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The biggest scandal of the early 21 th century was the case of "Enron". The financial collapse of U.S. energy giant is also not without participation of offshore companies. The corporation came into being in 1985 through the merger of two gas companies in Nebraska and Texas. It was the "Enron" became the first owner of the gas pipeline network that stretches across the country.
In the 1990s the company has engaged in trade, not only gas but also electricity. Corporation has entered the market of securities, which enabled her to have room for financial maneuver. "Enron" will soon become the largest trader in the electricity market in 2001, the company took 7 th place in the "Fortune 500". At that time, its staff consisted of 21,000 employees in 40 countries. At that time, the country's electricity market was freed from excessive state control; Enron was able to manipulate electricity prices across the United States.
At the same time the corporation has entered the market of energy futures and derivatives securities, which provide her with further significant field for financial maneuver. Soon the company became the largest trader in the electricity market, and in 2001 took seventh place in the "Fortune 500". By this time the company had 21 thousand employees in 40 countries.
In the 90s the U.S. energy industry has been largely deregulated , that is free from excessive government control. As a result, due to its dominant position in the market, " Enron " actually was able to manipulate electricity prices across America.
As befits a true oligarch, "Enron" had a very close relationship in political circles, especially in the Republican Party. President of the Corporation Kenneth Lay was considered a personal friend of George W. Bush. In fact, "Enron" was the number one sponsor of the campaign of the current president of the United States, as well as in his previous political career. The money generously to the campaign and the needs of other politicians (mostly Republicans, but the Democrats to secure some). For these purposes, "Enron" and his officials personally donated millions of dollars (according to expert estimates, about 6 million in the period 1989-2001.). Many senior members of the Bush administration in the past were part of the leadership of "Enron" , or were his employees, attorneys , advisors, etc., not to mention the possession of packages of its shares.
As a result, " Enron " not only received an unprecedented share of the public electricity supply , but also unprecedented tax concessions , and at the same time a decisive influence on the choice of the persons responsible for the regulation of the energy market (that is to oversee the corporation itself ) .
However, all of the above, although it does not look appropriate , broadly in line with U.S. law . In particular, the campaign contributions, of course, were not made "blind" , as it is in some other countries, making transfers and finding the appropriate reporting of both payers and campaign headquarters .
The shadow side of "Enron" was different: in its accounting. As it turned out, the leadership of the corporation during the 90's developed and realized in the life of a complex scheme designed to conceal from the public in particular, from its own shareholders and investors of the true state of affairs in the finance company. To do this, A myriad of thousands of separate legal entities, mainly offshore companies and partnerships. Thus, only one domicile (Georgetown) of the Cayman Islands was registered 692 subsidiaries of energy giant.
All offshore companies were set up on a completely legitimate, with submission of relevant reports to the tax authorities of the United States. Moreover, the activities of the offshore fleet, " Enron " was approved by its board of directors , lawyers and external auditors , the firm " Arthur Andersen " . Moreover, the auditors , of course, took an active part in the development of the whole circuit . ( It is no secret that all the world's leading accounting firms offer their clients various schemes to minimize taxes . Difference in scale )
Despite the incredible complexity of the design principle of it was pretty simple : on the one hand, deal with electricity conducted through subsidiaries , allowed as needed " inflate " the cost of , and hence the selling price of electricity , on the other hand, offshore made out those debts of the corporation , which she did not want to advertise.
I must say that U.S. law provides for a fairly strict "anti off-shore" measures. The provisions of the legislation on the so-called controlled foreign corporations provide for compulsory inclusion of income offshore companies in the taxable income of their American owners. Therefore, the U.S. cannot just throw on your own income to offshore tax evasion, while remaining at least formally within the law.
However, the management of " Enron " had other problems . On offshore dumped arrived, and losses. For what? As a result of corporate financial performance improved significantly, its shares rose in price, it captures more and more market share, well, its leadership has received the right to multi-million dollar bonuses, not to mention the increase in the value of their shares in their own company. In parallel, some managers have time to profit from the trading activities of the offshore companies that were going through financial flows.
