Chapter 1048: Safe or Unsafe

Two major events happened in mid-January. One was that China successfully bid for the 2008 Summer Olympics. The other was that Enron, an American company, was exposed for fraud.

Enron is an American energy tycoon that owns a natural gas transmission network across the United States and Canada. The company's headquarters is located in Houston, Texas, the home of the Bush family.

Enron has always been shrouded in layers of golden halos. As the world's largest energy trader, the company's operations cover 40 countries and regions around the world, with a total of more than 20,000 employees and assets of up to 62 billion US dollars. The company controls 20% of the electricity and natural gas transactions in the United States, and its businesses include energy wholesale and retail, broadband, energy transportation and finance.

Last year, it ranked seventh in the Fortune 500 selection of the United States, and was named the most innovative company in the United States by the magazine for six consecutive years. Enron stock is a blue chip stock strongly recommended by all securities rating agencies. The stock price is as high as more than 70 US dollars and is still rising. It has become the object of pursuit of many investors, and due to its close relationship with the Bush administration, the company's development has become more rapid.

However, in the second quarter, Enron's financial report attracted widespread attention from investors, the media and management.

Because Enron, which had been growing profits for 21 consecutive months, suddenly announced a loss of $600 million in the second quarter, it was this report that opened the prelude to the Enron incident.

Under strong pressure from government regulators, the media and the market, Enron submitted documents to the US Securities and Exchange Commission admitting that there was financial fraud. From 1997 to this year, it falsely reported profits of more than $500 million and did not record huge debts.

After the financial fraud of Enron was exposed, it was severely criticized by the media, and its stocks were sold off by investors. The stock price fell all the way, and the market value fell from more than $80 billion at its peak to less than $200 million.

The revelation of Enron's fraud caused a great shock in the US government and the public. The case involved a large number of government officials and congressmen, and it would also cause teachers, firefighters and some government employees to lose more than $1 billion in retirement funds. What is more terrible is that the Enron incident fundamentally shook the faith of American investors.

Wall Street stocks fell one after another. Continuously creating new lows in the stock market, investors' investment assets in the US stock market shrank by $2.5 trillion, equivalent to a quarter of the US's decline that year.

The decline of the US stock market also affected the global stock market. The major European stock markets and the stock markets in Tokyo, Hong Kong, Singapore, and Australia also fell sharply. The US dollar continued to depreciate, the bond market was also turbulent, and the price of gold rose all the way.

The Enron incident also caused a chain reaction of a series of corporate bankruptcies. Xerox and other large companies were also reported to have financial irregularities. At the same time, American companies also triggered a series of bankruptcy storms. Kmart, the second largest retailer in the United States, Global Crossing, and the sixth largest cable TV company in the United States successively declared bankruptcy protection.

The second largest long-distance telephone company in the United States, WorldCom, surpassed Enron with assets of 107 billion US dollars, creating the latest bankruptcy record in the United States.

This series of bankruptcies further hit the US financial market. It was such a business case that was used as a classic teaching case in all business school courses. It collapsed in just three months. So what exactly caused Enron to close? Why did the Enron incident cause such a big shock in American society?

The Enron incident was actually a huge business scandal related to American politics and economy, government officials and corporate officials. The most important problem was the company's financial fraud.

There are several ways for listed companies to commit financial fraud. The most common one is to conceal debts through affiliated companies and branches. In the United States, as long as you own no more than 50% of a company's shares, even if you are the actual controlling shareholder. You do not need to record the company's debts under your own company name. Since the mid-1990s, Enron has established a complex corporate system through capital restructuring. Its various subsidiaries and partnerships have more than 3,000 companies, forming a typical pyramid-shaped affiliated enterprise group.

Enron forced these affiliated companies at the bottom of the pyramid to borrow money for top-level capital reserves. These liabilities are not reflected in the financial statements of the head office at all, while their profits can be reflected in the financial statements of the head office. In this way, the company's returns on the books continue to increase.

Moreover, since US law stipulates that companies with different organizational forms bear different taxes, general sole proprietorships, partnerships, and limited liability companies only pay personal property and income taxes by their shareholders, and do not have to pay corporate income taxes. Enron took advantage of this to change the holding company into a limited liability company and evaded high taxes.

