Questionable Accounting Leads to Collapse
Enron used multiple strategic partners to help cover up their
accounting schemes. Houston law firm Vinson & Elkins’
top client was Enron. Enron’s counsel and some of Enron’s
legal department came from Vinson & Elkins. There are allegations
that Vinson & Elkins helped structure some of Enron’s
special-purpose partnerships. The law firm wrote opinion letters
supporting the legality of the deals Enron was making even though
they were illegal.
Arthur Andersen LLP was Enron’s auditor. More than 100 employees
at Arthur Andersen were dedicated to Enron’s account. The
firm was a major business partner of Enron and some Arthur Andersen
executives accepted jobs with Enron. Some believe there was a conflict
of interest. It is also believed Andersen was influenced to destroy
auditing documents because of the large consulting fees Enron paid
Merrill Lynch, one of the largest investment banking firms, was
also a contributor. They reportedly helped out in a scheme of Enron’s
to improperly record their earnings in 1999 through the sale of
Federal prosecutors and the SEC wanted to penalize Enron and Merrill
Lynch for the 1999 sale of Nigerian Barges. The sale allowed Enron
to improperly record about $12 million in earnings. Therefore Merrill
Lynch is accused of aiding Enron’s fraudulent manipulation
of its income statement.
People have described the organizational culture of Enron as being
arrogant. Enron’s compensation plans seemed less concerned
with generating profits for shareholders than with enriching officer
wealth. Enron’s corporate culture reportedly encouraged flouting
or even breaking the rules. Enron's focus shifted from working hard
and being successful, to taking short cuts to stay successful. "There
was an overwhelming aura of pride, carrying with it the deep-seated
belief that Enron's people could handle increasing risk without
Enron employees were rated every six months, and those that were
ranked in the bottom 20% were fired. Instead of working together
as a team, employees were forced to compete against each other and
against rivals outside of the company. This internal rivalry contributed
to less communication between operations for fear of being fired.
The "survival of the fittest" atmosphere reached the point
where illegal activity was a necessity to stay on top.
Andrew Fastow, Enron’s Chief Financial Officer, is believed
to be the mastermind behind the partnerships used to hide the $1
billion debt that led to Enron’s bankruptcy. He defrauded
Enron and its shareholders to make Enron look more profitable than
it really was.\
Former CEO Jeffrey Skilling is seen as the mastermind behind Enron’s
fraudulent accounting. Skilling has been quoted as saying Enron
could make “a kazillion dollars” in a new accounting
scheme. He is also reported dumping 39 percent of his Enron stock
before the company disclosed its financial troubles.
Kenneth Lay, also a former Enron CEO, sold about $80 million of
his stock even though he encouraged employees to buy more shares
of the company. He participated in the board meetings that allowed
the off-the-balance-sheet partnerships to be created.
Enron vice president Sherron Watkins was a whistle-blower during
the Enron scandal. Watkins typed a seven-page letter to CEO Kenneth
Lay telling him that Enron would “implode in a wave of accounting
scandals” if nothing was done. Lay in return had her hard
drive confiscated and moved her from her executive office to a lower
level in the building.
This internal environment affected all the decisions Enron would
make, and allowed for normally unapproved behavior to become required
in order to keep up with their demands. Another aspect in their
internal environment was their lack of assets. This pushed Enron
to rely heavily on their intellectual capital of their employees
which praised innovation but punished those employees deemed weak.
As Enron's internal culture took a change for the worse other companies
also began supporting them in their corrupt decisions. Enron was
able to respond to its environment through its alliances with business
partners, law firms and auditing firms. Enron’s ability in
forming strategic business alliances prevented authorities from
uncovering their off-balance-sheet partnerships. In concealing their
losses Enron officials had established special purpose entities.
Under the guidance of Andrew Fastow, Enron’s Chief Financial
Officer, special purpose entities would move assets and debts off
the balance sheets in order to increase cash flow. Although some
of theses business transactions occurred on paper only, brokerage
firms like Merrill Lynch contributed to Enron’s scandals through
a planned purchase of Nigerian barges. For instance, “Merrill
Lynch allegedly bought the barges for twenty eight million, of which
twenty one million was financed by Enron”. Within six months
Enron purchased the Nigerian barges back and gave Merrill lynch
a fifteen percent interest rate return on their seven million dollar
deal. The business transactions enabled Enron to meet their financial
earning goals for 1999.
Enron’s influence in promoting the profitability of the company
was extended in its alliance with Vinson and Elkins Houston law
firm. Because Enron accounted for Vinson and Elkins thirty one and
a half million dollars in revenue, Sharon Watkins vice president
of Enron claimed that the firm, “helped structure some of
Enron’s special purpose partnerships,”…”because
the firm had written opinion letters supporting the legalities of
the,” special purpose partnerships. Enron used Arthur Andersen’s
reputation in order to gain the confidence of potential investors.
The accounting firm reassured the corporation’s stability
by certifying Enron’s financial statements.
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