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Enron: The smartest guys in the room (2005) is a documentary that delves into the rise
and fall of this once-revered company. The Enron corporation based in Houston, Texas, was
founded in 1985 as a merger between Houston Natural Gas and InterNorth. Both were small
companies occupying the same region. According to Wikipedia:
Enron employed approximately 29,000 staff and was a major electricity, natural gas,
communications, and pulp and paper company, with claimed revenues of nearly
$101 billion during 2000. Fortune named Enron "America's Most Innovative Company"
for six consecutive years.
At the end of 2001, a whistleblower revealed that Enron's reported earnings were due to
systematic accounting fraud. This scandal not only led to the company filing for bankruptcy and
selling all remaining assets in 2006, but Enron also changed the way we looked at accounting
and bookkeeping practices forever.
After the merger in 1985, Kenneth Lay, who has been the CEO of Houston Natural gas,
became the chairman and CEO of Enron. As documented in the Film, Lay rebranded Enron into
an energy trader and supplier. Deregulation of energy markets allowed companies to name their
price for the future, and Enron took this to an extreme. By 2000, the company has grown into the
largest natural gas provider in the United States. In the documentary, Lay created the Enron
Finance Corporation and appointed Jeffery Skilling to the head of the corporation in 1990.
Skilling had impressed Lay with his work as a consultant at the Mckinsey & Company and was
one of the youngest partners at the firm. It was during this time Skilling converted Enron to Mark
to Market accounting. Mark to market accounting can change the values on the balance sheet as
the market conditions fluctuate, which could become dangerous if the market value severely
alters. Skilling liberally added money to the ledger for Enron, and his creative accounting led to
its collapse. This system, rarely used in the power industry though perfectly legal, had the
positive effect of pushing Enron's earnings numbers up, creating the illusion of profit in the
absence of proof. (Independent Lens, 2007). Mark to market accounting seems like an unethical
business practice. It's cheating when there is nothing physical to back up the claim its quite
simply a lie and completely immoral. Skilling claimed using this form of accounting would show
the True Market Value when in all reality, it was just a way to claim profits even when there
were not profits. Luckily due to Enron, this business practice is practically extinct.
Skilling not only used unethical practices with his creative accounting; he subjected
Enron employees to corrupt policies, harassment, and abuse. He established at Enron a review
committee that graded employees resulting in firing the bottom fifteen percent known as "the
rank and yank." Thus creating a competitive and brutal working environment for the employees.
