0
Enron:Enron:
the scandal, thethe scandal, the
legendlegend
DerivativeDerivative
 A derivative is an instrument whose value is “derived”A derivative is an instrument whose value is ...
WhistleWhistle BlowerBlower
 The technical term for these often brave peopleThe technical term for these often brave peop...
InternetInternet bandwidthbandwidth
 By the late 1990s Enron controlled some 25By the late 1990s Enron controlled some 25...
401k401k PlanPlan
 Pension Plans- Employee 401k contributions arePension Plans- Employee 401k contributions are
automatic...
SPESPE
 SPE- Acronym for Special Purpose Entities.SPE- Acronym for Special Purpose Entities.
 SPE’s reflect a common fin...
Key Players in the EnronKey Players in the Enron
ScandalScandal
 Kenneth LayKenneth Lay
 Former CEO of Enron, helped sta...
 Jeffrey SkillingJeffrey Skilling
 Enron's chief executive in the first half of 2001Enron's chief executive in the first...
 David DuncanDavid Duncan
 Enron's chief auditor at AndersonEnron's chief auditor at Anderson
 His job was to check Enr...
 Andrew FastowAndrew Fastow
 Former Chief Financial Officer of EnronFormer Chief Financial Officer of Enron
 The master...
 Sherron WatkinsSherron Watkins
 Known as the "Enron whistle-blower"Known as the "Enron whistle-blower"
 Was Enron's vi...
EnronEnron
What Went Wrong?What Went Wrong?
How did the collapse begin?How did the collapse begin?
 Energy companies lobbied congress in theEnergy companies lobbied ...
Skilling’s PlanSkilling’s Plan
 Under Skilling’s new plan Enron bet againstUnder Skilling’s new plan Enron bet against
fu...
EarlyEarly 20002000
 Enron took advantage of the dot.comEnron took advantage of the dot.com
boom and traded internet band...
Fuzzy NumbersFuzzy Numbers
 Enron began tweaking the numbers inEnron began tweaking the numbers in
their financial statem...
 Andrew Fastow (ChiefAndrew Fastow (Chief
Finance Officer)Finance Officer)
created thecreated the
partnershipspartnership...
 Sherron Watkins, theSherron Watkins, the
Enron “Whistleblower”Enron “Whistleblower”
noticed the fuzzynoticed the fuzzy
a...
WhyWhy wasn’twasn’t EnronEnron caughtcaught
earlier?earlier?
 Throughout all of this,Throughout all of this,
Enron and it...
 In the year 2000,In the year 2000,
Kenneth Lay metKenneth Lay met
three times with Dickthree times with Dick
Cheney to d...
 Aug 14, 2001 Jeff Skilling resigned,Aug 14, 2001 Jeff Skilling resigned,
Kenneth Lay became CEO once again.Kenneth Lay b...
 December 2001,December 2001,
Enron filed for chapterEnron filed for chapter
11 bankruptcy11 bankruptcy
 It’s share pric...
ChapterChapter 1111 BankruptcyBankruptcy
 Companies and large firms that are facingCompanies and large firms that are fac...
WhatWhat NowNow
 ““Enron is in the midst of restructuringEnron is in the midst of restructuring
various businesses for di...
Investor SentimentInvestor Sentiment
 ``Enron has been elevated to a symbol,''``Enron has been elevated to a symbol,'' sa...
Market EfficiencyMarket Efficiency
 ````The market has already responded toThe market has already responded to
the potent...
Rocking WashingtonRocking Washington
 After investors’ reaction to Enron and fear ofAfter investors’ reaction to Enron an...
Dems vs. RepsDems vs. Reps
 Democrats see Enron as justification for a strongDemocrats see Enron as justification for a s...
CCorruption & Regulation$orruption & Regulation$
 After Enron, 89% of investors strongly favor theAfter Enron, 89% of inv...
Public Company AccountingPublic Company Accounting
Reform & Investor Protection ActReform & Investor Protection Act
 crea...
The Best Advice!The Best Advice!
 Investors were left wondering whetherInvestors were left wondering whether
they could t...
