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Imagine working for one of the most accomplished corporate companies in the world, only for everything to change overnight. Thousands lose their jobs, and millions lose their confidence, because all the profits that were being celebrated were completely nonexistent. This is the story of Enron, a scandal that has been regarded as one of the largest corporate scandals in history.

It started as a merger between two natural gas transmission companies: InterNorth and Houston Natural Gas Corporation. The company was originally named HNG InterNorth but was renamed to Enron in 1986. Kenneth Lay, the founder and chairman of Enron, founded Enron in 1985; he played a fundamental role in transforming Enron from a natural gas pipeline operator into an energy trading corporation, while also prioritising investor confidence. Jeffrey Skilling, the Chief Executive Officer, restructured the company’s entire business model, shifting it from operating natural gas pipelines to trading derivative contracts. These trades had several positive impacts on producers, such as being able to shield themselves from the unpredictable energy price fluctuations. As a result, Enron had transformed energy trading into a highly lucrative enterprise that was generating staggering profits. Skilling sought to create a high-pressure, highly competitive environment. Enron’s leadership believed that highly skilled employees are likely to maximise profitability, hence they recruited the top graduates from MBA programmes. If anyone failed to meet their targets, they were immediately dismissed from their positions. This work culture rewarded risk-taking, and Enron’s dominance soon started to catalyse in the energy trading market.

Andrew Fastow, the Chief Financial Officer of Enron, was responsible for supervising all the finances and investments of the company. Fastow relied heavily on some of the advanced financial engineering techniques in order to raise capital. They created complicated financial arrangements without recording large amounts of debt on their main balance sheet. During the dot-com boom, Enron launched EnronOnline in October 1999. By the mid-2000s, the company was handling around $350 billion in trades. The company poured vast resources into its broadband telecommunications infrastructure, with hopes of creating a high-speed network which was capable of supporting its increasing digital trade operations. At this point, Enron was regarded as one of the most powerful, successful corporations in the United States and was widely rewarded for its growth.

Enron held a near-monopolistic position, allowing it to have substantial control over the transportation and sale of gas in specific regions, essentially indicating their dominance over the gas supply chains. This prompted the United States Congress to propose deregulation laws, which enabled other companies to enter the energy market. For this reason, competition intensified rapidly, and the once soaring profits of Enron started to decline. Rather than accepting the harsh reality of these eroding profits, the executives at Enron began taking steps to conceal the company’s worsening financial situation. Under the standard accounting rules, profits from a 10-year contract should be recognised over the life of the agreement. However, what Enron did was completely unprecedented. Once the contract was signed, the company estimated the total profits it expected to generate and instantly reported those projected profits, even if their deals didn't generate any revenue. This demonstrated that the company's financial statements showed large amounts of profit that were nonexistent. 

Yet this notorious scheme extended even further as Enron established Special Purpose Entities (SPEs), which functioned as off-balance-sheet entities. Enron transferred underperforming investments and mounting losses to the SPEs; since these SPEs were structured as legally separate companies, the relevant liabilities didn’t appear on Enron’s main balance sheet. This created an extremely distorted image of Enron as a highly profitable company.

Andrew Fastow controlled some of these SPEs, thereby portraying unethical abuse of power. Some of the executives at Enron questioned these misleading accounting practices, including Sherron Watkins. She specifically cautioned that if these practices were to continue, a major scandal could be triggered and that had the ability to topple Enron as a whole. Nonetheless, her warnings were disregarded, leaving Enron highly vulnerable.

“How exactly does Enron make its money?” —Bethany McLean asked the question that occupied every observer. Financial analysts began to scrutinize Enron's financial reports with mounting skepticism and noticed that profits surged on paper while the company's cash flow painted a highly distorted picture. The Securities and Exchange Commission (SEC) looked into Enron’s accounting practices, after which the company revealed that it lost $638 million in the first quarter—far worse than what investors had anticipated. More troubling was the company’s disclosure of a $1.2 billion decline in shareholder equity, demonstrating that the business was worth far less than it had claimed, initially. This concerning news gave rise to panic selling, as investors who owned several Enron shares instantly sold their stock to limit any substantial losses. Consequently, the large volume of shares that were being sold simultaneously caused the company’s stock price to begin to decline sharply. The stock price of Enron began to collapse at a rapid rate, falling from around $90 to below $12 by November 2001, before it plunged to less than $1. This catastrophic decline made one thing clear: investors lost all their trust in Enron.

Banks and lenders—pivotal in facilitating credit—started to distance themselves from Enron, and the consequences were immediate. Numerous financial institutions refused to lend any additional credit, and the business partners became cautious of maintaining any associations with Enron. Once investors lost confidence and realised that Enron’s financial statements were inherently unreliable, the company had lost its ability to secure funding.

By late 2001, Enron was amid a severe financial crisis and hence agreed to a takeover by Dynegy. The deal, however, collapsed after due diligence, which revealed that Enron had multiple hidden debts and accounting irregularities. Consequently, on December 2, 2001, Enron filed for Chapter 11 bankruptcy, making it the largest corporate collapse of a once celebrated industry titan.