Essay

Financial markets suffered tremors when Enron filed for bankruptcy on December 2, 2001. The collapse of Enron Corporation traumatized many investors, accountants, and boardrooms and had a devastating impact on the society as a whole. Thousands of employees lost their jobs and retirement savings of many were wiped out. According to the Student guide to the Sarbanes-Oxley Act (2010), “The Enron financial debacle was the greatest business scandal of a generation and one of the biggest of last century” (p. 7).

Background:

In 1985, after federal deregulation of natural gas pipelines, Enron was born from the merger of Houston Natural Gas and InterNorth, a traditional pipeline company. As a result of merger, Kenneth Lay former CEO of Houston Natural Gas became the chairman and CEO of new entity.

Lay believed that energy deregulation would open doors for energy trading and to take the advantage Enron opened an office in Valhalla, New York to trade oil and petroleum products. However the office was shut down in 1987 due to unauthorized dealing by two employees and Enron suffered substantial losses, a charge of $85 million and one of the employee concerned was jailed for fraud. Nevertheless, Lay along with Richard Kinder (COO) continued to grow Enron through acquisitions and new ventures. Although the company was becoming larger and larger, by end of 1987 it accumulated debt of 75% of its market capitalization (Hamilton, 2003, p. 295).

In order to assist in developing Enron’s business strategy, Lay hired a young consultant Jeffrey Skilling, a Harvard MBA and partner in charge of McKinsey energy practice in Houston, as a head of Enron finance. As per the film Enron: The Smartest Guys in the Room, “Skilling’s biggest single idea was to find a new way to deliver energy rather than be bounded by the physical flow of the pipeline” (Gibney, 2005). With this viewpoint he helped Enron establish a “"Gas bank," a mechanism to provide funding for smaller gas producers to enable...