A Quick look:A Quick look:
Enron
Enron
Upcoming SlideShare
Loading in...5
×

Enron

955

Published on

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
955
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
80
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide
  • 200 million since 1999
  • Enron set up trading markets in sectors other than oil and gas, such as broadcast time for advertisers and Internet Bandwidth
  • They were the first players in the dot.com business. The energy market was already very efficient, so they weren’t making very much money from trades in this market any more. With the dot.com business, everyone was doing well, and Enron was raking in huge amounts of money from transaction costs in the internet bandwidth sector( there was a limited amount of space on the internet, so prices for internet space were very high)
  • Blockbuster Example- there was a 110 million dollar deal with blockbuster video to stream videos over the internet. A partnership was created within Enron to run this business, but the idea fell through. Nevertheless, Enron recorded the 110 million dollars as a profit, even though nothing ever happened of the operation. And they passed operating costs and other losses form the development to the partnership to eliminate the debt from their financial record.
  • Raptor and Condor were noticed by Sherron Watkins. These weren’t the only partnerships created. Although these were the two most publicized partnerships, there were hundreds of others that concealed losses from the company that amounted to billions of dollars.
  • They were almost bought by Dynegy, a smaller company that they had dominated in the past, but Dynegy pulled out of the merger, and enron, in turn sued them for pulling out.
  • Transcript of "Enron"

    1. 1. Enron:Enron: the scandal, thethe scandal, the legendlegend
    2. 2. DerivativeDerivative  A derivative is an instrument whose value is “derived”A derivative is an instrument whose value is “derived” from the underlying value of something else, such as afrom the underlying value of something else, such as a stock, a bond, or in the case of Enron’s derivatives, astock, a bond, or in the case of Enron’s derivatives, a unit of electricity.unit of electricity.  Derivatives are useful because they enable an investorDerivatives are useful because they enable an investor to hedge against a decline in value.to hedge against a decline in value.  Example: Enron could enter a contract with a purchaserExample: Enron could enter a contract with a purchaser of electricity, such as a utility, guaranteeing that theof electricity, such as a utility, guaranteeing that the purchaser would pay a certain price for a certain amountpurchaser would pay a certain price for a certain amount of electricity at a certain date in the future.of electricity at a certain date in the future.
    3. 3. WhistleWhistle BlowerBlower  The technical term for these often brave peopleThe technical term for these often brave people is "whistle blower," as in the expression "blowingis "whistle blower," as in the expression "blowing the whistle on corruption (or on government lies,the whistle on corruption (or on government lies, etc)."etc)."  Whistle blowers are people who reveal generallyWhistle blowers are people who reveal generally harmful or very unfair activities, often of whichharmful or very unfair activities, often of which they have become aware because of theirthey have become aware because of their employment position within their employer'semployment position within their employer's organization and, or their access to otherwiseorganization and, or their access to otherwise unavailable communications from within theunavailable communications from within the organization.organization.
    4. 4. InternetInternet bandwidthbandwidth  By the late 1990s Enron controlled some 25By the late 1990s Enron controlled some 25 percent of all electricity and natural gaspercent of all electricity and natural gas contracts traded worldwide and were consideredcontracts traded worldwide and were considered the best in the business.the best in the business.  This success led Enron to act as a marketThis success led Enron to act as a market middleman for other commodities as diverse asmiddleman for other commodities as diverse as lumber andlumber and InternetInternet bandwidthbandwidth (the rate at which(the rate at which data can be delivered over the Internet).data can be delivered over the Internet).
    5. 5. 401k401k PlanPlan  Pension Plans- Employee 401k contributions arePension Plans- Employee 401k contributions are automatically deducted from their paycheckautomatically deducted from their paycheck each pay period. This money is taken out beforeeach pay period. This money is taken out before the employees’ paycheck is taxed.the employees’ paycheck is taxed.  The contributions are invested at the employees’The contributions are invested at the employees’ direction into one or more funds provided in thedirection into one or more funds provided in the plan.plan.  Employers often "match" employeeEmployers often "match" employee contributions, but are not required to do so.contributions, but are not required to do so.  While the investments grow in the employeesWhile the investments grow in the employees 401k account, they do not pay any taxes on it.401k account, they do not pay any taxes on it.
