Corporation Gone Away
The Fall of Enron Empire
Professor Andrew B.C. Huang
National Taiwan Tech University, Management School
huang prof@gmail com
An ingenious (clever and skillful)
device for obtaining profit without
A b Bierce,
The Devil’s Dictionary, 1906
The Fall of Enron Empire
The World No. 1 Energy Trader Goes Bankruptcy
Enron’s Rise and Fall
A sudden collapse
In less than two decades Enron grew from a small
Midwestern gas pipeline company (established in Enron files its annual report in which it claims to
1984) into the world's largest energy trader with a have tripled its revenues since 1998.
pipeline business on the side. Jan. 2000
Fortune magazine ranks Enron no. 24 among the
quot;100 Best Companies to Work for in America.quot;
Since 1997, Kenneth Lay and his wife contributed a
total of $444,960 in political donations, mostly to
members of the Republican Party.
New CEO Jeff Skilling gets hit in the face with pie
from a protester who blamed Enron for California's
energy crisis. California consumer groups and
politicians accused Enron of price-gouging during
California's power shortage. Enron stock drops to
Nov. 8 2001
Enron revises its financial statements to reduce
earnings by an additional $586 million over the past
four years, due to losses with suspect partnerships.
It is also disclosed that Fastow made $30 million in
fees and profits from his involvement with outside
Enron announces it must pay a $690 million in debt,
with another $6 billion by next year.
Enron: Fallen Giant
From US$83.5 Drop to 0.83 Per Share in A Year
“Enron never owned anything that created real
value and made real money. We have a record of
nothing but years of bad business and
mismanagement, kept hidden by cover-up. “
Kurt Eichenwald, “Flinging Billions to Acquire Assets That No
One El W ld Touch.” (U
O Else Would T h ” (Unveiling th secret d l th t
ili the t deals that
allowed Enron to hide bad business decisions)
The New York Times, October 3, 2002
Enron’s Fraudulent Financial Engineering
Five Ghosts to Exchange Loses and Revenues
I 2001, endgame began, and E
d b d Enron empire all f ll apart f
i ll fell t from it hi h of
its high f
$90, reached in late Fall 2000. Even through Enron said that it had a
healthy profits, but in fact it had never profitable under any common
acceptable definition of “profitability” in last five years.
“profitabilit ” fi e ears
But why Enron could stated that it is profitable, it took the following fraud
and false methods 五鬼搬運
1.To generate the profits from unreal futures trading;
2.To hide the losses in accounting book;
3.To avoid paying income tax by establishing 900 offshore
p y g y g
subsidiaries in tax-heaven countries;
4.To turn accounting division to as a profit center;
5 To build profitable consulting relationships with outside auditors.auditors
How Did Enron Go Bankruptcy
With 21,000 employees in over 30 countries and stated revenues $100 billion
Time Things Happen/Key Events
Early July •Enron said it would post a $500million loss in quarterly statement, due to
blamed losses on the California energy crisis, poor investments in India and
South America, and a moribund broadband Internet market.
The Stock $50
August •CEO Jeffrey Skilling unexpectedly resigned and claimed the move was for
The Stock $40 quot;personal reasons,quot; but investors were left stunned and anxious about the
stability of Enron.
July-October •The Securities and Exchange Commission began an inquiry into Enron's
October •Enron said it would reduce shareholder value by $1.2 billion. It was blamed
The Stock $20.65 the losses on its broadband division, international subsidiaries, and its
partnerships, like LMJ and Chewco.
Two weeks •Enron fired Andrew Fastow, the chief financial officer, for allegedly
arranging deceptive and failing partnerships what were being used to hide
millions of dollars in Enron losses.
How Did Enron Go Bankruptcy
With 21,000 employees in over 30 countries and stated revenues $100 billion
Time Things Happen/Key Events
•The SEC publicly upgraded its inquiry into a formal investigation of Enron's
suspec ed audu e
suspected fraudulent financial statements. Enron claimed profit $53million in
a c a s a e e s. o c a ed p o $53 o
July-September but turned to $21billion lose.
Early •Enron conceded it had overstated its profits by nearly 16 percent, or $600
million, since 1997. Enron's auditors, Arthur Andersen alerted shareholders
not trust any financial reports issued before June 30, 2001.
