What Were the Consequences of the Enron Scandal Case Study

What Were the Consequences of the Enron Scandal - Case Study Example This case study represents a bold attempt to answer the question stated in the work's title: What Were the Consequences of the Enron Scandal? Enron, â€Å"a provider of products and services related to natural gas, electricity and communications to wholesale and retail costumers† represented one of the largest fraud scandals in history. As a result of the fraud investigations, the company was forced to file for bankruptcy in December 2001. While the bankruptcy of a small company is taken as a routine, Enron’s case is different as the company was ranked seventh by Fortune 500. During the 1990s, Enron expended quickly into several areas such as developing a power plant and a pipeline. This expansion, however, required large initial capital investments and long gestation period. By that time, Enron already raised a lot of debt funds from the market and hence any other attempt to raise funds would affect Enron’s credit rating. But Enron had to maintain the credit ranking at investment rate in order to continue business. On top of that, the company wasn’t making enough profits either, as it promised to investors. Hence, Enron began making partnerships and other special â€Å"arrangements† (Special Purpose Entity, or SPE). These companies were used to keep Enron’s debts and losses away from its balance sheets, therefore allowing it have a good credit rating and look good in front of the investors. Figure 1 How SPEs worked Adapted from Chary, VRK. (2004). Ethics in Accounting. Global Cases and Experiences. Punjagutta. The ICFAI University Pres., India, pg. 115 -$ millions- Year 1997 1998 1999 2000 Revenues 20,273 31,260 40,112 100,789 Total assets 22,552 29,350 33,381 65,503 Long Term Debt 6,254 7,357 7,151 8,550 Shareholder's Funds 5,618 7,048 9,570 11,470 Table 1 Enron's Financial Highlights Adapted from Chary, VR. ((2004). Ethics in Accounting. Global Cases and Experiences. Punjagutt., The ICFAI University Press. India. pg. 119 Enron's goal was to bypass the rules of consolidation and still increase credibility. If a parent company (in this case Enron) financed less than 97% of an initial investment in a SPE, it didn't have to consolidate in into its own accounts. If properly done, the legal isolation and the third party control over the SPE, reduce the risk of the credit. Therefore, off-balance sheet treatment of such a SPE involves enough third party equity. The third party's equity must be "at risk", otherwise the transferor would be required to consolidate the SPE into its own financial statements. Up to end of 2000, no one pointed fingers at Enron. For 2000, the corporation reported $101 billion revenue and the auditors gave a clean report. But, at this stage, Enron announced its intention that during the third quarter of 2001, it would book a loss of $1.01 billion and, at the same time, reducing shareholders' funds by $1.2 billion as a result of correcting accounting errors in the past. After a long trial, Andrew Fastow, the former Enron finance executive has been sentenced to six years in prison. Fastow pleaded guilty for fraud and money laundering in 2004 and also became the chief whiteness in the trial against Jeffrey Skilling and Ken Lay. His testimony helped convict Lay (who died in July 2006 after a heart-attack) and Skilling, who was sentenced to 24 years in jail. In May 2006, the latter was found guilty on 19 counts of conspiracy, fraud and inside trading over Enron scandal. Skilling was found to have orchestrated a series of deals and financial scheme which later