64 The collapse of Enron

In 2001 Enron won the title of
America’s most innovative company in Fortune
magazine. The company,
based in Houston, Texas, had won the award
for the previous six years and was phenomenally
successful. Enron’s CEO, Kenneth Lay,
was an American corporate hero. He was even a friend of
the American President. But the company’s
success was a mirage. By the end of 2001, Enron’s position
was increasingly precarious; it filed for bankruptcy
in December and Kenneth Lay was arrested
shortly afterwards. Enron was originally
an electricity and power company, based in Omaha,
Nebraska. Lay had promised to keep
the company in Nebraska, but he moved Enron to Houston
in Texas in the late 1980s. Enron now diversified
into other areas of business, including plastics,
paper and shipping. Many business analysts were
skeptical about the company; they said it had
too much debt. Enron often sued people
who criticized the company. In the 1990s
Kenneth Lay, Jeffrey Skilling, the company’s
Chief Operating Officer, and Andrew Fastow,
the Chief Financial Officer, began the potentially
disastrous practice of hiding losses
and over-estimating profits. They hid losses and debts
by putting them into ‘off-shore’ companies
they formed for this purpose. They also boosted profits
during a project by recording the profit they anticipated,
not the loss that actually occurred. From the outside, Enron
and its leaders looked brilliant. They built a beautiful new
headquarters in Houston. They had an excellent,
well-planned pension scheme. Even the company’s
workers praised it. Publicly things started
to go wrong in 2000 and 2001, when Enron tried to sell off
its international subsidiaries. Analysts thought that
this was an attempt to raise money and many began to advise
investors to sell Enron shares. Kenneth Lay and other executives
continued to maintain that the company
was healthy. During 2001 he and his colleagues
sold shares in the company. On the second of December 2001
the company filed for bankruptcy. Since 2001 the company’s assets
have been sold to pay off creditors. Even the company’s
auditors, Arthur Andersen,
were ruined by association. Lay and Jeffrey Skilling were arrested
and charged with fraud. Their former colleague,
Andrew Fastow, testified against them. They were both
found guilty, but Lay died in July 2006
before he could be sentenced.

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