Several aspects of the Great Depression actually worked in Northern's favor, however. Consumers initially were not enthusiastic about natural gas as a heating fuel, but its low cost led to its acceptance during tough economic times. High unemployment brought the new company a ready supply of cheap labor to build its pipeline system.
In addition, the inch steel pipe, which could transport six times the amount of gas carried by inch cast iron pipe, had just been developed. Northern grew rapidly in the s, doubling its system capacity within two years of its incorporation and bringing the first natural gas supply to the state of Minnesota. The s brought changes in Northern's regulation and ownership. The Federal Power Commission, created as a result of the Natural Gas Act of , regulated the natural gas industry's rates and expansion.
Northern was listed on the New York Stock Exchange that year. The following year, the Argus properties were consolidated into Peoples Natural Gas Company, a subsidiary of Northern. In , Peoples was dissolved as a subsidiary, its operations henceforth becoming a division of the parent company. Also in , the company set up another subsidiary, Northern Natural Gas Producing Company, to operate its gas leases and wells. Another subsidiary, Northern Plains Natural Gas Company, was established in and eventually would bring Canadian gas reserves to the continental United States.
Northern created two more subsidiaries in Northern Gas Products Company later Enron Gas Processing Company , for the purpose of building and operating a natural gas extraction plant in Bushton, Kansas; and Northern Propane Gas Company, for retail sales of propane. Northern Natural Gas Producing Company was sold to Mobil Corporation in , but the parent company continued expanding on other fronts.
In , it formed Hydrocarbon Transportation Inc. Eventually, this system would bring natural gas liquids from plants in the Midwest and Rocky Mountains to upper-Midwest markets, with connections for eastern markets as well. Northern made several acquisitions in Protane Corporation, a distributor of propane gas in the eastern United States and the Caribbean; Mineral Industries Inc. Also in , Northern created Northern Petrochemical Company to manufacture and market industrial and consumer chemical products.
The petrochemical company acquired Monsanto Corporation's polyethylene marketing business in Northern continued expanding during the s. In , it bought Olin Corporation's antifreeze production and marketing business. It set up UPG Inc. UPG eventually would handle oil and liquid gas products for other companies as well.
Northern Border Pipeline Company, a partnership of four energy companies with Northern Plains Natural Gas as managing partner, began construction of the eastern segment of the Alaskan pipeline in This segment, stretching from Ventura, Iowa, to Monchy, Saskatchewan, was completed in About that time, it became apparent that transporting Alaskan gas to the lower 48 states would be prohibitively expensive.
Nevertheless, the pipeline provided an important link between Canadian gas reserves and the continental United States. Northern changed its name to InterNorth, Inc. That same year, while attempting to grow through acquisitions, InterNorth became involved in a takeover battle with Cooper Industries Inc. But they were different from standard debt securitization in several significant—and potentially disastrous—ways.
One major difference was that the SPVs were capitalized entirely with Enron stock. This directly compromised the ability of the SPVs to hedge if Enron's share prices fell.
Just as dangerous as the second significant difference: Enron's failure to disclose conflicts of interest. Enron disclosed the SPVs' existence to the investing public—although it's certainly likely that few people understood them—it failed to adequately disclose the non-arm's-length deals between the company and the SPVs.
Enron believed that their stock price would continue to appreciate—a belief similar to that embodied by Long-Term Capital Management , a large hedge fund, before its collapse in The values of the SPVs also fell, forcing Enron's guarantees to take effect.
Duncan, who oversaw Enron's accounts. As one of the five largest accounting firms in the United States at the time, Andersen had a reputation for high standards and quality risk management. However, despite Enron's poor accounting practices, Arthur Andersen offered its stamp of approval, signing off on the corporate reports for years. By the summer of , Enron was in freefall. By Oct. This action caught the attention of the SEC.
A few days later, Enron changed pension plan administrators, essentially forbidding employees from selling their shares for at least 30 days. Fastow was fired from the company that day. Also, the company restated earnings going back to By Dec. Once Enron's Plan of Reorganization was approved by the U. The company's new sole mission was "to reorganize and liquidate certain of the operations and assets of the 'pre-bankruptcy' Enron for the benefit of creditors.
Its last payout was in May Arthur Andersen was one of the first casualties of Enron's notorious demise. In June , the firm was found guilty of obstructing justice for shredding Enron's financial documents to conceal them from the SEC. Several of Enron's executives were charged with conspiracy, insider trading, and securities fraud. Enron's founder and former CEO Kenneth Lay were convicted on six counts of fraud and conspiracy and four counts of bank fraud. Prior to sentencing, he died of a heart attack in Colorado.
Enron's former star CFO Andrew Fastow pled guilty to two counts of wire fraud and securities fraud for facilitating Enron's corrupt business practices.
He ultimately cut a deal for cooperating with federal authorities and served more than five years in prison. He was released from prison in In , Skilling was convicted of conspiracy, fraud, and insider trading.
