This document provides an overview of the Enron scandal, including key players, the organization, and introduction to the scandal. It discusses Enron's origins and business lines, as well as its rapid growth and downfall. The critical analysis section notes issues with Enron's revenue recognition, accounting practices, and use of special purpose entities to hide debt and losses. When uncovered, the scandal led to Enron's bankruptcy, dissolution of auditor Arthur Andersen, and lawsuits against executives and other parties involved in the fraud.

1. 1 | P a g e
ST JOSEPH’S COLLEGE (AUTONOMOUS)
Department Of Commerce And Management
TOPIC: ENRON’S FRAUD AND SCANDAL
(1985)
SUBMITTED BY
SHOBITA R J -19IFA56002
MARIA BHOOMIKA-19IFA56005
SUMA V- 19IFA56006
ADRIEL ARRON ALEMO -19IFA56015
DATTA ESWAR TANGETI-19IFA56039
KALPANA U-19IFA56056

2. 2 | P a g e
TABLE OF CONTENTS
SL.NO CONTENTS PAGE
NO
1 Key Players Of The Scandal 3-4
2 Overview Of The Organization 5-7
3 Introduction To The Enron Scandal 8-9
4 Critical Analysis Of The Scam 10-12
5 Conclusion 13
6 Recommendations 14
7 References 15

3. 3 | P a g e
KEY PLAYERS OF THE SCANDAL
1) KENNETH LAY :
• Enron founder and former CEO
• Lay took up the reins at Enron in 1986. Prior to Enron’s collapse, he
was credited with building Enron's success. Lay resigned as CEO in
December 2000,and was replaced by Jeffrey Skilling. In August 2001,
he resumed leadership after Skilling resigned. Lay resigned again in
January 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.
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.
5) ENRON’S ACCOUNTING FIRM –ARTHUR ANDERSEN:
• ArthurAndersen,wasEnron’sauditingfirm.

4. 4 | P a g e
• It’sjob wasto check thatthe company’saccountswere a fairreflectionof
whatwas reallygoingon.The companyearnedlarge feesfromitsaudit
workfor Enron and fromrelatedworkasconsultantstothe same company.
Whenthe scandal broke,the US governmentbegantoinvestigatethe
company’saffairs,Andersen’sChiefAuditorforEnron,DavidDuncan,
orderedthe shreddingof thousandsof documentsthatmightprove
compromising.Thatwasafterthe SecuritiesandExchange Commission(SEC) hadorderedaninvestigation
intothe speculative actionsof Enron.AndersenfiredDuncan.
WHISTLE BLOWER
1) SHERRON WATKINS :
• She 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.
• In August 2001, Watkins alerted then-Enron CEO Kenneth Lay of accounting irregularities in
financial reports. In February 2002, she revealed the various facts regarding ENRON partnerships
and finally resigned in November. But Watkins Revealed all the facts only after Enron filed for
bankruptcy.
• 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.
2) JOHN OLSEN
He uncovered Enron. Back in the 1990s Olson, a veteran energy
industry analyst, was a lonely voice in the wilderness; he was
skeptical about Enron for a decade before its collapse.
He became a target of Enron's Ken Lay and lost his job at Merrill
Lynch because he refused to go bullish on the company.

