Accounting and Finance

1. ENRON SCANDAL
BY MUHMMAD ZEESHAN

2. ENRON
 Enron was an American energy, Commodities and Service Company based in Houston.
 It was found in 1985 when there was a merger between Houston Natural Gas and
InterNorth.
 Fortune Magazine published Enron in their Magazine as the most innovative company
of the US for straight 6 years.
 Enron hired McKinsey & Company (a consultant company) to help Enron in different
business strategies as they were planning to start new businesses.
 McKinsey & Company appointed Jeffrey Skilling as a consultant for this project. His
business strategies were proved to be good for Enron, So in 1990 Enron hired Jeffrey
Skilling.
 After his appointment in 1990, Jeffrey Skilling hired Andrew Fastow who was famous
for making different complicated deals.

3. CHANGE IN PERFORMANCE REVIEW
SYSTEM
BEFORE
 Respect
 Integrity
 Communication
 Excellence
AFTER
 Profit

4. HIGH RISK BUSINESSES AND DEALS
 To grow its business, Enron entered many high risk businesses and made several
high risk deals. These businesses include;
 Internet Broadband
 Power Plants
 Commodity Trading
Kenneth Lay (Enron’s Founder), Andrew Fastow and Jeffrey Skilling were planning to
make the company grow as soon as possible.
Company faced losses as many of the businesses and deals failed miserably.
To save Company’s image, they showed fake revenues in Company’s financial
statements. Besides that, they need to acquire more capital to generate more profits.
By doing so, they would be able to overcome their losses.

5. CHANGE IN THE ACCOUNTING METHODS
 Jeffrey Skilling in 1992, made a proposal to US Capital Market Regulator to allow
Enron to use Mark-to-Market Accounting Method instead of Historical Cost
Accounting Method. US Capital Market Regulator accepted Jeffrey’s proposal.
 A historical cost is a measure of value used in accounting in which the value of an
asset on the balance sheet is recorded at its original cost when acquired by the
company.
 Mark to market is an accounting practice that involves adjusting the value of an
asset to reflect its value as determined by current market conditions.

6. MISSTAEMENTS IN BALANCE SHEET

7. MISSTATEMENTS IN P/L STATEMENT

11. MANIPULATION IN COMPANY’S FIGURES
 1996 – Revenue ($13 billion) Profit ($584 million)
 1997 – Revenue ($20 billion) Net Income ($105 million)
 1998 – Revenue ($31 billion) Profit ($703 million)
 2000 – Revenue ($100 billion) Profit ($979 million)
These figures help in increasing Enron’s share price although they were all fake.

12. SPECIAL PURPOSE VEHICLE (SPV)
 A special purpose vehicle (SPV) is a
subsidiary company that is formed to
undertake a specific business purpose or
activity

13. ENRON’S SPVs

14. Manipulation in Financial Statements

15. Manipulation in Financial Statements

16. Misconceptions About Enron

17. Dot-com Bubble
Dot-com Bubble
 The dot-com bubble, also referred to as
the Internet bubble, refers to the period
between 1995 and 2000 when investors
pumped money into Internet-based
startups in the hopes that these fledgling
companies would soon turn a profit.
When Dot-com Bubble Bursts

18. Enron’s Downfall
October 2001 November 2001

19. Bankruptcy
 Once Enron’s plans of Reorganization was
approved by the U.S. Bankruptcy
Court, the new board of directors changed
Enron’s name to Enron Creditors Recovery
Corp. (ECRC). 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.
 The company paid its creditors more than
$21.7 billion from 2004 to 2011. Its last
payout was in May 2011

20. Criminal Charges
 Kenneth lay (Enron’s founder), was
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.
 Fastow, Enron’s former star CFO, pleaded
guilty to two counts of frauds and served
more than five years in prison. He was
released from prison in 2011.
 Skilling, Enron’s former CEO, ultimately
received the harshest sentence of anyone
involved in the scandal. In 2006, Skilling was
convicted of conspiracy, fraud, and insider
trading. Skilling originally received a 17 and
a half year sentence, but in 2013, it was
reduced by 14 years. As a part of the new
deal, Skilling was required to give $42 million
to the victims of the Enron fraud. Skilling was
originally scheduled for release on Feb. 21,
2028, but was instead released early on Feb.
22, 2019.

21. New Regulations after Scandal
 The Financial Accounting Standards
Board (FASB) substantially raised its
levels of ethical conduct.
 Company boards of directors became
more independent, monitoring the audit
companies and quickly replacing poor
managers.
 In July 2002, then-President George W.
Bush signed into law the Sarbanes-Oxley
Act (The Sarbanes-Oxley Act of 2002 is a
law the U.S. Congress passed on July 30 of
that year to help protect investors from
fraudulent financial reporting by
corporations). The act heightened the
consequences for destroying, altering, or
fabricating financial statements and for
trying to defraud shareholders.

22. Thank You