Enron did not focus on actually supplying oil and gas, like a traditional company would. Instead, Enron oriented their efforts towards buying futures (investments predicting the future price of a commodity) in oil. The company also bought electricity from generators and sold it to consumers. One of the bold moves that the Company carried out was the signing of marketing agreement for a year, which was the first in the industry, with Calpine Corporation. According to the agreement, the natural gas daily prices would be linked with the electricity prices. Another example would be the signing of contract for natural gas supply for a period of 15 years with National Gas Company of Trinidad and Tobago Limited (NGC) at 60 MMcf/d.
What was Enron's relationship to George W. Bush? To Arnold Schwarzenegger?
The CEO of Enron, Kenneth Lay was a close personal friend of Bush. Kevin Philips even goes to the limit of explaining the relationship of the two as more than just friendship favors. There were opposition from Lay and Bush about the interfering of Government in the matter, however favors from Bush in the form of Enron subsidies continued for a long time. It was so called that the association between Lay and Bush was as well as the professional courtesy shared by the sidewinder and timber rattlesnake.
Regarding the second person, during the California energy crisis, Arnold Schwarzenegger met with Kenneth Lay to attempt to end the rolling brownouts. Arnold Schwarzenegger was elected mainly due to his opposition to Enron's practices.
3) With respect to Enron's financial statements, what was the one question nobody could answer?
The financial statements of Enron were manipulated in such a way that nobody could identify the loopholes with surficial analysis. This went on for many years not just because of one person, but because many parties were actively involved in covering up the mess created. The major question however that popped out from the financial statements was, "How does Enron make money?"
4) How was Enron able to continue reporting profits even though its business was beginning to collapse?
Enron would report future earnings before they actually made the earnings. Essentially, due to creative accounting primarily from the CFO, Enron was able to secretly park their assets and hide debt while reporting strong numbers.
The analysts in Wall Street were impressed with a trading room that was completely faked. A show was put up in the drama of setting a command center belonging to Enron Energy Services (EES) so that the analysts present for the annual meeting would believe that deals were taking place. The drama of staffs pretending to engage in deals was performed for a long time and nobody even suspected that something was wrong. EES, which was taken to the powerhouse of the organization, was based on false deals and staffing.
5) Based on your knowledge of accounting, what accounting principles and/or conventions were violated by Enron's management?
There are three major accounting principles that I feel were duly violated in the Enron case:
Fairness of reporting,
Misapplication of GAAP
Accounting risks.
One of such application violation can be explained with the use of mark to market accounting that was used by Enron. This is a concept which fits in just perfectly for many situations. For example, companies like Goldman Sachs can use this method to value their portfolio taking the prices of all stocks for a day as the basis. The condition in this case is; there exists a market. In case of Enron, the problem was that the Company was making efforts for putting prices of a deal of long term energy supply. Thus, all their market transactions were based on the expected energy prices 10 to 15 years down the line. This means that there was no actual market and/or a valid pricing mechanism. So, rather than a mark to market existence, this is just dealing with future hallucinatory prices which is a mark to model accounting, based on guesses and not facts.
6) Who was really responsible for Enron's collapse? Why wasn't the company's situation exposed earlier?
The collapse of Enron resulted in the collapse of about 1500 jobs and loss of investor money to the amount of $70 billion. In all this, the top executives had a pocket lining of millions. The executives (leadership team) at Enron produced and nurtured and morally corrupt corporate culture that enabled and even encouraged amoral ways of producing higher revenues.
It was the combination of Ken Lay and Jeff Skilling that took Enron to whole new level and established it as the model company at the global scale. It was established in 1985 and within years, it was able to generate billions in profit. It was the year 2001 when the Company declared bankruptcy forcefully as there was artificial inflation of profits. The Chairman and the President are now in prison.
The accusation comes to these two mainly when the veil is lifted as it is assumed that they had full knowledge on market manipulation and the endorsement of all the sleazy deals of Enron. The contribution to California energy crisis is also evident. The CFO was also made to involve in the whole matter as Lay and Skilling put their own mistakes to the shoulders of others only. Ken Lay and Jeff Skilling stand as the poster children when it comes to corporate fraud.