5. 5 | P a g e
OVERVIEW OF THE ORGANIZATION
Enron’s Origins
Kenneth Lay founded Enron in 1985. The company was formed as a result of a merger between two
natural-gas-transmission companies, Houston Natural Gas Corporation and InterNorth, Inc. Hence,
the merged company, HNG InterNorth’s name was changed to Enron in 1986. Lay quickly
converted Enron into an energy trader and supplier when he took over as CEO of the company.
Deregulation of the energy markets in the 90s allowed companies to place bets on future prices, and
Enron decided to take full advantage. In 1990, Lay created the “Enron Finance Corporation” and
appointed Jeffrey Skilling, as head of the new corporation. Skilling was then one of the youngest
partners at McKinsey and had greatly impressed Lay with his work.
Enron had three main business units - Wholesale Services, Energy Services and Global Services
combing broadband and transportation services. It offered its services to thousands of customers
around the world.
 The Wholesale Services unit was responsible for marketing a number of wholesale
commodity products, allowing industrial companies to manage commodity delivery and price
risk. Customers could arrange selling or buying commodities on terms that suited their needs
(i.e. long term, short term, fixed price, indexed price or other innovative variations).
 Enron’s Energy Services unit, the retail arm of Enron, offered companies a better way to
develop and execute their energy strategies. Enron was the largest provider of energy services
to commercial and industrial companies, with a total contract value amounting to $2.1 billion
in 2000.
 Enron’s Global Services unit included North American pipeline businesses of Enron
Transportation Services including Northern Natural Gas, Transwestern Pipeline, Florida Gas
Transmission, Northern Border Partners, Portland General Electric and Enron Global
Services. On an international level it encompassed engineering businesses; Enron Wind;
EOTT Energy Corp; Azurix and Wessex Water. EnronOnline was the world's largest e-
commerce site for global commodity transactions, which provided real-time transaction tools
and information for commodity transactions.

6. 6 | P a g e
Enron’s Line of Business
Enron was originally involved in transmitting and distributing electricity and natural gas throughout
the United States. The company developed, built, and operated power plants and pipelines while
dealing with rules of law and other infrastructures worldwide. Enron owned a large network of natural
gas pipelines, which stretched ocean to ocean and border to border.
Enron traded in more than 30 different products, including the following:
1. Petrochemicals 2. Plastics 3. Power 4. Pulp and paper 5. Steel 6. Weather Risk Management
7. Oil and LNG transportation 8. Broadband 9. Shipping / freight 10. Streaming media 11.
Water and wastewater 12. Principal Investments 13. Risk management for Commodities etc.
Trading Model
•ENRON’s major focus on the deregulated market who are highly inefficient market, complex
distribution channels, deregulated, low supply and services quality, etc.
•In UK 1993, TESSIDE was the largest gas and power plant in the world. It was the first project
with investment of $1.4bn.
•In 1997, ENRON acquired electric power generation, transmission and distribution expertise by
Portland General Electric for $ 2.1bn.
•In 1997, Risk Assessment and Control (RAC) for $675m with 150 staff. It evaluate risk and
reward of the company’s investment.
•In 1998, acquired AZURIX subsidiary for water industry & its development. •In India 1999,
DHABOL project for $2,9bn was later criticized by Indian state.“PEAKING PLANT” designed to
meet short-term demand.
•In 1999, ENRON sold 76% of Azurix in Public offering on NYSE.
•In January 2001, announced the formation of ENRON Broadband Services (EBS) fro $1bn.
International Business
 First major project was the construction of the 1.4 billion, Teesside power plant in the united
kingdom and completion 1993 (gas supply provider).
 Second large construction and asset management project included $2.9 billion Dabhol power
project in Mumbai India and completed in may 1999.
 The Dabhol project proved to be particularly troubled, with delays arising local criticism of
the Indian state and national governments over the favorable terms offered to Enron. ( china
was offer electricity in Pakistan.)
MANAGING TALENT
 ENRON’s major focus on the deregulated market who are highly inefficient market,
complex distribution channels, deregulated, low supply and services quality, etc.
 Employee approximately 21,000 staff one of the world’s major electricity gas company. The
employees evaluated on performance review committee (PRC), any employee who doesn’t
add value to the company and ranked in the bottom 20% risk being fired.
 This process was used to drive employees compensation and $750m annually paid to
employees as cash bonus.