In addition, Enron also used self-dealing to commit fraud, using the income from the sale of assets as business income and fabricating profits. The asset sales were mostly carried out in affiliated companies, and the prices were significantly higher than the normal market prices. In the twelfth quarter, Enron's affiliated company bought a factory for $200 million from Enron. This transaction caused great controversy on Wall Street and in the investment community, because no one wanted the factory two years ago, and it was sold to another company at such a high price. However, it was this transaction that caused Enron's earnings per share to increase dramatically, which greatly increased market tracking.

In order to increase the amount of investment by shareholders, Enron continued to create concepts to make investors believe that the company has entered a high-growth, high-profit field, and will record the future period income that may be brought to the company into the current period income. However, the uncertainty was not disclosed, which seriously misled investors.

At this point, some people may ask, what are the US government regulators doing? Why did they fail to find the problem in time?

In fact, the United States is one of the countries with the most developed market economy in the world. The essence of the market economy is the contract economy and credit economy, and the market economy based on this credit is developed.

Major American companies generally rely on accounting firms and other credit rating agencies and investment banks for evaluation and auditing. The government is very confident in this market supervision system, so it rarely intervenes.

When the Enron fraud scandal occurred, people first speculated whether the famous accounting firm Andersen, which was responsible for the audit of Enron, had any ulterior motives with Enron.

In fact, it was Andersen's illegal operations that helped Enron falsely report profits, conceal huge debts, and mislead investors to invest.

In fact, since the 1980s, while Andersen was responsible for Enron's audit work, it also did accounting and provided consulting services for it. Last year, Andersen received $52 million in revenue from Enron. The consulting service income was as high as $27 million. It can be seen that Andersen and Enron have a long-standing material interest relationship.

Because of the fear of offending these big customers, Andersen turned a blind eye to Enron's fraud, and considering the huge consulting income, it naturally gave it a pass in financial auditing.

The collapse of Enron is not just a company's collapse, it is the collapse of a system. This system is not due to backwardness or imperfection, but due to corruption.

In fact, some people have long expressed doubts about Enron's profit model. They pointed out that although Enron's business looks brilliant, it actually doesn't make much money. However, because Enron has close contacts with the US government, the prosecutors dare not act rashly.

Until May this year. Finally, an insider discovered Enron's huge financial problems. This "person" was Sharon Watkins, Enron's vice president. He wrote a seven-page memo to Enron's former CEO Kenneth. He described the company's crisis. But this memo was not taken seriously by Kenneth, because this person himself participated in the company's fraud.

When the Enron incident ended, the U.S. federal executive, legislative and judicial agencies immediately launched emergency procedures to deal with the crisis. They made necessary supplements and amendments to the original laws around how to effectively ensure the authenticity and fairness of listed companies' financial reports.

Although Enron's arrival in Taiwan affected the U.S. market, it also had a certain impact on domestic companies. Some domestic companies had previously planned to go public in the United States. At this time, due to the high execution costs in the implementation of internal control of financial reports, A considerable number of domestic enterprises that were willing to raise funds in the United States postponed their listing in the United States or eventually chose capital markets in other regions for financing. For example, Air China decided to change its listing location from Hong Kong and the United States to Hong Kong and the United Kingdom due to the harsh regulations in the bill, and Bank of China and Construction Bank, which originally planned to list in New York, eventually gave up the US market.

Regarding the Enron incident, Fan Wubing also talked about this issue in the company's high-level video conference. He clearly pointed out that due to the occurrence of the Enron incident, the world economy has entered a new period of development. With the fall of a large number of old and large enterprises, countless new companies have stood up.

"In this new era, we should think about what model should companies use to develop so as not to repeat the same mistakes? "Fan Wubing put forward his requirements for many executives at the meeting.

But it is obvious. Due to the collapse of Enron, many contents in economic textbooks have become inapplicable to this era. Although many executives have received very professional training, they are also at a loss at this time.

However, as executives of Fan Investment Group, they are still lucky, because the company's profits are still growing at a high level. At least Enron's affairs are far away from them.