In particular , it is assumed that the CFO of " Enron " , Andrew Fastow , who developed this whole grand scheme , was one of the activities of offshore companies over $ 30 million , and his aide Michael Kopper 10 million ( It is no longer fit in American law , even formally , as there is a clear conflict of interest the corporation and its officers. )
But what about the taxes? After all, such a financially strong company, of course, has to be one of the largest taxpayers in America? Not at all. Everyone knows that the balance of profit and profit for tax purposes is not quite the same thing. However, in this case the figures to be met to shareholders and tax authorities disagreed just fantastic. In the tax office all debts and expenses are provided in full, and the result for the purposes of corporation tax was totally unprofitable. " Enron " for years did not pay income tax at all. Instead, he, however, received from the Treasury reputable tax recovery: a total of $ 380 million in the period 1996-2000.
Given that the corporation is, of course, used the services of the most highly paid lawyers and accountants America, there is no doubt that every single transaction , contract, or tax calculation " Enron " were completely legitimate, almost legitimate, or at least have a good chance of being recognized as legitimate in the proceedings. The general result, however, was simply monstrous. Unaccounted debts accumulated as a snowball, and eventually could not swim out. The accident happened in 2001, the first year of the new millennium.
In the new year, " Enron " has a new president Jeffrey Skilling . In this case, Kenneth Lay remained chairman of the board of directors. But six months apparently gone out to gain insight into the situation Skilling unexpectedly resigned (and was now forced to give evidence and to fend off accusations of complicity) . In August 2001, the corporation once again topped Lay. Despite the warnings of imminent collapse, which have already started to come from his aides, Lei said cheerfully Corporation employees that the firm has never been so brilliant, and that its shares over the next ten years will certainly grow by 800%. I must say that he Ley had already dropped its shares " Enron " - valued at more than $ 20 million So did many others in the leadership of the corporation. (Now there is a trial on insider trading.)
In October came the quarterly reporting deadline. By this time, no further concealment was impossible. " Enron " announced losses of $ 638 million, as well as a decrease in equity in the corporation $ 1.2 billion loss was charged to offshore fraud accountant Andrew Fastow , who was immediately fired.
Shares of " Enron " went into a steep dive . Kenneth Lay sought help from the government, but the Cabinet decided not to intervene. Instead of helping the Securities Commission launched an investigation into the possible conflict of interest when dealing with offshore companies.
In November, " Enron " was forced to once again review their records . Reported profit for the last five years has been reduced by $ 586 million , and debt increased by another 2.5 billion shares are still at the beginning of the year , stood at about $ 80 apiece, collapsed to below $1.
After this energy company "Dynegy" previously expressed a desire to acquire a competitor in distress , strongly rejected these plans. In December 2001, " Enron " was forced to file for bankruptcy in the form prescribed Chapter 11 of the Bankruptcy Code (which means that companies are given the opportunity to restructure under temporary protection from creditors ) . It was the largest bankruptcy in U.S. history. More than 4000 employees was fired in the U.S. and more than a thousand in Europe.
Along the way, it became clear that burned retirement savings 15,000 employees, "Enron" worth about $ 1 billion The fact that their pension fund, which is controlled by the corporation itself, invested most of the funds raised in the campaign " Enron " , which now cost nothing .
The criminal investigation was started to Enron. Immediately there was a question about the dubious role of auditors. It turned out that the employees of the company " Arthur Andersen " not only participated in the development schemes of the corporation , but also in anticipation of the disaster destroyed ( by shredding ) a huge amount of sensitive documents relating to the " Enron ." On this basis, the grand jury found the company “Arthur Andersen” guilty of obstruction of justice , after which one of the leading auditing firms in the world virtually ceased to exist . Sentence ($ 500 thousand fine) imposed an auditing firm in October 2002, has become almost a formality
The main characters of this story have exercised their right to refuse to testify on the ground that the testimony might incriminate them. This is Andrew Fastow , chief accountant corporation and the alleged author of the criminal scheme , Kenneth Lay, President and Chairman of the Corporation , and David Duncan, chief auditor of the corporation in " Arthur Andersen " . The degree of fault of each now will determine the U.S. Supreme Court .