7. 7 | P a g e
 Superior originators who create new things had average salary of $1,500,00 to $2,000,00.
 In the early 1990s, he helped to initiate the selling of electricity at market prices, and soon
after, the United States Congress approved legislation deregulating the sale of natural gas.
The resulting markets made it possible for traders such as Enron to sell energy at higher
prices, thereby significantly increasing its revenue.
 As Enronbecame the largestsellerof natural gasinNorth Americaby 1992, itstradingof gas
contracts earned$122 million,the secondlargestcontributortothe company'snetincome.
 Enron's stock increased from the start of the 1990s until year- end 1998 by 311%, the stock
increased by 56% in 1999 and a further 87% in 2000.
 By December 31, 2000, Enron's stock was priced at $83.13 and its market capitalization
exceeded $60 billion, 70 times earnings and six times book value.
 Between 1996 and 2000, Enron's revenues increased by more than 750%, rising from $13.3
billion in 1996 to $100.8 billion in 2000.
 The Enron scandal, publicized in October 2001, eventually led to the bankruptcy of the
Enron Corporation and the de facto dissolution of Arthur Andersen
 Enron was cited as the biggest audit failure.
 When Jeffrey Skilling was hired, he developed a staff of executives that – by the use of
accounting loopholes, special purpose entities, and poor financial reporting – were able to
hide billions of dollars in debt from failed deals and projects.
 Chief Financial Officer Andrew Fastow and other executives not only misled Enron's board
of directors and audit committee on high-risk accounting practices, but also pressured
Arthur Andersen to ignore the issues.
 Enron shareholders filed a $40 billion lawsuit after the company's stock price, which
achieved a high of US$90.75 per share in mid-2000, plummeted to less than $1 by the end
of November 2001.
 Its complex business model and unethical practices required that the company use
accounting limitations to misrepresent earnings and modify the balance sheet to indicate
favorable performance.

8. 8 | P a g e
INTRODUCTION TO THE ENRON
SCANDAL
Enron scandal is the name for the events that led to the bankruptcy of the US ener gy,
commodities and services company Enron and dissolution of its auditor Arthur Anderson
LLP. Enron held more than $60 billion worth of assets, when it abruptly filed for the
biggest bankruptcy in the history of the USA leaving long lasting repercussions on the
financial world.To understand the scam in detail, we must understand the two concepts
of market system, the Bullish and the Bearish system.
 The Bear system is more into trial and error. The investments and capitalisat io n
is on daily level. The fluctuations are also regular and very evident.
 Whereas in Bullish system, the market is stabilised at all times. The stock market
has mostly been Bullish. Enron took the benefit of the Bullish system of market
and grew overnight. The company was ready to create a market for anything and
everything in which anyone was willing to trade. It made derivative contracts for
a wide range of commodities like electricity, coal, paper, steel and even weather
reporting. The company also invested in building a broadband telecommunicat io n
network to facilitate high speed trading.
 This was a period of boom for the economy when there was a market for every
commodity. Soon, the system changed. The company was facing increased
competition and its profits shrank rapidly. To compete, and to avoid the pressure
from shareholders, the company began a practice of dubious accounting known
as ‘mark-to-market’ under which the company accounts showed the future gains
from trading contracts into current income statements, thus fooling the investors
by showing higher profits than they actually were.
 The troubled operations of the company were transferred to Special Purpose
Entities (hereinafter referred as ‘SPEs’), to limit the partnerships created with
outside parties. Enron used the SPEs as a dump site for its troubled assets.
Transferring the assets to SPEs meant that the same need not be shown in
company’s books, which made the losses look less severe than they actually were.
 All this while, Arthur Anderson worked not only as the auditor of the company
but also as a consultant for the company. This was seen as a fraud and malic io us
practice against the investors who were not told the truth before they planned to
invest in the company.
 The matter came into notice when various analysts began to dig into the financ ia l
statements of Enron. An internal investigation took place, headed by the Vice
President of the company, which was soon followed by an official investigat io n
by the SEC analysing the transactions between Enron and the SPEs. Soon after,
Enron filed for bankruptcy . The Enron executives were indicated on a variety of
charges and were later sentenced to prison. Along with the federal lawsuits,
multiple civil suits were filed by the shareholders against Enron.

