Most people usually work from rags to riches but, this is not the case of the Enron Scandal. In 1985 Ken Lay created Enron when he merged two companies in the Natural Gas industry. Moving into the early 90s, he aided in the selling of electricity at regular market prices. Following this initial action the US Congress approved the deregulation in the sale of natural gas. This caused Enron to be able to sell the energy at higher costs, increasing their profit. Once this plan was set Enron was on its way to the top in becoming the largest seller of natural gas in North America. By 1992, contracts earned $122 million, only the second largest contributor to the company’s net income. Seven years later in 1999, Enron became online accessible as a trading website allowing the company to more efficiently manage its contracts. In this case the entire company reversed the common saying “from rags to riches”, these people went “from riches to rags”.
Beginning in the 1990s Enron’s stock increased 311% by the end of the year in 1998. In 1999 the increase was only 56% and another 87% in 2000. The end of the year in 2000, the final stock price was at $83.13 and capitalization exceeded $60 billion, nearly six times book value. Enron was then rated the most innovative large company in America in Fortune’s Most Admired Companies survey.
From the film Enron: The Smartest Guys in the Room, it was only 24 days for the company to become completely bankrupt. There were several factors that caused the downfall of Enron. The company’s complex financial records were confusing to the shareholders and analysts. The complexity of the business model and unethical practices required that they use accounting limitations to misrepresent earned income and manipulate the balance sheet in their favor. These were the two main issues that led to the downfall of Enron.
Along with other energy suppliers, Enron earned their profits by providing services such as wholesale trading and risk management in addition to building and maintaining electric power plants, natural gas pipelines, storage and processing facilities. Although most trading companies used the conventional method for reporting revenue, Enron elected to report the entire value of each of its trades as revenue. Enron’s methods or reporting the revenue was later adopted by other companies in order to stay competitive. Between the years of 1996 and 2000, the company’s revenues increased by more than 750%, rising from $13.3 billion to $100.8 billion.
The accounting methods in this business were pretty straightforward until Jeff Skilling joined the company. He demanded that the company switch to mark-to-market accounting, reporting that it would represent the true economic value of the company. Enron was the first non-financial company to use this accounting method for long-term contracts. This method requires that once a long-term contract is signed, the income was estimated as the present value of the future net cash...