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World Economy- Enron Scandal and downfall of Arthur Andersen

  Introduction


The Enron controversy included the Enron Corporation, an American energy firm with headquarters in Houston, Texas. Following the company's bankruptcy filing, which was made public in October 2001, Arthur Andersen, one of the five largest audit and accounting partnerships in the world at the time, virtually ceased to exist. Enron was noted as the biggest audit failure at the time in addition to being the biggest bankruptcy reorganization in U.S. history.






Background


After combining Houston Natural Gas and InterNorth, Kenneth Lay founded Enron in 1985. Lay created a team of executives that were able to conceal billions of dollars in debt from failed transactions and projects through accounting loopholes, special purpose corporations, and bad financial reporting for several years.





The company's stock price, which peaked at US$90.75 per share in mid-2000, crashed to less than $1 by the end of November 2001, prompting shareholders to file a $40 billion lawsuit. As the U.S. Securities and Exchange Commission (SEC) launched an inquiry, Dynegy, a rival corporation from Houston, made a very low-ball bid to buy the business. After the deal fell through, Enron filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code on December 2, 2001. Up until the WorldCom crisis the following year, Enron's $63.4 billion in assets made it the largest corporate bankruptcy in American history.


Aftermath

In the four years prior to the company's bankruptcy, Enron's investors lost $74 billion of which $40 to $45 billion was linked to fraud. Enron provided little, if any, aid to its employees and shareholders other than severance payments because it owed creditors around $67 billion. Enron staged auctions to sell its assets, including artwork, pictures, logo signs, and its pipelines, in order to pay its creditors.


Arthur Andersen was found guilty of obstructing justice after six weeks of trial, which led to the SEC banning the company from auditing public organizations going forward. The firm was disbanded and the partnership ended. In late 2002, Andersen declared bankruptcy, reducing the Big Five to the Big Four.

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