The Enron scandal was revealed in October 2001. In the end it resulted in two major bankruptcies. Firstly, the failure of Enron Corporation, an American energy company based in Houston, Texas and secondly, the de facto dissolution of Arthur Andersen, a firm which was one of the five largest audit and accountancy partnerships in the world. The failure of Arthur Andersen then resulted in the largest bankruptcy reorganisation in American history and the biggest audit failure.
Enron shareholders filed a $40 billion lawsuit. The company’s stock price was falling from a high of US$90.75 per share in mid-2000 to less than $1 by the end of November 2001. Many executives at Enron were indicted for a variety of charges and some were later sentenced to prison. Enron’s complex financial statements were confusing to shareholders and analysts, but that’s actually why accounting companies need to perform their audits, to professionally verify what normal investors cannot. However the complex business model and unethical practices also confused Arthur Andersen and the audit firm failed to stop this practice. Enron’s business practice even required that the company use accounting limitations to misrepresent earnings and modify the balance sheet to indicate favorable performance.
Between 1996 and 2000, Enron’s revenues increased by more than 750%, rising from $13.3 billion in 1996 to $100.8 billion in 2000. This extensive expansion of 65% per year was unprecedented in any industry, including the energy industry which typically considered growth of 2–3% per year to be respectable. In 2001 the fast growth became obviously unrealistic as the company reported $138.7 billion in revenues in the first 9 months. This would have brought Enron to sixth position on the Fortune Global 500.
For further information, please click here.