    6. 6. SPESPE  SPE- Acronym for Special Purpose Entities.SPE- Acronym for Special Purpose Entities.  SPE’s reflect a common financing technique for companies.SPE’s reflect a common financing technique for companies. Companies can cut their risk by moving assets into separateCompanies can cut their risk by moving assets into separate partnerships that can be sold to outside investors.partnerships that can be sold to outside investors.  In Enron’s case, assets that were losing money were sold toIn Enron’s case, assets that were losing money were sold to partnerships. Enron listed the sales of these assets as earnings.partnerships. Enron listed the sales of these assets as earnings. However, to be legitimate, accounting rules require that an SPE beHowever, to be legitimate, accounting rules require that an SPE be legally isolated from the company that created it.legally isolated from the company that created it.  In Enron’s case this was not true. The SPE’s relied upon EnronIn Enron’s case this was not true. The SPE’s relied upon Enron managers for leadership and Enron stock for capital. When outsidemanagers for leadership and Enron stock for capital. When outside auditors told Enron to treat some of the 4,000 SPE’s it had createdauditors told Enron to treat some of the 4,000 SPE’s it had created as part of Enron, the company had to take the $1-billion chargeas part of Enron, the company had to take the $1-billion charge against earnings.against earnings.
    7. 7. Key Players in the EnronKey Players in the Enron ScandalScandal  Kenneth LayKenneth Lay  Former CEO of Enron, helped start the company.Former CEO of Enron, helped start the company.  Enron extended to him $7.5 million revolving credit line, whichEnron extended to him $7.5 million revolving credit line, which he reportedly used and repaid with Enron stock 15 times withinhe reportedly used and repaid with Enron stock 15 times within a period of just several monthsa period of just several months  He quit as CEO in February 2001He quit as CEO in February 2001  He returned as CEO in August 2001until he resigned on Jan.He returned as CEO in August 2001until he resigned on Jan. 23, 200223, 2002  He quit the Enron board altogether on Feb. 4.He quit the Enron board altogether on Feb. 4.  Sherron Watkins said Lay was "duped" by top executivesSherron Watkins said Lay was "duped" by top executives
    8. 8.  Jeffrey SkillingJeffrey Skilling  Enron's chief executive in the first half of 2001Enron's chief executive in the first half of 2001  Since joining the company in 1990, Skilling helpedSince joining the company in 1990, Skilling helped transform Enron from a natural-gas pipeline companytransform Enron from a natural-gas pipeline company into an energy-trading powerhouse.into an energy-trading powerhouse.  Between January and August 2001 he sold off about $20Between January and August 2001 he sold off about $20 million in Enron stockmillion in Enron stock  Resigned after the close of markets on Aug. 14 2001Resigned after the close of markets on Aug. 14 2001  Being charged with conspiracy, fraud and insider tradingBeing charged with conspiracy, fraud and insider trading
    9. 9.  David DuncanDavid Duncan  Enron's chief auditor at AndersonEnron's chief auditor at Anderson  His job was to check Enron’s accountsHis job was to check Enron’s accounts  He is accused of ordering the shredding of thousands ofHe is accused of ordering the shredding of thousands of Enron-related documents in an effort to hide them fromEnron-related documents in an effort to hide them from Securities and Exchange Commission investigatorsSecurities and Exchange Commission investigators
    10. 10.  Andrew FastowAndrew Fastow  Former Chief Financial Officer of EnronFormer Chief Financial Officer of Enron  The mastermind behind the deceptive accountingThe mastermind behind the deceptive accounting practicespractices  Lea Fastow (his wife) also plead guilty to signing andLea Fastow (his wife) also plead guilty to signing and filing a tax return that did not include income thefiling a tax return that did not include income the Fastow’s had received from Mike KopperFastow’s had received from Mike Kopper
    11. 11.  Sherron WatkinsSherron Watkins  Known as the "Enron whistle-blower"Known as the "Enron whistle-blower"  Was Enron's vice president of corporate developmentWas Enron's vice president of corporate development  Wrote a letter to Kenneth Lay about “suspicions ofWrote a letter to Kenneth Lay about “suspicions of accounting improprieties"accounting improprieties"  Not really a “whistle-blower” because she never wentNot really a “whistle-blower” because she never went public with her suspicionspublic with her suspicions
    12. 12. EnronEnron What Went Wrong?What Went Wrong?
