Enron
Questionable Accounting Leads to Collapse

Strategic Allies

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 them.

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 Nigerian Barges.

Regulators

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.

Organizational Culture

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 danger."

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.

Owners

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.

Employees

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.

Part II

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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Enron Questionable Accounting Leads to Collapse

Enron
Questionable Accounting Leads to Collapse