Enron's collapse and the financial havoc it wreaked on its shareholders and employees led to new regulations and legislation to promote the accuracy of financial reporting for publicly held companies. In July , President George W. Bush signed into law the Sarbanes-Oxley Act. The act heightened the consequences for destroying, altering, or fabricating financial statements and for trying to defraud shareholders. As one researcher states, the Sarbanes-Oxley Act is a "mirror image of Enron: the company's perceived corporate governance failings are matched virtually point for point in the principal provisions of the act.
The Enron scandal resulted in other new compliance measures. Moreover, company boards of directors became more independent, monitoring the audit companies, and quickly replacing poor managers.
These new measures are important mechanisms to spot and close loopholes that companies have used to avoid accountability.
At the time, Enron's collapse was the biggest corporate bankruptcy to ever hit the financial world since then, the failures of WorldCom, Lehman Brothers, and Washington Mutual have surpassed it. Increased regulation and oversight have been enacted to help prevent corporate scandals of Enron's magnitude.
More than 30 people were charged with various crimes arising from Enron's business practices. More than 20 people, including its chairman, president, and chief financial officer, were ultimately convicted of or pleaded guilty to fraud, conspiracy, and other crimes, although the chairman, Kenneth L. Lay, had his conviction extinguished when he died in before being sentenced.
The collapse also destroyed Arthur Andersen, Enron's accounting firm, which found itself accused of obstructing justice when it destroyed documents relating to the case in late after the Securities and Exchange Commission had begun investigating Enron. Arthur Andersen, which had been one of the top five accounting firms, quickly lost clients and partners when it came under SEC investigation for its role in Enron's collapse, and its federal criminal conviction for obstruction of justice in sealed the firm's fate.
The conviction was overturned in by the U. Supreme Court because of faulty instructions given by the judge to the jury. This can occur when a company is forced to calculate the selling price of its assets or liabilities during unfavorable or volatile times, as during a financial crisis. For example, if the asset has low liquidity or investors are fearful, the current selling price of a bank's assets could be much lower than the actual value.
It can also be manipulated by bad actors like Skilling and Enron's top management. Some believe MTM was the beginning of the end for Enron as it essentially permitted the organization to log estimated profits as actual profits and opened the door for further accounting manipulations.
For instance, Skilling advised the firm's accountants to transfer debt off of Enron's balance sheet to create an artificial distance between the debt and the company that incurred it. The company set up special purpose vehicles SPVs , also known as special purposes entities SPEs , to formalize its accounting scheme that went unnoticed for a long time. Enron continued to use these accounting tricks to keep its debt hidden by transferring it to its subsidiaries on paper.
Despite this, the company continued to recognize revenue earned by these subsidiaries. As such, the general public and, most importantly, shareholders were led to believe that Enron was doing better than it actually was, despite the severe violation of GAAP rules. Skilling abruptly quit in August after less than a year as chief executive—and four months before the Enron scandal unraveled.
But, of course, it was related. Both Skilling and Kenneth Lay were tried and found guilty of fraud and conspiracy in Other executives plead guilty. Lay died in prison shortly after sentencing and Skilling served twelve years, by far the longest sentence of any of the Enron defendants. In the wake of the Enron scandal, the term " Enronomics " came to describe creative and often fraudulent accounting techniques that involve a parent company making artificial, paper-only transactions with its subsidiaries to hide losses the parent company has suffered through other business activities.
Parent company Enron had hidden its debt by transferring it on paper to wholly-owned subsidiaries —many of which were named after Star Wars characters—but it still recognized revenue from the subsidiaries, giving the impression that Enron was performing much better than it was. Another term inspired by Enron's demise was "Enroned," slang for having been negatively affected by senior management's inappropriate actions or decisions.
Being "Enroned" can happen to any stakeholder, such as employees, shareholders, or suppliers. For example, if someone has lost their job because their employer was shut down due to illegal activities that they had nothing to do with, they have been "Enroned.
As a result of Enron, lawmakers put several new protective measures in place. One was the Sarbanes-Oxley Act of , which serves to enhance corporate transparency and criminalize financial manipulation. The rules of the Financial Accounting Standards Board FASB were also strengthened to curtail the use of questionable accounting practices, and corporate boards were required to take on more responsibility as management watchdogs. At the time, Enron's collapse was the biggest corporate bankruptcy to ever hit the financial world since then, the failures of WorldCom, Lehman Brothers, and Washington Mutual have surpassed it.
The Enron scandal drew attention to accounting and corporate fraud as its shareholders lost tens of billions of dollars in the years leading up to its bankruptcy, and its employees lost billions more in pension benefits. Increased regulation and oversight have been enacted to help prevent corporate scandals of Enron's magnitude.
However, some companies are still reeling from the damage caused by Enron.
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