The story of Enron is a story of greed and how a Houston-based energy company rocketed to the top echelon of Corporate America before losing everything.
Formed from the merger of Houston Natural Gas and InterNorth in 1985, Enron began with humble roots. Kenneth Lay was an enterprising economics graduate from Missouri who learned the ropes of the oil and gas business early while obtaining his PhD in economics in 1970 and working his way up to management at InterNorth before it was purchased by HNG.
For years the company had solid (if not spectacular) results and even overcame a couple near-fatal financial disasters that resulted from oil futures and origination guarantees deals gone bad. An almost overly-proud Harvard MBA from Illinois, Jeff Skilling joined Enron's ranks after several years of consulting for the energy giant as part of Enron's cozy relationship with McKinsey and Company.
In time, Skilling became COO and began to call for the mass hiring of elite MBA types and math gurus which he transformed into his "complex deal making" army. He became particularly close with Enron's oddball finance and accounting veteran Andrew Fastow who paired the brains of Jeff's army with the creativity of accounting fraud to make Enron appear, at least to investors and banks, as an extravagant capital-generating machine.
Fastow and his crack team of corporate fraudsters developed a network of shell companies known as SPEs or "special purpose entities" and used these as vehicles for hiding losses and booking fictitious deals- to the tune of several billion dollars of imaginary capital and unreported losses. Quarter after quarter, when Enron divisions were struggling to "hit the numbers" that Wall Street analysts expected- Andy would step in to save the day with his SPE magic that- at least temporarily- made bad news go away.
Another favorite method of Fastow and Skilling was to use "mark to market" accounting treatment of their energy deals. Meaning that they reported- as current income- all estimated future income of the life of the deal- for virtually all the deals they did. This is great when things are going good but it is an obviously untenable situation. While Enron was flashing the gaudy mark to market income figures to the Street, the future required them to actually service those deals- and never book another accounting profit as the entire deal's income has already been reported.
Enron, which had once been a company with deep roots in Oil & Gas and was hands-on in developing pipelines and sourcing fossil fuels for delivery contracts, was now in the business of trading on energy futures that bore little to no resemblance to true tangible "present values". Everything was speculation. Everything was reduced to hedges and bets. Nothing was real anymore. And it all collapsed under the weight of its own obfuscation.
Sure there were other reasons Enron collapsed. There was the comical Enron Broadband Services which tried to take on the early internet giants like AOL, and went..... nowhere. There were notorious global deals in places like India and England that became financial albatrosses which only Fastow's shell games could attempt to mask- for a time. But it was really just simple greed and criminal accounting.
Even the once-proud accounting firm Arthur Anderson would be brought down by the fall of Enron and eventually file for bankruptcy. They had some protestations early on about the use of SPEs and the anachronistic manner of applying profits and losses, but ultimately they went along with and signed off on the grossly improper financial reporting.
The Justice Department, the SEC and FBI had long been looking at the company by the time Enron's offices were raided on January 22nd, 2002. What followed was the trial and conviction of several Enron executives including Fastow, Skilling and Lay who were sentenced for an assortment of fraud and conspiracy charges related to the heart of the scandal.
Andy Fastow was given a reduced 6 year sentence after agreeing to cooperate and testify against his former bosses. He was released from prison in 2011 and is now a popular speaker at business ethics and accounting fraud conferences.
Skilling received 24 years in federal prison for his role. He was released to a Texas half-way house on August 30th of 2018.
Ken Lay died of a heart attack while awaiting sentencing.
The Smartest Guys in the Room book by Bethany McLean and Peter Elkind
ENRON: The Smartest Guys in the Room
In the end, this was a tragedy of obscene hubris and ultimate humility. The ironic thing is that they had a solid business model and were it not for the lies that enabled inflated financial reporting, Enron- albeit a smaller and less glamorous Enron- would likely still be in business today.
From stodgy Oil & Gas merger, to high-flying corporate giant, to an astonishing demise
For years the company had solid (if not spectacular) results and even overcame a couple near-fatal financial disasters that resulted from oil futures and origination guarantees deals gone bad. An almost overly-proud Harvard MBA from Illinois, Jeff Skilling joined Enron's ranks after several years of consulting for the energy giant as part of Enron's cozy relationship with McKinsey and Company.
Enron's fatal flaw was the belief that accounting "creativity" can permanently hide fraud
Fastow and his crack team of corporate fraudsters developed a network of shell companies known as SPEs or "special purpose entities" and used these as vehicles for hiding losses and booking fictitious deals- to the tune of several billion dollars of imaginary capital and unreported losses. Quarter after quarter, when Enron divisions were struggling to "hit the numbers" that Wall Street analysts expected- Andy would step in to save the day with his SPE magic that- at least temporarily- made bad news go away.
Enron's pursuit of Wall Street's favor made a mockery of their Code of Ethics
Sure there were other reasons Enron collapsed. There was the comical Enron Broadband Services which tried to take on the early internet giants like AOL, and went..... nowhere. There were notorious global deals in places like India and England that became financial albatrosses which only Fastow's shell games could attempt to mask- for a time. But it was really just simple greed and criminal accounting.
Jeff Skilling Harvard MBA abstract mastermind, avoider of details and implementation
Even the once-proud accounting firm Arthur Anderson would be brought down by the fall of Enron and eventually file for bankruptcy. They had some protestations early on about the use of SPEs and the anachronistic manner of applying profits and losses, but ultimately they went along with and signed off on the grossly improper financial reporting.
The Justice Department, the SEC and FBI had long been looking at the company by the time Enron's offices were raided on January 22nd, 2002. What followed was the trial and conviction of several Enron executives including Fastow, Skilling and Lay who were sentenced for an assortment of fraud and conspiracy charges related to the heart of the scandal.
Andy Fastow was given a reduced 6 year sentence after agreeing to cooperate and testify against his former bosses. He was released from prison in 2011 and is now a popular speaker at business ethics and accounting fraud conferences.
Skilling received 24 years in federal prison for his role. He was released to a Texas half-way house on August 30th of 2018.
Ken Lay died of a heart attack while awaiting sentencing.
The biggest losers of Enron's demise were Enron employees and common stockholders who bet big on Enron's future
The timeline, web of deceit and cast of characters in this tragedy is truly fascinating. Rebecca Mark, Ken Rice, Lou Pai, and so many more interesting personalities are woven into this spectacular story that is told best by the people who (literally) wrote the book. For a comprehensive look into this business debacle, the award-winning book and documentary can be found here:The Smartest Guys in the Room book by Bethany McLean and Peter Elkind
ENRON: The Smartest Guys in the Room
In the end, this was a tragedy of obscene hubris and ultimate humility. The ironic thing is that they had a solid business model and were it not for the lies that enabled inflated financial reporting, Enron- albeit a smaller and less glamorous Enron- would likely still be in business today.