•Enron's shareholders and investors sold their shares as fast as they could.
•Enron's credit rating was reduced and had to pay back a part of its debt
immediately, consequently, its deal with Dynegy fell through.
December 2 •Faced with paying back millions of dollars in debt, Enron's
executives and company board agreed to seek Chapter 11 bankruptcy
ti d b d dt k Ch t b k t
By Liz Harper, Online NewsHour (June 2002)
The Wheels of Misfortune
Enron’s Fraudulent Profitability Method
The New Culture: Ambition and greed
Nothing mattered except getting rich
The New Accounting:
False Profits Accounting Fraud Profit Center, mark-to-market
Lock in future income
Misreported Lucrative consulting relationships
ad g oses Revenue O
Outside auditors, investment analysts,
, y ,
Settlements Trading Loses
Fund required Trades
The ultimate failure of the system
Enron I ’t Real but Risk Money
E Isn’t R l b t Ri k M
had never been profitable under any acceptable
definition of “profitability”
•The financialization of all things
Integrity: Everything rested
•Hedge derivatives with derivatives
on the reputation
•Refer tax division as a profit center
Auditing VS Consulting
•Sell underperforming assets to improve balance
•Never owned anything that created
Kept silent to the checks and balances
real value and make real money
Had Profited form its participation The Wall Street Fixation
Everybody knows that the market
has to be kept happy
The only real things Enron had
--were sold to raise quarterly earnings
The Market need huge funds to grow their assets
And that need coincides nicely with the opportunity of insiders
To make a huge amount of money by manipulating stock
and cashing in options
The Common-Size Financial Statements
Where’s the Black Holes That Enron Made
•Cash and marketable security Created s set of investment vehicles called the Raptors such as
Accounts Chewco to be an independent company that doesn’t show up on the
p p y p
•Inventories book, to hedge, or lock in the profits from other start-up ventures.
•Properties plant and equipments This accounting irregularity raised Enron’s profits by 75%; keeping
•其他 Others assets it going for the next 3 years resulted in $396 million in inflated
負債 Liabilities Formed a partnership with some other outside parties to buy none-
•Accounts payable profitable investment’s shares, to hide the loses.
•Other current expenses
•Capital leases Enron’s skill in locating its partnerships offshore and keeping cash
•Other long-term liabilities flow small had made the tax division a significant “profit center” by
S l bl saving $1billion in 5 years.
股東所得 Shareholder’s equity
Common-Size Income Statements
Where’s the Falsenesses that Enron Made
Revenues 收入 Falsenesses
Sales Federal regulators permitted Enron to use “mark-to-market”
accounting, a way of evaluating future income that works
Other revenues reasonably well in securities trading.
It allowed Enron to calculate projected income as present
profit in 1999, Enron claimed a $65 million profit based on a
natural gas sales from South American pipeline had yet to be
Expenses支出 Pay no income tax by making good use of about 900
subsidiaries in tax-haven countries,.
Cost of goods sold
Marketing, general, administrative In 2000, Enron got $278million in refunds, since options, need
Interest expense not reported to the shareholders as an expense, and can be
Taxation, current and deferred deducted from company’s income for tax purposes.
Total assets/ Total revenues
What If Enron’s New Accounting
When the van crashes into the retaining wall at 120 mph
The driver who
lost control (was
Th engine that
brought the van to
that speed (was it
The brakes that
failed or not
In Enron’s Crash
When the new accounting process
Th Same Model
M d l Results
The drivers were who were apparently zipping along without a
the managers of Enron
g roadmap with little regard to the safety of the
p g y
passengers (let alone the pedestrians 行人)
The engine was Enron’s unrestrained culture of greed and confidence in
organizational culture the business community that p
y permeated the nation as a
The brakes were who were supposed to be making good business
the bankers, analysts,
, y , judgments about the soundness of Enron’s decision-
and auditors making.
Sentenced to Imprisonment
Greedy, a waken dream
Arthur Andersen LLP
Arthur Andersen LLP is one of the Big Five accounting firms, grossing over $9 billion
in sales during 2001. The company, with 85,000 employees working in 84 countries,
audits th fi
dit the financial statements of most publicly t d d companies i th U S Whil
i l t t t f t bli l traded i in the U.S. While
their profits come directly from corporate clients' payments, they are accountable to
both the SEC and the public.