    13. 13. How did the collapse begin?How did the collapse begin?  Energy companies lobbied congress in theEnergy companies lobbied congress in the 1980s for deregulation of the energy1980s for deregulation of the energy businessbusiness  Energy policy was changed andEnergy policy was changed and Washington lifted controls on who couldWashington lifted controls on who could produce energy and how it was soldproduce energy and how it was sold  Jeff Skilling took and aggressive approachJeff Skilling took and aggressive approach to expand Enron by trading futures in gasto expand Enron by trading futures in gas contractscontracts
    14. 14. Skilling’s PlanSkilling’s Plan  Under Skilling’s new plan Enron bet againstUnder Skilling’s new plan Enron bet against future movements in the price of gas-generatedfuture movements in the price of gas-generated energyenergy  ““Enron bought and sold tomorrow’s gas at aEnron bought and sold tomorrow’s gas at a fixed price today”fixed price today”  With every trade, Enron took a cut forWith every trade, Enron took a cut for transaction coststransaction costs  Using the internet to promote trading, EnronUsing the internet to promote trading, Enron became the most successful player in thebecame the most successful player in the futures game; 90% of Enron’s income camefutures game; 90% of Enron’s income came from tradesfrom trades
    15. 15. EarlyEarly 20002000  Enron took advantage of the dot.comEnron took advantage of the dot.com boom and traded internet bandwidthboom and traded internet bandwidth  The value of Enron’s online transactionsThe value of Enron’s online transactions was huge ($880 billion)was huge ($880 billion)  The problem was Enron wasn’t makingThe problem was Enron wasn’t making money on many of their online tradesmoney on many of their online trades because they made the market verybecause they made the market very efficientefficient
    16. 16. Fuzzy NumbersFuzzy Numbers  Enron began tweaking the numbers inEnron began tweaking the numbers in their financial statements with accountingtheir financial statements with accounting techniques to hide their lossestechniques to hide their losses  Enron created partnerships, and thenEnron created partnerships, and then passed the assets (losses) to thesepassed the assets (losses) to these partnerships which eliminated the lossespartnerships which eliminated the losses from their balance sheetsfrom their balance sheets
    17. 17.  Andrew Fastow (ChiefAndrew Fastow (Chief Finance Officer)Finance Officer) created thecreated the partnershipspartnerships  Condor and RaptorCondor and Raptor were two majorwere two major partnershipspartnerships
    18. 18.  Sherron Watkins, theSherron Watkins, the Enron “Whistleblower”Enron “Whistleblower” noticed the fuzzynoticed the fuzzy accounting that had beenaccounting that had been used in relationship to theused in relationship to the Condor and RaptorCondor and Raptor partnerships and wrote apartnerships and wrote a letter to Kenneth Lay andletter to Kenneth Lay and Arthur Anderson warningArthur Anderson warning him that the Enron washim that the Enron was unstable.unstable.
    19. 19. WhyWhy wasn’twasn’t EnronEnron caughtcaught earlier?earlier?  Throughout all of this,Throughout all of this, Enron and its keyEnron and its key members were makingmembers were making political contributions topolitical contributions to the white house andthe white house and congress.congress.  Kenneth Lay donatedKenneth Lay donated $100,000 to President$100,000 to President Bush in 2000, and inBush in 2000, and in 2001 Bush invited Lay to2001 Bush invited Lay to become an advisor to hisbecome an advisor to his transition team.transition team.