9. 9 | P a g e
Class Action Suit
A class lawsuit was brought by former Enron employees, who held company’s stocks at
the time the company filed for bankruptcy in November, 2001. They suffered huge losses
in their retirement savings plan. The defendants in the case were Enron, members of its
Board, its executives and employees, the institutional trustee Northern Trust Company
and the auditor of Enron, Arthur Anderson. The violations were from the Employee
Retirement Income Security Act, 1974 (hereinafter referred as ‘ERISA’).
The court held that the corporate officers and employees who are appointed by the
employer to administer its retirement plan may be held personally liable. The defendants
further breached their fiduciary duty to disclose accurate information about Enron’s
financial condition. It defrauded the people for investing in the company.
Northern Trust acted as a trustee for the company, which puts a fiduciary responsibilit y
on the company to make the persons investing aware of the dangers of the plan. Northern
Trust was declared liable under ERISA for failing to override the directions received by
the company. The suit against Arthur Anderson was upheld as well for knowingl y
participating in hiding the truth about Enron’s financial condition.
Downfall of Enron
Enron grew manifold in the short time span of 20 years. But, it also saw the most abrupt
downfall ever by going for bankruptcy from a market capitalisation of $60 billion in a
year. The reasons for its downfall were many, mainly that the financial statements of
the company were confusing the shareholders and analysts. Its business model was very
complex that most people could not understand, the company was falling into many
unethical practices. The company even used its accounting limitations to misrepresen t
its earnings and modify the balance sheet to indicate favourable performance. The
company kept finding ways to hide its debt till the extent that the company went into
total losses.

10. 10 | P a g e
CRITICAL ANALYSIS OF THE SCAM
1.Revenue Recognition
 The company showed entire sales value as revenue in it financial statements. As a result,
Enron’s revenues increased from $13.3 billion to $100.8 billion. This 65% annual increase
was unprecedented in the energy industry wherein growth of 2-3% is considered
respectable.
2.Mark-to-Market Accounting.
 Fair value restatements of merchant investments that were not based on reliable
numbers:Mark-to-market or fair value accounting refers to accounting for the "fair value" of
an asset or liability based on the current market price, or for similar assets and liabilities, or
based on another objectively assessed "fair" value.
 Mark-to-market accounting can change values on the balance sheet as market conditions
change. In contrast, historical cost accounting, based on the past transactions, is simpler,
more stable, and easier to perform, but does not represent current market value.
 Fair value restatements of merchant investments that were not based on reliable numbers: In
Jan. 30, 1992 - SEC approves mark-to-market accounting for Enron.
 Such procedures allow managers who want to manipulate net income the opportunity to
make ‘‘reasonable’’ assumptions that would give them the gains they want to record. Such
appears to have been what Enron did.
 When Skilling joined the company, he demanded that the trading business adopt mark-to-
market accounting, citing that it would represent "true economic value.” Income was
estimated as present value of net future cash flow. The viability of the contracts and the
related costs were difficult to estimate.
 Investors were given false or misleading reports due to large discrepancies between profits
& cash.
 Enron recognized estimated profits of more than $110 million from the Enron-Blockbuster
Deal (July 2000), even though analysts questioned the technical viability and market
demand of the service.  When the network failed to work, Blockbuster withdrew from the
contract. Enron continued to recognize future profits, even though the deal resulted in a loss.
3.Special Purpose Entities
 Enron used special purpose entities, created to fulfill a specific purpose to fund or manage
risks associated with specific assets.As a result of one violation, Enron's balance sheet
understated its liabilities and overstated its equity, and as a result, its earnings were
overstated. Enron used Special Purpose Entities to exclude losses and liabilities from the
parent companies balance sheet thus displaying a very desirable and flawlessly profitable
business.
 Enron sponsored hundreds of SPEs with which it did business: Many of these were used to
shelter foreign-derived income from US taxes. Some were sponsored to conduct business