Andersen served as Enron's sole auditor throughout the energy giant's sixteen years,
also performing i t
l f i internal audits and consulting services. A
l dit d lti i According t E
di to Enron's fi
' financiali l
statements, Andersen earned $25 million for audit work and $27 million in non-audit
fees in 2000.
Shortly after Enron's sudden bankruptcy, the SEC questioned Andersen CEO Joseph
Berardino about his firm s inaccurate audit statements and Enron's overstated profits
firm's Enron s profits.
Berardino told the SEC that Enron's audited statements were misleading since
Andersen accountants did not include Enron's money-losing partnerships, like
Chewco, in the main financial statements.
The General Accepted Accounting Principles (GAAP) state that the degree of a
company's investment in partnerships determines whether such partnerships
should be consolidated into the main balance sheets.
Enron exceeded the three percent maximum investment in many of its partnerships,
such as Chewco therefore Andersen should have recalculated earnings by including
the business deals into Enron's overall balance sheet. Berardino told the SEC that
Andersen restated Enron's earnings in 2001 after learning that Enron had invested
much more money into the partnerships than it originally claimed.
Andersen also accused Duncan of directing quot;the deletion of thousands
of e mails and the rushed disposal of large numbers of paper
As the breadth of Enron's alleged fraud became apparent Andersen fired Houston
Enron s apparent,
partner David Duncan on Jan. 16, 2002, saying he ordered the destruction of Enron
documents the day after it was learned the government was investigating its financial
statements. When asked to testify before the congressional hearing, Duncan cited his
Fifth Amendment rights, declining to discuss his involvement or knowledge of the
The SEC and several congressional committees continue to investigate
whether or not Andersen compromised its professional ethics or violated
standards set by GAAP.
Andersen has recently been involved in several other major auditing scandals. Last
year, the SEC fined the firm $7 million for 'improper professional conduct', including
overstating client Waste Management's earnings by $1.4 billion. It was the first
successful case against an auditor in over 20 years. In May 2001, Anderson also paid
$110 million to Sunbeam shareholders t settle l
illi t S b h h ld to ttl lawsuits stemming f
it t i from it i fl t d
earnings statements. Both Sunbeam and Waste Management restated their earnings
after admitting fraud in their financial statements.
In mid-June, a federal jury convicted Arthur Andersen of obstruction of justice by
destroying Enron-related materials to impede an investigation by securities regulators.
d t i E l t d t i l t i d i ti ti b iti l t
The accounting firm, which vowed to appeal the verdict, informed the SEC it would
cease auditing public companies by Aug. 31.
Penalty for Corporate Criminal Deception
Aiming to restore trust in America's financial markets, President
Bush on Tuesday signed the corporate responsibility bill passed by
Congress last week.
In a signing ceremony in the East Room of the White House the president enacted new legislation that toughens
penalties for corporate fraud, establishes an independent accounting board and increases spending for the
Securities and Exchange Commission.
Lauding the bill as quot;the most far-reaching reforms of American business practicesquot; since the Depression, Mr. Bush
said the bill would send a strong message urging corporate America to quot;uphold their responsibilities,quot; or otherwise
be quot;exposed and punished.quot;
The legislation quadruples the maximum jail time for corporate executives and auditors indicted for wire
or mail fraud, setting sentences at 20 years. The bill also classifies securities fraud as a crime that could
carry a prison sentence of up to 25 years.
A new independent board will oversee the accounting industry, which largely had been monitored by
members of its own profession. Following the indictment of Enron auditors Arthur Andersen, the
accounting self-regulatory system has come under pressure to reform. reform
quot;This law says to accountants: 'The high standards of your profession will be enforced without exception,quot; the
president said. quot;The auditors will be audited, the accountants will be held to account.'quot;
quot;In the aftermath of September 11 we refused to allow fear to undermine our economy and we will not allow fraud
to undermine it either,quot; Mr. Bush told a group of Democratic and Republican lawmakers and administration officials
present at the signing ceremony.
g g y
Despite the president's pledge to crack down on corporate fraud, a rally on Wall Street was humbled by a dismal
new report on consumer confidence.