    20. 20.  In the year 2000,In the year 2000, Kenneth Lay metKenneth Lay met three times with Dickthree times with Dick Cheney to discussCheney to discuss energy policy review.energy policy review.  When the review wasWhen the review was published in Maypublished in May 2001, it was very2001, it was very favorable to the Enronfavorable to the Enron and the energyand the energy sector.sector.
    21. 21.  Aug 14, 2001 Jeff Skilling resigned,Aug 14, 2001 Jeff Skilling resigned, Kenneth Lay became CEO once again.Kenneth Lay became CEO once again.  Stock prices began to fall, as investorsStock prices began to fall, as investors were uncertain about the company’swere uncertain about the company’s stability.stability.  This started a chain reaction: Enron hadThis started a chain reaction: Enron had hedged against its own stock, so as longhedged against its own stock, so as long as the stock price was declining, it couldas the stock price was declining, it could not recover its losses.not recover its losses.
    22. 22.  December 2001,December 2001, Enron filed for chapterEnron filed for chapter 11 bankruptcy11 bankruptcy  It’s share price hadIt’s share price had collapsed from aboutcollapsed from about $95 to under $1.$95 to under $1.
    23. 23. ChapterChapter 1111 BankruptcyBankruptcy  Companies and large firms that are facingCompanies and large firms that are facing severe and unmanageable debt may seek to filesevere and unmanageable debt may seek to file chapter 11 bankruptcy, which allows them to re-chapter 11 bankruptcy, which allows them to re- organize so they can either continue their day-organize so they can either continue their day- to-day operations or go out of business entirely.to-day operations or go out of business entirely.  Under chapter 11, a company is protected fromUnder chapter 11, a company is protected from damaging lawsuits and other negativedamaging lawsuits and other negative measures, but in exchange the company ismeasures, but in exchange the company is usually required to have all its major businessusually required to have all its major business decisions approved by the bankruptcy court.decisions approved by the bankruptcy court.
    24. 24. WhatWhat NowNow  ““Enron is in the midst of restructuringEnron is in the midst of restructuring various businesses for distribution asvarious businesses for distribution as ongoing companies to its creditors andongoing companies to its creditors and liquidating its remaining operations.”liquidating its remaining operations.”
    25. 25. Investor SentimentInvestor Sentiment  ``Enron has been elevated to a symbol,''``Enron has been elevated to a symbol,'' sayssays Woody Dorsey of Market Semiotics, anWoody Dorsey of Market Semiotics, an institutional forecasting service,institutional forecasting service, ``There's a``There's a whole new level of uncertainty about profits,whole new level of uncertainty about profits, about the integrity of the accountingabout the integrity of the accounting profession and of Wall Street.''profession and of Wall Street.''  With a crisis like Enron,With a crisis like Enron, during a bear market,during a bear market, stocks typically take about 12 months tostocks typically take about 12 months to recover.recover.  From 2000 to mid-2002 prices of stocks forFrom 2000 to mid-2002 prices of stocks for the nation’s largest companies fell by morethe nation’s largest companies fell by more than 33 percent, while technology stocksthan 33 percent, while technology stocks dropped 70 percent (more factors than justdropped 70 percent (more factors than just Enron).Enron).  But, then again…But, then again…
    26. 26. Market EfficiencyMarket Efficiency  ````The market has already responded toThe market has already responded to the potential of overstated profits in thethe potential of overstated profits in the same way it responds to an unexpectedsame way it responds to an unexpected negative event:negative event: ready, fire, aim,''ready, fire, aim,'' sayssays Jeffrey M. Applegate, chief investmentJeffrey M. Applegate, chief investment strategist at Lehman Brothers Inc.strategist at Lehman Brothers Inc.  This assumes a fully efficient market, oneThis assumes a fully efficient market, one where all current information is alreadywhere all current information is already included in the prices.included in the prices.