11. 11 | P a g e
with Enron domestically. This is the source that Enron understated and hid its real debt from
investors
 Accounting for investments in subsidiaries and special-purpose entities (SPEs): • Under
GAAP rules at that time, Enron was not required to consolidate these SPEs with its financial
statements
 As is usual with SPEs, Enron guaranteed their bank debt BUT the SPEs’ principal asset was
restricted Enron stock. When the market price of Enron’s stock declined, the SPEs’ assets
were insufficient to cover its debt. As a result, Enron had to assume the debt.
 Investors were oblivious to the fact that the special purpose entities were actually using the
company's own stock and financial guarantees to finance the hedged downside risk in its
own illiquid investments, protecting itself from the same.
 Notable examples of special purpose entities that Enron employed were JEDI, Chewco,
Whitewing, and LJM.
4.Pension Issues
 Enron sponsored a pension plan for it’s employees that contribute a portion of their pay on
deferred tax basis. Almost 62% of assets held in corporation’s 401(k) retirement plan consist
of Enron’s stock.
 Shares traded in Jan 2001 for more than $80share become worth less than 70% in Jan 2002.
While the investments grow in the employees 401k account, they do not pay any taxes on it.
Employees accounts were wiped out and losses suffered by participants.
5.Banking Issues
 There was a questionable relationship between Enron and bankers Citigroup and J.P Morgan
Chase also contributed to the downfall of Enron. Enron was lucrative investment banking
business for the banks. In exchange of potential profits, the banks had lend money to Enron
and promote it’s derivative and securities
6.Energy Derivative Issues
 Since the markets in which Enron traded are largely unregulated, with no reporting
requirements, little information was available about the extent or profitability of Enron’s
derivative activities.
7.Auditing And Accounting Issues
 As per federal securities law, accounting statement of publicly traded corporations be
certified by an independent auditor.
 Enron’s auditor, Arthur Andersen, turned a blind eye to improper accounting practices as
well as he was actively involved in devising complex financial structures and transactions
 Enron’s auditor also violated GAAP( general accepted accounting principles and permit
corporation to play “number games”.
 As an organization of public accountant, Arthur Andersen violated the regulations of the
public Accountant practices because Andersen was not only as the internal auditor but also
as the external auditor of Enron.

12. 12 | P a g e
8.Corporate Governance
Even with its complex corporate governance and network of intermediaries, Enron was still able to
"attract large sums of capital to fund a questionable business model, conceal its true performance
through a series of accounting and financing maneuvers, and hype its stock to unsustainable levels.
 Executive Compensation -Excessive compensations were given to the executives in order to
maximize bonuses. The focus was on short term earnings. • Executives stressed high volume
deals instead of of cash flows or profit. On December 31, 2000, stock options accounted for
about 13% of the company’s issued shares.
 Risk Management - Enron bankruptcy was attributed to its reckless use of derivatives and
specials purpose entities. • By hedging its risks with special purpose entities , the company
retained its risks associated with the transactions.
 Financial Audit- Both the audit function and accounting function in Enron were fraudulent and
opaque. • Management of Enron pressurized the auditors to deviate from the established
auditing standards. • There was a conflict of interest as the auditors earned more as consultancy
fees much more than audit fees.
 Ethical & Political Analysis -Ethical explanations centered on executive greed and hubris, a
lack of corporate social responsibility, situation ethics and get-it-done business pragmatism. •
Political-economic explanations cited post 1970s deregulation and inadequate staff and funding
for regulatory oversight
 Audit Committee -No technical knowledge to question auditors properly on accounting issues
relating to the company’s SPEs. • Also unable to question the company’s management due to
pressures on the committee. • Enron collapsed due to reliance on political lobbying, rent seeking
and the gaming of regulations. Audit Committee
 Fraud on the part of Enron’s certified Independent Auditor Arthur Anderson possibly arising out
of conflict of interest from the consulting services engagements between both the parties..
 In 2001, followed by then CEO Jeffrey Skilling’s resignation was a disclosure of losses incurred
by Enron 1st time in 4 years. Furthermore, the losses incurred were to the tune of $586 million
which included re-adjustment of earnings since 1997.

