In early 2000, Enron moved away from its core business (electricity and natural gas) to trading in derivatives. It believed that the profits from derivatives could be used to mask the losses of its primary business. Enron star ted incurring massive debt. Though its derivatives related asset yields grew by good numbers, liabilities also piled up rapidly.
Trouble began in 2001. To hide bad investments in derivatives as well as its poorly performing assets in the energy business, it created multiple Special Purpose Vehicles.
It started avoiding millions in tax dues by using its stock options. Its financial condition was sustained by institutionalised, systematic and creatively planned accounting fraud. In the meantime it lost exclusive rights to its pipelines.
For the third quarter of 2001, it reported a huge $618 million loss and on November 4, 2001 it told its investors that they were restating profits for the last four and a quarter years. Finally, on December 2, 2001 the company filed for bankruptcy. The scandal created such waves in the auditing community that it led to the dissolution of Arthur Andersen, one of the worldÃ¢ÂÂs top accounting firms.
Text: Business Line
Also Read: Satyam: The truth at last!