    27. 27. Rocking WashingtonRocking Washington  After investors’ reaction to Enron and fear ofAfter investors’ reaction to Enron and fear of more such scandals, Conservatives havemore such scandals, Conservatives have learned a sobering lesson:learned a sobering lesson:  ““The clamor for accountability in theThe clamor for accountability in the financial system means more rules andfinancial system means more rules and regulations in a sector they have spentregulations in a sector they have spent decades trying to deregulate.”decades trying to deregulate.”  Democrats, though, were soon out calling forDemocrats, though, were soon out calling for limits on the amount of company stock in 401(k)limits on the amount of company stock in 401(k) plans and moves to ease shareholder suitsplans and moves to ease shareholder suits against corporate officers, directors, andagainst corporate officers, directors, and auditors.auditors.
    28. 28. Dems vs. RepsDems vs. Reps  Democrats see Enron as justification for a strongDemocrats see Enron as justification for a strong assertion of government power to outlawassertion of government power to outlaw conflicts of interest and even restore the ban onconflicts of interest and even restore the ban on companies operating in both the banking andcompanies operating in both the banking and securities industries.securities industries.  The GOP would instead cater to the InvestorThe GOP would instead cater to the Investor Class with more transparency:Class with more transparency:  On Feb. 13, the SEC took a large step in thatOn Feb. 13, the SEC took a large step in that direction by announcing plans to impose fardirection by announcing plans to impose far stiffer disclosure rules on companies, likestiffer disclosure rules on companies, like insisting that significant trading in company stockinsisting that significant trading in company stock by officers and directors must be revealedby officers and directors must be revealed immediately & that any important changes inimmediately & that any important changes in business must be reported within days.business must be reported within days.
    29. 29. CCorruption & Regulation$orruption & Regulation$  After Enron, 89% of investors strongly favor theAfter Enron, 89% of investors strongly favor the criminal prosecution of corporate officials whocriminal prosecution of corporate officials who are implicated in serious financial fraud.are implicated in serious financial fraud.  New York Stock Exchange and the NationalNew York Stock Exchange and the National Association of Securities Dealers issued aAssociation of Securities Dealers issued a proposal that would limit compensation thatproposal that would limit compensation that analysts can receive from investment-bankinganalysts can receive from investment-banking activity.activity.  Other rules: restrict analysts' trading of stocksOther rules: restrict analysts' trading of stocks they cover, ban them from reporting to theirthey cover, ban them from reporting to their firm's investment bankers, and prohibit themfirm's investment bankers, and prohibit them from promising favorable ratings to companiesfrom promising favorable ratings to companies they cover.they cover.
    30. 30. Public Company AccountingPublic Company Accounting Reform & Investor Protection ActReform & Investor Protection Act  created the Public Company Accountingcreated the Public Company Accounting Oversight Board under the SEC’s supervisionOversight Board under the SEC’s supervision  board given the power to set accountingboard given the power to set accounting standards and to investigate whetherstandards and to investigate whether companies and certified public accountingcompanies and certified public accounting (CPA) firms are conforming to the standards(CPA) firms are conforming to the standards  board also had the power to fine certified publicboard also had the power to fine certified public accountants (CPAs) and their firms foraccountants (CPAs) and their firms for violations, suspend CPAs and their firms, andviolations, suspend CPAs and their firms, and recommend criminal investigations by therecommend criminal investigations by the Justice DepartmentJustice Department  law also required CPA firms to separate theirlaw also required CPA firms to separate their consulting & auditing services in order to avoidconsulting & auditing services in order to avoid conflicts of interest like those in the Enronconflicts of interest like those in the Enron scandalscandal
    31. 31. The Best Advice!The Best Advice!  Investors were left wondering whetherInvestors were left wondering whether they could trust corporations, auditors, orthey could trust corporations, auditors, or stock analysts.stock analysts.  And theAnd the best outcome from the presentbest outcome from the present wave of angst would no doubt be a returnwave of angst would no doubt be a return to commonsense investing. Investorsto commonsense investing. Investors should place their bets onshould place their bets on rationalityrationality, not, not the next skyrocketing stock.the next skyrocketing stock.
    32. 32. A Quick look:A Quick look:
    1. A particular slide catching your eye?

      Clipping is a handy way to collect important slides you want to go back to later.

    ×