headquartered in Houston, Enron was an energy,
commodities and services company that had employed close to 22,000 people and had revenues
of nearly $101 billion in 2000, shortly before its downfall.

Enron Formed after Merger

Enron was formed in 1985 following a merger between Houston Natural Gas and Omaha-based
InterNorth. Kenneth Lay, who had been the chief executive officer (CEO) of Houston Natural
Gas, became Enron's CEO and chairman, and quickly rebranded Enron into an energy trader and
supplier. Deregulation of the energy markets allowed companies to place bets on future prices,
and Enron was poised to take advantage.

Enron Named America's Most Innovative Company

By 1993, Enron had set up a number of limited liability special purpose entities that allowed
Enron to hide its liabilities while growing its stock price. Analysts were already criticizing Enron
for "swimming in debt," but the company continued to grow developing a large network of
natural gas pipelines, and eventually moving into the pulp and paper and water sectors. Enron
was named "America's Most Innovative Company" by Fortune for six consecutive years between
1996 and 2001.

Misleading Financial Accounts

Creative accounting allowed Enron to appear more powerful on paper than it really was. Special
purpose entities – subsidiaries that have a single purpose and that did not need to be included in
Enron's balance sheet – were used to hide risky investment activities and financial losses.
Forensic accounting later determined that many of Enron's recorded assets and profits were
inflated, and in some cases, completely fraudulent and nonexistent. Some of the company's debts
and losses were recorded in offshore entities, remaining absent from Enron's financial
statements.

During the late 1990s and into the early 2000s, more and more special purpose vehicles were
created that allowed the company to keep debts off the books and inflate assets. These entities,
along with other accounting loopholes and poor financial reporting, let Enron ultimately hide
billions in debt from special deals and projects. (For more on corporate disclosure, read The
Importance of Corporate Transparency.)

Sell-Off
In August of 2001, shortly after the company achieved $100 billion in revenues, then-CEO Jeff
Skilling unexpectedly resigned, prompting Wall Street to question the health of the company.
Kenneth Lay once again took the helm, and both Lay and Skilling, in addition to other Enron
executives, began selling large amounts of Enron stock as prices continued to drop – from a high
of about $90.00 per share earlier in the year, to less than a dollar. The U.S. Securities and
Exchange Commission (SEC) opened an investigation. (For more on the structure of the
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commission, check out Policing The Securities Market: An Overview Of The SEC.)

Dec. 2, 2001
Less than a week after a white knight takeover bid from Dynegy was called off, Enron filed for
bankruptcy protection. The company had more than $38 billion in outstanding debts. In the
following months, the U.S. Justice Department initiated a criminal investigation into Enron's
bankruptcy. Several Enron executives and Enron's auditor firm, Arthur Andersen, have since
been indicted for a variety of charges including obstruction of justice for shredding documents
and conspiracy to commit wire and securities fraud, and some have been sentenced to prison.

New Regulations
Enron's collapse, and the financial havoc it wreaked on its shareholders and employees, led to
new regulations and legislation to promote the accuracy of financial reporting for publicly held
companies. In July of 2002, President Bush signed into law the Sarbanes-Oxley Act, intended to
"enhance corporate responsibility, enhance financial disclosures and combat corporate and
accounting fraud." (For more on the 2002 Act, read How The Sarbanes-Oxley Act Era Affected
IPOs.)

The Act heightened the consequences for destroying, altering or fabricating financial records,
and for trying to defraud shareholders.

Enron Creditors Recovery Corp.

Once Enron's Plan of Reorganization was approved by the U.S. Bankruptcy Court, the new board
of directors changed Enron's name to Enron Creditors Recovery Corp (ECRC) to reflect its sole
mission: "to reorganize and liquidate certain of the operations and assets of the 'pre-bankruptcy'
Enron for the benefit of creditors." The board wishes to "obtain the highest value from the
company's remaining assets and distribute the proceeds to the company's creditors." After ECRC
has finalized "outstanding litigation and monetized all of assets, it will make a final distribution
to creditors," and the company "will cease to exist."

Conclusion
At the time of Enron's collapse, it was the biggest corporate bankruptcy ever to hit the financial
world. Since then WorldCom, Lehman Brothers and Washington Mutual have surpassed Enron
as the largest corporate bankruptcies. The Enron scandal drew attention to accounting and
corporate fraud, as its shareholders lost $74 billion in the four years leading up to its bankruptcy,
and its employees lost billions in pension benefits. The Sarbanes-Oxley Act has been called a
"mirror image of Enron: the company's perceived corporate governance failings are matched
virtually point for point in the principal provisions of the Act." Increased regulation and
oversight have been enacted to help prevent or eliminate corporate scandals of Enron's
magnitude.

Read more: http://financialedge.investopedia.com/financial-edge/1211/The-Enron-Collapse-A-

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