ENRON CASE SUMMARY
In 1985, Kenneth Lay established Enron through the combination of two natural-gas-
transportation companies, Houston Natural Gas Corporation and Omaha-based
InterNorth, Incorporated. The combined business, HNG InterNorth, was rebranded as Enron in
1986. Following the merger, Kenneth Lay, the former CEO of Houston Natural Gas, assumed the
role of CEO and chair of Enron. In the early 1990s, the US Congress passed a number of laws
that deregulated the selling of natural gas, and the corporation lost its sole authority to run its
pipelines. Jeff Skilling, a former McKinsey & Co. consultant, joins Enron in June 1990. Under
Skilling’s leadership, Enron soon dominated the market for natural-gas contracts, and the
company started to generate huge profits on its trades. Andrew Fastow was one of Skilling's best
new hires; he advanced fast through the ranks to become the chief financial officer of Enron.
Enron's earnings declined sharply as the boom years came to an end and the company had to
contend with more competition in the energy trading industry. Company officials started using
questionable accounting methods, such as "mark-to-market accounting," to conceal the issues as
a result of pressure from shareholders. During this time, Arthur Andersen worked for Enron as a
consultant in addition to being its auditor.Skilling became Enron's CEO in February 2001, with
Lay continuing in his role as chairman. But Skilling abruptly quit in August and Lay took over as
CEO. In a letter to Lay, vice president of Enron Sherron Watkins raises concerns over the
company's accounting methods. On October 16, 2001, Enron announced a $618 million loss for
the third quarter and disclosed a $1.01 billion non-recurring charge on its balance sheet, mostly
attributed to Andrew Fastow, the company's chief financial officer,'s "structured finance"
operations. That day, Lay also reports a $1.2 billion reduction in shareholder equity on the
analyst conference call. Enron collapsed as more information about the accounting scams
became out. After Fastow lost his job, the company's shares fell from a peak of $90 per share in
the middle of 2000 to less than $12 at the start of November 2001. Enron agreed to be acquired
by Dynegy in an attempt to avert catastrophe that month. But a few weeks later, Dynegy pulled
out of the agreement. The announcement sent Enron's stock plunging to less than $1 per share.
Enron filed for Chapter 11 bankruptcy protection on December 2, 2001.
Many Enron executives received prison sentences after being charged with a range of
offenses such as conspiracy, insider trading, and securities fraud. Remarkably, in 2006, Skilling
and Lay were found guilty of several counts of fraud and conspiracy. Although Skilling was
sentenced to 24 years and 4 months and forfeited $45 million, he only served 12 years. Lay,
Enron’s founder and former CEO, died of a heart attack in Colorado in July before receiving his
sentence, which would have included more than 45 years in prison. Furthermore, Fastow was
sentenced to six years in prison after entering a guilty plea in 2006; he was released in 2011.
Arthur Andersen also came under heavy criticism, and the US Department of Justice filed an
obstruction of justice indictment against the firm in March 2002. Customers that wanted to give
investors' confidence that their financial statements could satisfy the strictest accounting
requirements left Andersen in favor of its rivals. Andersen staff members and entire offices
quickly trailed behind them. Furthermore, there were thousands of layoffs. Arthur Andersen lost
its license to practice public accounting on June 15, 2002, after company was found guilty of
deleting evidence. Moreover, shareholders brought hundreds of civil lawsuits against Andersen
and Enron. Even while many lawsuits were successful, the majority of investors lost money, and
employees only got a small portion of their 401(k)s back.
New laws and regulations to support the accuracy of financial reporting for publicly traded
firms were brought about by Enron's demise and the financial devastation it caused for its
shareholders and employees. George W. Bush, who was president at the time, signed the
Sarbanes-Oxley Act into law in July 2002. The statute increased the penalties for attempting to
deceive shareholders and for deleting, falsifying, or manipulating financial statements.
