Buffalo Toronto Public Media. Show Search Search Query. Play Live Radio. Next Up:. Available On Air Stations. Sometimes it's easy. Sometimes it's not. After Sept. He helped plan the attacks, he funded them, he trained the terrorists.
He's the one responsible. Go get him. After the collapse of Enron, it's not so easy. There were so many players, at so many levels. There does not seem to be any one person responsible. But there are many who share the blame. First and foremost: Enron's top executives. With skill and daring, they created a highly successful company. Then, by diverting funds into phony investments and cashing in their own stock, they bled it to death -- all the while, assuring employees and investors their company was still sound.
On Aug. To this day, many wonder how such a powerful business, at the time one of the largest companies in the United States, disintegrated almost overnight. Also difficult to fathom is how its leadership managed to fool regulators for so long with fake holdings and off-the-books accounting. Lay quickly rebranded Enron into an energy trader and supplier. Deregulation of the energy markets allowed companies to place bets on future prices, and Enron was poised to take advantage.
Skilling was then one of the youngest partners at McKinsey. Skilling joined Enron at an auspicious time. The era's minimal regulatory environment allowed Enron to flourish. At the end of the s, the dot-com bubble was in full swing, and the Nasdaq hit 5, Revolutionary internet stocks were being valued at preposterous levels and, consequently, most investors and regulators simply accepted spiking share prices as the new normal.
One of Skilling's early contributions was to transition Enron's accounting from a traditional historical cost accounting method to mark-to-market MTM accounting method, for which the company received official SEC approval in Mark-to-market aims to provide a realistic appraisal of an institution's or company's current financial situation, and it is a legitimate and widely used practice. However, in some cases, the method can be manipulated, since MTM is not based on "actual" cost but on "fair value," which is harder to pin down.
Enron was the counterparty to every transaction on EOL; it was either the buyer or the seller. To entice participants and trading partners, Enron offered its reputation, credit, and expertise in the energy sector. One of the many unwitting players in the Enron scandal was Blockbuster, the former juggernaut video rental chain. The VOD market was a sensible pick, but Enron started logging expected earnings based on the expected growth of the VOD market, which vastly inflated the numbers.
When the dot-com bubble began to burst, Enron decided to build high-speed broadband telecom networks. Hundreds of millions of dollars were spent on this project, but the company ended up realizing almost no return. When the recession hit in , Enron had significant exposure to the most volatile parts of the market.
As a result, many trusting investors and creditors found themselves on the losing end of a vanishing market cap. By the fall of , Enron was starting to crumble under its own weight. CEO Jeffrey Skilling hid the financial losses of the trading business and other operations of the company using mark-to-market accounting. This can work well when trading securities, but it can be disastrous for actual businesses.
In Enron's case, the company would build an asset, such as a power plant, and immediately claim the projected profit on its books, even though the company had not made one dime from the asset. If the revenue from the power plant was less than the projected amount, instead of taking the loss, the company would then transfer the asset to an off-the-books corporation where the loss would go unreported. This type of accounting enabled Enron to write off unprofitable activities without hurting its bottom line.
The mark-to-market practice led to schemes that were designed to hide the losses and make the company appear more profitable than it really was. To cope with the mounting liabilities, Andrew Fastow, a rising star who was promoted to chief financial officer in , developed a deliberate plan to show that the company was in sound financial shape despite the fact that many of its subsidiaries were losing money.
Fastow and others at Enron orchestrated a scheme to use off-balance-sheet special purpose vehicles SPVs , also known as special purposes entities SPEs , to hide its mountains of debt and toxic assets from investors and creditors.
The standard Enron-to-SPV transaction would be the following: Enron would transfer some of its rapidly rising stock to the SPV in exchange for cash or a note. The SPV would subsequently use the stock to hedge an asset listed on Enron's balance sheet.
In turn, Enron would guarantee the SPV's value to reduce apparent counterparty risk. Although their aim was to hide accounting realities, the SPVs were not illegal. But they were different from standard debt securitization in several significant—and potentially disastrous—ways. One major difference was that the SPVs were capitalized entirely with Enron stock. This directly compromised the ability of the SPVs to hedge if Enron's share prices fell.
Just as dangerous as the second significant difference: Enron's failure to disclose conflicts of interest. Enron disclosed the SPVs' existence to the investing public—although it's certainly likely that few people understood them—it failed to adequately disclose the non-arm's-length deals between the company and the SPVs. Enron believed that their stock price would continue to appreciate—a belief similar to that embodied by Long-Term Capital Management , a large hedge fund, before its collapse in Andersen collapsed in , its reputation destroyed by the Enron story.
The US quickly passed the Sarbanes Oxley Act which meant auditors of publicly traded companies are barred from providing most consulting services to audit clients. In the UK, there was little or no reform in response to Enron.
And according to Labour peer Prem Sikka, emeritus professor of accountancy at Essex University, that fundamental conflict of interest remains. He argues auditors are not independent: "Companies select their auditors. It's a bit like a beauty contest. He says the firm which provides auditors often advises on other things and becomes dependent on the client for fees, forming a "very, very close relationship with directors". Since , we have seen a series of high-profile accounting scandals where the role of auditors has come under scrutiny.
And Germany last year was rocked by an accounting scandal at the electronic payments company Wirecard, a politically-savvy stock-market star. He has denied the allegations, saying that the company was the victim of fraud. He is in custody awaiting trial. The scandal was first uncovered by Financial Times reporter Dan McCrum, alerted by a hedge fund manager who asked if he would be "interested in some German gangsters".
0コメント