For many years, Enron was a legitimate energy company that brought in big profits. In order to continue reporting great profits and a high stock price, the company altered its numbers. It knowingly applied illegal accounting practices to report inflated and non-existent profits (Madura, 2010). The management made a series of poor decisions in deciding to report growth yet there was none. Companies usually want to report growth in order to attract more investors and to push their stock price. Financial analysts and investors usually look out for steady improvements in the major financial indicators like net income, revenues, cash flow and gross margins. Enron put a lot of effort into bookkeeping that was aimed at hiding the financial doldrums that the company was headed towards. Enron used the auditing firm of Arthur Andersen, which was one of the most reputable in the business. The audit firm had introduced a new policy that required all auditing partners to bring in double the amount in non-audit revenue for every amount made from audits. This made it difficult for the firm’s auditors to report Enron’s financial crisis, and this led to the company being an accomplice to the whole saga.
Arthur Andersen was to be charged with conspiring with Enron to hide the real picture of their finances. The auditing company was later dissolved in the wake of these revelations.
In general, Enron manipulated its accounts by creating offshore entities as units for avoiding taxes and hiding operating losses (Niskanen, 2007). The company’s principals and managers were also required to hide the massive losses. The cover up continued to grow bigger as more damaging information had to be covered up. The whole scheme was to make Enron appear more profitable that it really was. In the end, the scheme led to a situation in which corporate officers had to continually use more lies in order to maintain the false impression that they were making billions in profits yet the company was suffering heavy losses. This scheme seemed to work for a while. Enron’s stock rose very high and the company executives took advantage of the inflated prices to sell their stock options, raking in millions in the process. The Enron executives were given incentives as compensation for their cooperation. These were in the form of annual bonuses and options that were pegged to profit and stock price levels.
Before stories emerged of Enron going bankrupt, it had 692 subsidiaries incorporated in the Cayman Islands. It was also reported to have other 200 offshore companies in other tax havens around the globe (Madura, 2010). The main reason that this offshore network was set up was to help Enron avoid taxes in the countries in which it operated. For this purpose, the company set up a special unit to figure out the best offshore dealings for tax evasion purposes. With this set up, Enron made profits of close to $2 billion in the period between 1996 and 2000. During the same period, it only paid $17 million in taxes (Madura, 2010). It is this aggressive offshore set up that was the platform for Enron’s growth and expansion into a global multinational during the 1990s.
Enron also used its offshore set up to engage in “corporate financialization” that is common with many corporations today. This refers to the way multinationals are nowadays involved in highly complex trading in the world’s markets. They engage in business practices like doing deals and swaps, hedging loans, currency conversion and buying contracts. Apart from the product manufacturing side, these corporations also act as banks and financial companies (Niskanen, 2007). In order to succeed on this front, the corporations need to set up offshore subsidiaries and entities which will enable them to enjoy many seemingly legal advantages in the countries that they operate in. Here, they get the secrecy they need, not just to avoid taxes, but also for other purposes, like omitting some figures from their public accounts. At Enron, financialization activities and offshore cover ups combined to become a mega-corrupt business line. Enron wanted to be a successful offshore trading company that was also very successful on the onshore stock markets in New York (Niskanen, 2007). Many multinationals of today heavily rely on this dual set up of having an onshore consumer service side and an offshore financial side. The problem with this kind of set up is that it drives the corporations to engage in dishonest and fraudulent financial practices that will get them into trouble in the end.
There are some people who have tried to say that the Enron story was just a case of continuous poor decision-making. This is not true, as Enron insiders knew very well that the company was on the brink of collapsing, yet its investors were not informed about it. To make matters worse, Enron engaged in this manipulation with the help of Arthur Andersen, a financial audit company with an impeccable reputation. In today’s highly competitive business environment, companies all over the world are under pressure to report good financial figures in order to keep the investors happy an attract more investment. Investors and financial analysts put a lot of emphasis on the financial reports of companies as a way of telling if they are performing well. The companies can, therefore, sometimes be tempted to manipulate the figures in order to give the impression that all is going well. Companies also manipulate figures to avoid taxes and gain other financial advantages. All these bad accounting practices eventually put the company in trouble.