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The Beginning of the End of Enron

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The Beginning of the End of Enron

The mission of the Financial Accounting Standards Board (FASB) is to establish and improve standards of financial accounting and reporting for the guidance and education of the public. Accounting standards assist analysts, potential investors, and corporate figures in determining and comparing the financial performance of a corporation. In recent years, a wave of accounting scandals broke, and a number of companies admitted to following fraudulent accounting procedures to defer attention from the company’s financial performance. Enron Corporation, a natural gas provider, led the pack with dubious accounting practices, a series of off-balance sheet transactions, and a series of investigations that ultimately led to beginning of accounting reform.

The Beginning of the End of Enron

Enron Corporation, an energy and communications company was established in 1985 by the merger of Houston Natural Gas and InterNorth (enron.com). This merger catapulted Enron into becoming the largest natural-gas company in America. Fortune magazine named Enron “America’s Most Innovative Company” in the years of 1996 to 2000. And in 2000, Enron was Fortune’s “100 Best Companies to Work for in America.” In 1986, Enron’s CEO, Kenneth Lay, proclaimed that the vision of Enron is to become “the premiere natural-gas pipeline in North America” (enron.com). However, this vision of Enron would ultimately lead to the most scandalous fall of a business lead by corporate greed.

Enron continued its meteoric rise to becoming the world’s leading Energy Company. In 1989, Enron formed a trading company, Gas Bank, run by CEO Jeffrey Skilling, and within a year Gas Bank became Enron Finance Corporation and Enron Gas Services. This corporate split was renamed in 1997 to Enron Capital & Trade Resources. This marked the beginning of a series of events that brought on the evolution of Enron into different markets. Originally Enron was the operator of gas pipeline, but soon diversified into other markets. In 1998, Enron created Azurix, a water company to enter into the water and waste waterforms market. In 1999, Enron stretched even further by creating Enron Broadband Services, which sells broadband internet services as a wholesale commodity. It appeared Enron had created a successful business through diverging itself into different areas of energy and service markets; Enron was trading pulp, paper, fertilizer, plastics and other commodities in addition to natural gas. By 1999, Enron had grown so much that it was involved in about a quarter of all energy deals. In late 2000 Enron reported earnings tripled since 1998; however, this event would mark the sudden fall of a great empire.

In May 2001, the energy market took a tumble as Californians struggled with the soaring prices of energy. California politicians blamed Enron for manipulating the energy market. In 2001, Californians were hit with skyrocketing energy prices, rolling blackouts, and one of the leading utility companies, Pacific Gas and Electric Company, filing for bankruptcy. Enron was hit with a change of CEO’s; Lay resigned as CEO and Skilling replaced him (for only a short time). In October 2001, the energy crisis took a turn for the worst and marked the beginning of the end of Enron. On October 12, 2001, Enron disclosed a $638 million loss in its third quarter for the fiscal year. This monetary disclosure sparked an interest by the US Securities and Exchange Commission (SEC), who began to inquire about Enron’s financial statements. Shortly after, Enron fired Andrew Fastow, the organization’s CFO, due to what Enron calls losing investor confidence (Swartz). The termination of Fastow increased suspicion and the SEC announced Enron will

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