2. Introduction
Enron Corporation wasanAmerican energy, commodities, and services companybased in
Houston, Texas.Enron's predecessor wasthe Northern Natural GasCompany, which was
formed during 1932, in Omaha, Nebraska.It wasreorganized during 1979 asthe main
subsidiary of aholding company, Inter-North which wasadiversified energy and energy
related products company. During 1985, it bought the smaller and lessdiversified Houston
Natural Gascompany. Thecompanyinitially named itself "HNG/Inter-North Inc. however
waslater renamed to Enron.
Employedapproximately 20,000 staff
Oneof the world's major electricity, natural gas,communications, and pulp and paper
companies.
Revenuesof nearly $101 billion.
Named Enron "America's Most Innovative Company" for six consecutive years by
Fortune.
3. Enron’s LineofBusiness
Enron wasoriginally involved in transmitting and distributing electricity and natural gas
throughout the United States. Thecompany developed, built, and operated power plants
and pipelines while dealing with rules of law and other infrastructures worldwide. Enron
owned alarge network of natural gaspipelines, which stretched ocean to ocean and border
to border.
Enron traded in more than 30 different products, including thefollowing:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Petrochemicals
Plastics
Power
Pulp andpaper
Steel
Weather Risk Management
Oil and LNG transportation
Broadband
Shipping/ freight
Streaming media
Water andwastewater
PrincipalInvestments
Riskmanagement for Commodities etc.
4. Whatmadeita
“SCANDAL”?
In 1990’scorporate self regulation in the United Statesof America had been widely
thought to havereached ahigh plateau of evolutionary successdue toproliferating good
practices and sophisticated institutional monitoring. However,the bankruptcy of Enron
shook the entire system. Somehighlights brought about when this scandalhad been
exposedwere:
1. $30 million of self dealings by the chief financial officer
2. $700 million of net earningsdisappeared
3. $1.2 billion shareholders equitydisappeared
4. Over $4 billion in hiddenliabilities
Many of Enron'srecorded assetsand profits were inflated or even wholly fraudulentand
Nonexistent. Debts and losseswere put into entities formed "offshore" that were not
included in the company's financial statements, and other sophisticated and arcane
financial transactions between Enron and related companies were used to eliminate
unprofitable entities from the company'sbooks.
7. November-2001
It admitted accounting errors, inflating income by $586 million
since 1997. It effectively admitted that it had inflated its profits by
concealing debts in the complicated partnership arrangements.
October-2001
Arthur Anderson legal counsel workers who audit Enron’s books
to destroy all but the most basic documents.
Enron reports a third quarter loss of $618 million.
August-2001
Jeff skilling resigned as CFO, citing personal reasons. Kenneth Lay
became CEO once again.
December-2001
Enron filed for chapter 11-bankruptcy.
US justice department launches criminal investigations.
Timeline of Downfall…
8. Date (Yr2001) StockPrice ($’s) Events
January01 83.12
February12 79.80 Skilling namedCEO
March 26 LJMtransactions restructured; Chewcoclosed out
April 17 60 First quarter profits of $536 millionannounced
May 5 59.78
August 14 43 Skillingresigns
August 15 40.25 Sherron Watkins delivers letter to Lay
October 15 33.17
October 16 33.84 Third quarter lossof $618 millionannounced
October 17 32.20 Rumorsof $1.2 billion equity write off circulate on WallStreet
October 17 32.20 401(k) plansfrozen
October 17 32.20 Wall Street Journal reports Fastowrakeof $30million
October 18 29 Wall Street Journal reports the $1.2 billion writeoff
October 22 SEClaunches investigation of Enronaccounting
October 24 16.41 Fastowterminated
October 25 16.35 Merger discussionswith Dynegycommence
October31 13.90 Form 8-Kfiled; reveals LJMand Chewcoearnings write offs
November 8 8.41 Dynegy merger agreement executed and delivered
November 9 8.63 Form 10-Qfiled; reveals hidden guarantees, cashflow crisis
November 19 9.06 S&Pdowngrades Enronto junk status
November 28 0.61
November 28 0.61 Dynegy cancelsmerger
November 30 0.26
December2 0.40 Chapter11 filing (BANKRUPTCY)
Source:Figureshave been extracted from Researchpapers printed at TheGeorgeWashington University
9. WHISTLE BLOWER
• Sherron Watkins was Vice President of
Corporate Development at the Enron Corporation.
• In June 2001, she was given the task of finding some
assets to sell off but it was very difficult for her. She
prepared a Memo regarding the various problems and
placed it into the box but this Memo was not taken into
consideration. On August 22, Watkins handed CEO
Lay a seven page letter and told him that ENRON
would implode in a wave of accounting scandals.
• However, Watkins has been criticized for not reporting
the fraud to government authorities and not speaking up
publicly sooner about her concerns, as her memo did
not reach the public until five months after
10. Flaws in corporate governance
• Failure of the board committee to oversee the affairs.
• Failure of the audit committee to understand the related party
transaction between company and its SPEs.
• Credit rating agencies and regulators remained silent spectators
until the scam become too violent.
• Sherron Watkins, one of the employees of the company who
had raised concerns about some of the accounting policies of the
company in 1996, was transferred to another department. Only
in 2001 when she raised her voice against the extensive fraud in
SPEs and wrote letter to regulator to matter came out.
