The collapse at Enron

The Labor party was accused of taking Enron’s money in return for access to government ministers. The party had apparently changed its policy on gas-fired power stations after being lobbied by companies, including Enron. This was seen by some as possible evidence of Enron’s influence on government policy. However, the UK Government insists its links with Enron have neither changed policy nor bought access to ministers. A second front of allegations emerged over Labor’s close ties with Andersen, Enron’s accountants, a company barred from government work for failing to prevent the DeLorean car company collapse. This ban was later lifted, which has caused the rise of awkward questions faced by the Labor party now.

FINANCIAL COMMUNITY CONTRIBUTED TO THE ETHICAL COLLAPSE OF ENRON INC.

KEY MANAGEMENT AT ENRON

Kenneth Lay

Former Enron Chief Executive, Chairman and Board Member. Lay took up the reins at Enron in 1986 after it was formed from the merger of two pipeline firms in Texas and Nebraska. Prior to Enron’s collapse, he was credited with building Enron’s success. Lay resigned as CEO in December 2000, and was replaced by Jeffrey Skilling. In August 2001, he resumed leadership after Skilling resigned. Lay resigned again in January 2002 after becoming the focus of the anger of employees, stockholders and pension fund holders who lost billions of dollars in this disaster.

Jeffrey Skilling

Former Chief Executive, President and Chief Operating Officer. Skilling joined Enron in 1990 from the consultancy firm McKinsey, where he had developed financial instruments to trade gas contracts. Prior to becoming Chief Executive in February 2001, Skilling was President and Chief Operating Officer of the firm. Skilling was also seen as a key architect of the company’s gas-trading strategy. Skilling resigned his post as Enron’s chief executive in August 2001 without a pay-off.

Fastow

Former Chief Financial Officer. Fastow was fired in October 2001, when Enron made losses amounting to $ 600 million. Fastow was allegedly responsible for engineering the off-balance sheet partnerships that allowed Enron to cover its losses. Fastow was also found by an internal Enron investigation to have secretly made $30 million from managing one of these partnerships. Clifford Baxter: Former Chief Strategy Officer and Vice Chairman. Baxter was known to have been one of the Enron executives, who had opposed its creative accounting practices. Baxter retired from Enron in May 2001. Baxter committed suicide in January 2002.

Enron’s Auditor Arthur Andersen

Arthur Andersen, one of the world’s five leading accounting firms, was Enron’s auditing firm. This means that Andersen’s job was to check that the company’s accounts were a fair reflection of what was really going on. As such, Andersen should have been the first line of defense in the case of any fraud or deception. Arguments about conflict of interest had been thrown at Andersen since they acted as both auditors and consultants to Enron. The company earned large fees from its audit work for Enron and from related work as consultants to the same company. When the scandal broke, the US government began to investigate the company’s affairs, Andersen’s Chief Auditor for Enron, David Duncan, ordered the shredding of thousands of documents that might prove compromising.

That was after the Securities and Exchange Commission (SEC) had ordered an investigation into the speculative actions of Enron. Duncan said he was acting on an e-mail from Nancy Temple, a lawyer at Andersen, but Temple denied giving such advice. While Andersen fired Duncan, its Chief Executive Officer, Joseph Berardino, insisted that the firm did not act improperly and could not have detected the fraud. Berardino conceded that an error of judgment was made in shredding documents, but he still protested Andersen’s innocence.

CREDIT RATING AGENCIES

Credit rating agencies like

 Moody’s

 Standard & Poor’s and

 Fitch IBCA

whose main duty is to provide guidance to investors on a borrowers’ creditworthiness i.e. inform investors how risky buying a company’s bonds might be, failed to spot any problems with Enron until the company was nearly bankrupt, only downgrading its bonds on 28 November 2001. The agencies claimed they could only act on public available financial information. An interesting comment regarding Enron’s operations was made in March 2001, when credit analysts at S&P and Fitch told a Fortune reporter they had no idea how Enron made its money.

Commentators attribute the lack of action on part of the credit agencies to Enron’s ordeal is their fear that downgrading a company’s bond rating could drive it into bankruptcy by sharply raising the costs of its loans. This is because the analysis that rating agencies provide is influential in determining the interest rates that borrowers pay on their debt. Enron had been facing dreadful financial troubles throughout October and November 2001, but rating agencies only downgraded their bonds to “junk” status on November 28th. This has caused critics to wonder if they were doing their jobs correctly. Rating agencies have responded by saying that Enron had evolved from an energy company to a broker and as a result in the context of a financial institution or a broker that loses confidence, these things can happen relatively quickly, as quoted by Fitch’s chief credit officer Bob Grossman. However, the three big agencies confirmed that they will be looking at modifying the way they do business.

Source: Essay UK - http://ntechno.pro/essays/finance/the-collapse-at-enron/


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