The Rise
Enron’s birth happened in 1985 after the merger between Houston Natural Gas Corp. and InterNorth Inc. venturing into natural gas and power generation operations led by CEO Kenneth Lay.
In 1990, Lay hired Jeff Skilling as the company’s top executive. The latter introduced the mark-to-market accounting method of recording to adjust the value of the assets from historical cost to its fair market value. This caused the assets to be overvalued, thus recognizing in the income statement unrealistic gains. They also booked revenues from deals even if they have not rendered the services yet.
Enron was successful in covering up their losses from the previous years by altering their financial statements with the help of the accounting firm, Arthur Andersen. They also operated fraudulently with some made-up companies to hide their losing assets. The stock prices went from $10 in 1992 to $85 in 2000, making it attractive investments from funds and instructional investors.
The Fall
Speculations started during a comprehensive interview with the Fortune writer. By the fall of 2001, piece by piece, all the lies, deception and fraud continue to uncover themselves from malpractice of accounting standards, bank frauds, illegal wire transfers, inside trading, cover-ups and other unethical business conduct exposed by the whistleblowers.
A few weeks later, stock prices went from $85 to $0.50 per share. They filed for bankruptcy and caused a huge effect on Wall Street.
The Judgments
Skilling was held the most responsible and was sentenced to 24 years of imprisonment. Former chairman Kenneth Lay was sentenced in the 2006 trial but died before he could be sentenced. Andrew Fastow, former chief financial officer who pleaded guilty to fraud and schemed unethical deals and attested in contradiction to his ex-bosses was sentenced to 10 years of imprisonment.
Arthur Andersen went out of business, and thousands of employees lost their job. It was found guilty of obstruction of justice by destroying all the shreds of evidence related to the case.
Sarbanes-Oxley Act of 2002, also known as SOX 404, was enacted. This serves as standards for internal controls to ensure the integrity of the company’s financial statement. The management has to sign off the financial statements and effectiveness of the internal controls alongside the accounting firm’s sign off.
At the time that this whole fiasco was unveiling to the world, I was just an innocent first-year accountancy student. We were really unaware until in our ethics class in our third year of studies. I still did not fully comprehend what really transpired, but I can remember I am more concerned for the people who lost their jobs. I thought justice should be served to the abusive top executives. I supposed that Arthur Andersen should be dissolved and revoke its operation, which eventually happened.
In early 2019, Skilling was released from prison after his term was reduced from 24 years to 14 years. He was reportedly meeting with former colleagues to find a way back into the energy business. Fastow served six years in prison after a reduced term in 2011. Today, he works for an artificial intelligence company focusing on investigative fraud.
Skilling is out yet again trying to climb up in the corporate world with maybe some help [of course] from his former colleagues in Enron. What does this tell us? How do I feel about this knowing he played a huge role in the collapse of a once-respected institution?
I strongly disagree with the judge’s decision to release him too soon. I feel he does not deserve to receive a term reduction. He should have completed the original sentence. He did not only destroy the company; he also damaged the reputation of those innocent employees who were collateral damages. They have lost not only their jobs as well as their pension funds and retirement benefits, too. Maybe some of them were about to retire when the scandal happens. They were left unguarded by the dangers brought by the malpractices of the top management.
The same sentiments go to the employees of Arthur Andersen. I am an accountant by profession; I can resonate with its 85,000 fallen employees. I wonder how you can stand up from the fall when you know your career should be anchored and expected to be performed with high integrity and compliance? How about investors who lost their money? I want to know how they feel knowing Skilling is out again trying to start a new venture. They might be so disappointed with the injustice. Most of the financial and investment institutions are still upset about the damages caused by the scandal. I know that there are still numerous corporations trying to file cases against Skilling for the losses incurred due to Enron’s stock. This scandal will forever haunt him for the rest of his life.
We do not know Skilling’s next steps and plans. Only time can tell. A person as well connected as him might lead an organization again anytime soon, but he will never win the public trust back. Enron’s scandal was so huge and affected many lives to be left forgotten. The only thing that we can do for now is to be more watchful. Truth be told, after all, the law prohibits him from engaging and holding any public corporation’s executive position.
The author is an MBA student at the Ramon V. del Rosario College of Business, De La Salle University. This article is part of his blog for the course on Leadership, Ethics, and CSR.
The views expressed above are those of the author. They do not necessarily reflect the position of De La Salle University, its faculty, and its administrators.