12. 1) KENNATH LAY
Enron founder and former CEO
Lay took up the reins at Enron in 1986. He resigned as CEO in
December 2000. In August 2001, he resumed leadership after
skilling redesigned. He resigned again in 2002. He drew down
his $4 million Enron credit line repeatedly and then repaid the
company with the Enron shares after becoming the focus of the
anger of employees, stockholders and pension fund holders who
lost billions of dollars in this disaster.
2) JEFFREY SKILLING
Former Chief Executive, President and Chief Operating Officer.
He joined Enron in 1990 from the consultancy firm McKinsey,
where he had developed financial instruments to trade gas
contracts. He was also seen as a key architect of the company’s
gas-trading strategy. He resigned his post as Enron’s chief
executive in August 2001 without a pay-off.
13. 3) ANDREW FASTOW
Former Chief Financial Officer.
He was fired in October 2001, when Enron made losses
amounting to $600 million. He was allegedly responsible for
engineering the off-balance sheet partnerships that allowed
Enron to cover its losses. He was also found by an internal
Enron investigation to have secretly made $30 million from
managing one of these partnerships.
4) DAVID DUNCAN
Enron’s Chief Auditor at Andersen
His job was to check Enron’s accounts. He is accused of
ordering the shredding of thousands of Enron related
documents in an effort to hide them from the Securities and
Exchange Commission.
14. 5) ENRON’S ACCOUNTING FIRM
– ARTHUR ANDERSEN
Arthur Andersen was Enron’s auditing firm.
When the scandal broke, the US government
began to investigate the company’s affairs.
That was after the Securities and Exchange
Commission (SEC) has ordered an
investigation into the speculative actions of
Enron. Andersen fired Duncan.
15. Consequences
• A white night rescue efforts by Dynegy, a similar smaller energy
company was not possible. It filled bankruptcy in December 2001.
• In July 2002 Arthur Anderson, one of the big five auditing firm
was found guilty of obstruction of justice for shedding documents
in Enron case.
• 22000 workers, who had no connection with the scam, lost their
jobs.
• Enron's former star CFO Andrew Fastow, served more than five
years in prison.
• Enron's founder and former CEO Kenneth Lay prior to sentencing,
he died of a heart attack in Colorado.
• Jeffrey Skilling was initially given 24 years imprisonment which
was later reduced to 10 years. He had to pay $42million to the
victims of the scam.
16. Sarbanes-Oxley Act
Unethical practices were also found at Global Crossing,
ImClone System Incorporated, Adelphia and WorldCom.
In July 2002, President George W. Bush signed into law,
the Sarbanes-Oxley Act.
• If a company does not follow SOX, fine $1million and
imprisonment of 10years.
• If any fraud is detected, $5million fine on all persons
responsible and 20years imprisonment.
17. Some of its elements are:
Public company accounting oversight board- This act provides independent
oversight of public accounting firms providing audit services.
Auditor independence- It establishes standards for external auditors’ independence
along with the requirements for new auditor and for audit partners’ rotation.
Managerial and board integrity- It gives additional authority and responsibility to
audit committees.
Certification of financial statements- It also certifies the responsibility of senior
executives for accuracy and completion of corporate financial reports.
18. Enhanced financial disclosures- The act requires disclosure of financial
transactions including off-balance sheet transactions and stock transactions of
corporate officers.
Code of ethics- The act also requires the CEOs, CFOs, controllers and other
persons performing similar functions, to adopt the code of ethics.
Corporate and criminal fraud accountability- It lays down the penalties for
manipulation, destruction or alteration of financial records and also provides
protection to whistle blowers.
19. 1. Now, when the Enron’s plan of reorganisation was approved by U.S.
bankruptcy court, the new board of directors decided to change Enron’s name
to Enron’s Credit Recovery Corporation.
2. The main aim behind this was reorganising and liquidating the assets of
pre-bankruptcy Enron for the benefits of creditors.
3. The creditors were paid more than $21.7 billion from 2004 to 2011. The
last payment was in May 2011.
4. Now, Arthur Anderson was disgraced by the scandal. A group of former
partners bought its name in 2014 and named it Andersen Global.
5. Kenneth lay, founder and former CEO, died of a heart attack prior to
sentencing.
20. 6. CFO Andrew Fastow served more than 5 years in the prison for practicing such
fraud and was released in 2011.
7. Former CEO Jeffrey Skilling received the harshest sentence among all personnel
involved in Enron. He was convicted of insider trading, conspiracy and fraud.
8. He received 24 years of imprisonment but in 2013 it was reduced by 10 years and
was asked to pay $42 million to the victims of this fraud. He will be released on
February 21, 2028.
9. Several former partners started a tax and consulting firm WTAS i.e. Wealth Tax and
Advisory Services, in 2014. They changed its name to Anderson Tax after acquiring
the rights to Anderson name.
10. Then 1 year old WTAS was rebranded as Anderson Global and took over all the
URL of Anderson accounting firm.
22. Bibliography
• www.wikipedia.com
• Analyzed inputs from Research papers printed at The George Washington
University
• Various articles available on Government websites and news sites
• ICAI Website