The Conference Board released its monthly Consumer Confidence Index Tuesday morning, showing a sharp fall
The index, based on its monthly survey of 5,000 U.S. households, tumbled to 97.1 points, its lowest level since
, y y , , p ,
February. While quot;consumers' expectations for the next six months have soured,quot; consumer confidence has not
struck a historic low, the Conference Board said.
Wall Street’s Penalty
Provide misleading stock advice
In one of the largest settlement deals ever,
Citigroup, J.P. Morgan Chase, Credit
g p, g ,
Suisse First Boston and Merrill Lynch,
must pay the fine and implement sweeping
structural reforms to resolve the alleged
conflicts of interest between corporate
banking and stock research.
quot;This agreement will permanently change the way Wall Street
operates quot; New York state Attorney General Eliot Spitzer one of the
settlement's lead negotiators, said on Friday.
quot;The objective throughout this investigation has been to protect small
investors by ensuring integrity in the marketplace,quot; Spitzer said. quot;Hopefully,
the rules that are embodied in this potential settlement will restore investor
confidence by restoring integrity to the marketplace.quot;
To address the alleged conflicts of interests, the settlement requires that the
ten firms separate their stock research and investment banking divisions. It
also bars stock analysts from being paid for equity research by their firms'
investment banking division and from attending their firms' meetings with
g g g
potential investment banking clients.
The firms must also spend $450 million over five years on independent
stock analysis and information to ensure their investors receive unbiased
research and pay another $85 million for a nationwide investor education
The agreement requires brokerage firms to discontinue the Wall Street
practice of quot;spinning,quot; or giving lucrative initial public offerings to corporate
executives whose companies h
ti h i have i investment b ki b i
t t banking business with th
brokerage firms. Regulators have argued this practice could exert an undue
influence on investment banking decisions.
The ten firms were not required to acknowledge any wrongdoing
or admit to allegations they knowingly promoted stocks in which
they had, or desired, a financial interest.
No individual civil charges were brought against any stock analysts or the executives who
managed them, although state and national regulators could still investigate whether some Wall
Street executives or analysts violated securities laws.
The Salomon Smith Barney unit of Citigroup will pay the largest fine of $325 million, while Credit
Suisse must pay $150 million. Seven other banks -- Goldman Sachs, J.P. Morgan Chase, Bear
Stearns, Morgan Stanley, Lehman B th
St M St l L h Brothers, D t h B k and UBS P i W bb -- are
Deutsche Bank d Paine Webber
expected to pay $50 million each.
Merrill Lynch, the nation's largest brokerage firm, agreed to pay a $100 million fine as part of a
settlement it reached with Spitzer last May. Merrill Lynch, which is not required to pay additional
fines as part of this agreement, had similarly agreed to separate its stock research division from
p g y g p
The money from the fines will be divided about evenly between the states and national regulators,
which include the Securities and Exchange Commission, the National Association of Securities
Dealers and the New York Stock Exchange. An unspecified amount of the money will go to a
restitution fund for affected investors.
The agreement comes after five months of haggling between regulators and the firms regarding
the settlement amount. Spitzer had initiated investigations into Wall Street brokerage activities
shortly after energy giant Enron and several other large companies declared bankruptcy, causing
thousands of investors to lose millions of dollars.
As Spitzer and his office discovered serious conflicts of interest within Wall Street stock analysis
and finance activities, other federal agencies joined the attorney general's investigation.
Topics to Discuss
An this is also your middle-term report
Legally corporations are “fictitious persons” created by the law and empowered with
certain rights and abilities that allow them to be recognized as financial entities,
capable of carrying on commercial transactions, and as institutional citizens that can
be held accountable to regulation and taxation.
Is a corporation responsible only to its stockholders? And is fiduciary success the
only measure of corporate success?
Greed, as Plato pointed out, is essentially unlimited. It seems that If people are
enjoying a comfortable existence now, they will immediately see that with more
money they could enjoy a luxurious existence. What you opinion to most of people
do you believe, they want it, also immediately? And how to deal with it?
Accounting firm Arthur Anderson has to take critical responsibility for Enron’s hurt to
the pubic, since it had assumed the role of corporate honesty guarantor. What’s the
main reason why shredding of Arthur Anderson’s p
y g professional trust and moral
Do you think Enron’s case is also an ethical issue? Why? And can corporations be
held morally accountable for their decisions and behaviors?
All term are requested to deliver your group papers (Within 8 pages power point)
before November 17.