Assistant Fastow , Michael Kopper , declined to cooperate with investigators and pleaded guilty in exchange for his cooperation possible account by the court. It was on his testimony about the machinations in the " Enron " to a large extent and expects the investigation. In October 2002, Fastow was charged with fraud, and along with money laundering, criminal conspiracy, etc. ( 78 total points).
Proceedings are likely to be long. In addition to the litigation itself bankrupt, lenders traditionally try to get money from someone who has it is: in this case with the bankers, " Enron ." Group shareholders ' Enron ' have lost their investment, previously filed a civil suit against the corporation and its auditors , accusing them of fraud and demanding the return of the money invested in stocks . In July 2002, the plaintiffs decided to add to the list of defendants and a number of major U.S. and foreign banks (including Citigroup and JP Morgan Chase), who are accused in the fact that they helped " Enron " to mislead investors. Namely, the bankers provide energy giant loans for working capital under the guise of payments (electricity?), and then secretly returned corporation loans to offshore accounts controlled by the banks. The purpose of " Enron " was hidden from the public 's investment in their plight of working capital , the purpose of the bankers get an unusually high percentage of the loan (7 % instead of 3%). However, experts believe that to prove in court their charges against bankers deceived investors will not be easy.
The Lessons We Learned from Enron Bankruptcy
- The market capitalization does not show the size of the company.
In fact, the market value - only the sum of shareholders' views on the future of the company, and not the characteristics of its current position. If you take the traditional criterion - value added tax - the biggest will be the good old General Electric, Exxon, General Motors.
- The main concern of the consultant is to provide them with work.
Enron gave a great deal of work and earnings to creditors, investment banks, consultants, auditors, representatives of business and political elite. Do not expect that all of these people have given us impartial advice on its business strategy and told shareholders and the public about the state of affairs of the company. Consultants are stimulated only by that to talk to the company and to outside people only what the company wants. That’s what exactly was said about Enron.
- All the participants have common business interests when things are going well. If you have problems interests diverge.
Staff, managers and investors is beneficial to the stock price rose. They receive stock options, bonuses, pay raises, they have growing confidence in the company and their work. If you have problems all behave differently. The main interest of managers - to keep it a secret as long as they do not resign. The main task of the staff - not to lose a job (usually their relationship with the company longer than the directors and shareholders). The purpose of the shareholders - to retain at least part of the cost of business. Do not expect all of them in a moment of crisis will stick together. So it was in Enron.
- The company's profit from speculation cannot be sustained.
The market as a whole is working effectively, and speculation can only give a small profit. Of course, there are some experts who can find speculative opportunities. But the company is rarely possible.
But many companies say that they receive regular income from speculation. Very often they do not give a full account of the cost of the capital employed and the risks associated with the game. Sometimes they combine reporting profits from speculation intermediary profits. And sometimes small regular profits have suddenly overpowered by a major loss caused by a serious miscalculation. Just as it was with Enron
- Most mergers and acquisitions do not add value
There is overwhelming evidence that the majority of mergers failure. Can you compare the profitability before and after the acquisition, you can count how many times the absorption led to huge write-offs and the sale of the business. Or just ask the people whether they think the combined company a success.
Only the reaction of the stock market exposes the merger in a favorable light. But the market reaction is not talking about what it actually is, and of what people expect from the future. However, I have yet to meet the management team without a theory of why their strategy of acquisitions finally disproves the rule.
One of the most important results and lessons of the Enron case was the adoption of laws aimed at tightening control of the financial statements. The most famous of them - the Sarbanes-Oxley Act of 2002
Works Cited
Robert Bryce, Pipe Dreams, “Greed, Ego, and the Death of Enron”, PublicAffairs, 2002
Lynn Brewer, Matthew Scott Hansen, House of Cards, Confessions of An Enron Executive”, Virtualbookworm.com Publishing, 2002. (p 134-136)
Kurt Eichenwald, “Conspiracy of Fools: A True Story”, Broadway Books, 2006. (p.20-26)