13. 13 | P a g e
CONCLUSION
Enron was a massive failure, partly because of its size, complexity, controls to protect the integrity
of capital market failed, and especially because of the massive greed and collusion of key
participants. Management failed , Auditor failed, Analyst failed, Creditors/Bankers failed, and also
regulators failed. The multiple failure sent a signal of management structure.
The Enron corporation was formed as the merger of Houston’s natural gas company and inter-north
incorporation. After the merger, it grew rapidly and was regarded as the most innovative company.
However, it resorted to bad accounting practices. It was involved in the creation of special purpose
vehicles, utilized to hide the rising debt of the Enron incorporation, and this led to the failure and
downfall of the business.

14. 14 | P a g e
RECOMMENDATIONS
While going through news reports, we find that the cases of financial fraud have grown
manifold over the last few years. This has been one of the most deterring factors for the
people with lesser knowledge about this sector from investing their capital and
contributing in the growth of a country’s economy. To bring about a decline in this
culture of corporate scams, the following systematic changes need to be brought-
 The law for protection of Whistle Blowers is imperative. More people will come
forth to give information if they are given assurance of their protection.
 The regulating agencies involved in these cases should be provided with greater
autonomy and less political influence.
 An essential judicial reform to provide for fast disposal of such matters, so that
the consequences are severe and immediate.
 There should be a healthy corporate culture in a company. The executives of
Enron believed Enron was best at everything and jumped into any possible new
arena. The shareholders were overly optimistic. Hiding the losses of company in
order to protect the name and reputation wasn’t a great idea.
 A more holistic system is required for supervision of the company by
shareholders, so that the executives are under a constant scrutiny of the
shareholders.
 The government needs to make more stringent norms regarding public companies
as their downfall hits the entire economy of the country, like in the present case.
 The approval of US government to use an immoral and illegal method ‘mark-to-
market’,which is nothing but a manner to fool the investors, and to hide the losses
of the company. Long term gains cannot be made out of this system. The
ignorance regarding the drawbacks of this system is a failure on the part of
government as it hides the major accounts of the company.
 This case is the best example of antithesis of ethics. A company is such an
organisation where there are multiple possibilities of fraud and demeanour. It is
of utmost importance to follow business ethics and be loyal to each other for all
employees of the company. In the present matter, the company officials defrauded
their own employees by hiding the accounts of the company from them.
 Assess the risk associated with the processes that make-up your organization

15. 15 | P a g e
REFERENCES
https://thecompany.ninja/enron-scam-america/
https://www.investopedia.com/updates/enron-scandal-summary/
https://www.wallstreetmojo.com/enron-scandal/
http://www.nytimes.com/2006/01/29/business/
http://www.eoearth.org/view/article/152569/
https://commons.wikimedia.org/wiki/File
https://m.media-
amazon.com/images/M/MV5BZGU1YjE1NjctY2NjYy00Mzc5LWIyMGUtYWM0MGEzZDMxMGQzXkEy
XkFqcGdeQXVyNjUxMjc1OTM@._V1_.jpg
https://encrypted-tbn0.gstatic.com/images?q=tbn:ANd9GcTTSyZsYg6U-
EZkk_cFb9jdOHswzMMpBHTvLw&usqp=CAU
https://alchetron.com/cdn/david-duncan-accountant-382b650f-ccd6-460e-95b6-fdd4f865ac4-resize-
750.jpg
https://www.google.com/imgres?