Financial Scandals

                                                Financial Scandals

Among the financial scandals involving Wall Street, the Enron scandal is arguably the most well-known. In the late 1990s, Enron was a high-flying energy services company and a stock market darling. Shareholders could have lost as much as $74 billion when it finally collapsed. In order to inflate sales and conceal debts, the CEO, Jeff Skilling, and the CFO, Andrew Fastow, employed a variety of questionable accounting techniques. As a result, while having debt, the corporation gave off the impression of being the most profitable in history. Enron was able to easily raise additional funding to continue the ruse thanks to the appearance of a sound balance sheet and sizable revenues.

Most of the fraud was committed between 1998 and 2001 resulting in the stock price trading as high as $90.56. During this period CEO Ken Lay gave Skilling more and more authority, which Skilling used to manipulate the company’s accounts. The company was able to exaggerate asset values and revenue by changing an accounting policy to use market-to-market prices. These prices were then manipulated. Billions of dollars in debt were also moved from the balance sheet and hidden in shell companies in the Cayman Islands. The fraud accelerated when Skilling took over the CEO position from Lay.

In 2001 the fraud became unsustainable and the company collapsed. Ken Lay, Jeff Skilling, Andrew Fastow, and others were arrested. Fastow and Skilling served six and 12 years in prison, respectively. Ken Lay died before he was sentenced. The scandal didn’t only lead to the collapse of Enron, but to the demise of the Arthur Andersen, Enron’s auditor. The auditor overlooked the financial fraud and helped with the cover up. Arthur Andersen’s role in the fraud remains one of the biggest accounting scandals in the United States to date.