Enron was once the seventh largest corporation in America that revolutionised trading and the energy market. According to Segal, at the firm’s peak, its shares were worth $90.75 each, which landed at $0.26 while filing for bankruptcy. The notion of Enron being the chicken that laid the golden egg was unfortunately methodically crafted. It wasn’t a business too complex for the average person to understand, rather, in reality, it was all a giant swindle full of fraud and political manipulation. The elderly lost their hard-earned pensions, the lead investors lost billions of dollars, and jobs were lost when the scam came to light in 2001. Enron thus came to be known as the largest and most sophisticated fraud the world has ever witnessed.
Enron, a $60bn giant at its peak, was born from InterNorth’s successful acquisition of Houston Natural Gas, which grew to its height in a mere decade but declared bankruptcy just a month after. This was not the complete picture of Enron's origins. Enron’s conception began with a brilliant man who, to break free from poverty, fought for the decentralisation of the energy market with the ulterior motive of profiting from it. Ken Lay met shoulders with shrewd individuals such as Jeffery Skilling and Andy Fastow: the team that devised innovative strategies for Enron's seemingly eternal stock market success.
Mark-to-market accounting along with Skilling's command of impression management was a game changer. The business was unparalleled — with the formation of SPEs and political support (Segal, T., 2021). Moreover, with the support of its auditing firm, Arthur Andersen reinforced the firm's debt concealment. This amplified the information gap between the firm's executives and shareholders, which they used to their advantage to exit the company before the bomb counted down to zero.
The entrance of Jeffery Skilling, along with the dot-com boom, catapulted Enron from a gas supplier to a market leader. The development of the Web-based transaction system proved to be a catalyst during the dot-com boom. The transaction system enabled customers to trade commodities with Enron on a worldwide scale facilitating the rapid expansion of trading operations. As a result, trade became accessible to anybody with a little amount of disposable cash, resulting in an ever-expanding market and so transmogrifying the economy. Enron's image as the safest investment, along with breakthrough trading technology such as trading with a single click, revolutionised the industry, prompting investors to place large bets on its stock.
The idea of institutional permanency held by Enron was backed by recruiting the “best and brightest”, who thereafter advanced up the corporate ladder (Palepu, K. & Healy, P., 2019). However, a peculiar series of events provide a view into another side of Enron. Employees transcending the levels of hierarchy achieved access to information about the firm that they were earlier not privy to. Thus, they fled before the ticking bomb blew up. This lack of transparency is indicative of information asymmetry and suggests a potential conflict of interest between the board and the executives.
The delusion of being the most inventive business enabled Enron to prosper in industries that were fragmented and were undergoing deregulation with its fraudulent activities. With the amalgamation of technological innovation and market expansion, the company falsely represented itself; it claimed to create high-volume output that contributed to greater economic growth.
Finally, illuminating Enron's goals suggests that Enron’s executives were only motivated to raise the stock price of the company to capture a sizable market share of investors. This is in contrast to Chandler's modern business enterprise's long-term goal, which valued the growth of the business over weaving a web of lies to fabricate a false impression of the company. Chandler's modern business enterprise believed in the growth of the company by fostering alignment between the interests of the shareholders and the executives (Chandler, 1999).
The surge in disposable income of US households along with great trading facilities resulted in the emergence of thriving financial markets. This caused the transformation into "the ownership society" which was institutionalised by the Bush administration (Knafo, S. & Dutta, S.J., 2020). A highlight of this was the approval of 401k shares, an initiative that attempted to partially privatise Social Security by enabling employees to invest a portion of their government-mandated retirement savings in the stock market. This granted households with greater disposable income to invest in the stock market. Enron’s high stock price indicated to the common man that it was a safe investment, consequently gaining more investors and cementing the firm in place.
In addition to political support, Arthur Andersen was the organisation that backed Enron. Holding a prestigious name in their own right, market principles like transparency were being compromised, but the trust in the firm kept investors going. Andersen exploited this confidence by fabricating a false impression of the firm's openness. The failure of Enron's new ventures, including its international energy asset construction company, the $2.9 billion Dabhol Power Project in Mumbai, and bandwidth trading operations, were not reflected in Enron's income (Rai, 2003). Arthur Andersen made the financial accounts seem accurate by utilising innovative and aggressive accounting practices.
The efficient market hypothesis asserts that financial markets accurately price stocks, bonds, and other financial instruments, even though financial markets are a type of prediction market (Davis, Gerald F., 2011). The claim of accuracy was centred on the incorporation of widely dispersed information in assessing a firm's or other traded entity's prospects. However, the key element affecting the outcomes of corporate policy was the corporation's share price. This concept made a compelling case for firms to reorient themselves toward shareholder profit, thus the market was dazzled by Enron's stock performance. Enron's advertisements frequently invited its investors to question why, but never how; the financial market's failure to examine 'how' led to a wrong conclusion.
The late-90s market bubble gave rise to corporate scandals in the early 2000s, which were caused in part by the unending web of connections that produced pervasive conflicts of interest in the finance industry. Enron serves as its best illustration. The Sarbanes-Oxley Act, which increased the cost of being a public business while requiring certain procedures in financial record keeping and reporting for firms, was established as a result of the Enron fraud (Kenton, 2022). This was a lesson well learned.
Enron's story assailed America with its catastrophe as a mountain of debt and deceit piled up high. It was in a rut because the question of how it worked went unanswered. As employees lost their jobs and investors lost their hard-earned money, it became evident that equating the company's growth to its stock market position was not the greatest approach to determine if shareholders' interests were being met. Thus, by introducing a set type of remuneration, with a mixture of behaviour-based and outcome-based contracts, a successful alternate future for Enron may be envisioned.
Edited By Radhika
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