• Enron Corporation was an American energy,
commodities, and services company based in Houston,
• Before its bankruptcy on December 2, 2001, Enron
employed approximately 20,000 staff and was one of
the world's leading electricity, natural gas,
communications, and pulp and paper companies, with
claimed revenues of nearly $101 billion in 2000.
• At the end of 2001, it was revealed that its reported
financial condition was sustained substantially by
institutionalized, systematic, and creatively planned
accounting fraud, known as the "Enron scandal".
• Enron has since become a popular symbol of willful
corporate fraud and corruption.
• The Enron scandal was a financial scandal involving
Enron Corporation and its accounting firmArthur
Andersen, that was revealed in late 2001.
• After a series of revelations involving irregular
accounting procedures conducted throughout the
1990s, Enron was on the verge of bankruptcy by
November of 2001. A white knight rescue attempt by a
similar, smaller energy company, Dynegy, was not
viable. Enron filed for bankruptcy on December 2,
2001. Enron’s Fall
Business Model • Deregulation generally led to lower
prices and increased supply, it also introduced
increased volatility in gas prices
• Standard contract(old)--- allowed suppliers to
interrupt gas supply without legal penalties.
• Creating a natural gas “bank”(Enron)----Enron
began offering utilities long-term fixed price contracts
for natural gas, typically at prices that assumed long-
term declines in spot prices.
• Off-balance sheet financing vehicles---Special
Purpose Entities(SPE) , to finance many of these
transactions. • Enron Online---The creation of the on-
line trading model
• The gas trading model was a huge success. By 1992,
Enron was the largest merchant of natural gas in
Pulp and Paper
• The world’s largest energy trader.
• The total revenue was $100 billion in 2000, 7th of Top
500 in US.
• Blue chip, $80 per share, 21 thousands employees,
globalization enterprise. Remarkable Company
• 2001, a investment agency boss publicly doubts the
profitability model of Enron, the stock price decrease
from $80 to 42$ in Aug • 16, Oct. Enron announces the
total loss for 3th quarter was $618 million. • 22, Oct.
SEC begin to investigate Enron formally.
• 8, Nov. Enron was forced to admit do false account,
profit total false nearly $600 million since 1997. • 30,
Nov. stock price falls to $0.26 per share.
• 2, Dec. formally apply for bankruptcy protection.
• How did it happen?
US monitor system
• Enron’s nontransparent financial statements did not
clearly depict its operations and finances with
• Accrual accounting: actual costs and actual revenues
were received and recorded when selling it.
• Mark-to-market accounting: income was estimated as
the PV of future cash flow, but costs were hard to be
• In July 2000, Enron and Blockbuster Video signed a
20-year agreement to introduce a new on-line video
game to various cities.
• After several pilot projects, Enron estimated profits
of more than $110 million form the deal, even though
analysts questioned the technical viability and market
demand of the service.
• When the net work failed to work, Blockbuster pulled
out of the contract, Enron continued to recognized
future profits, even though the deal resulted in a loss.
SPE(Special purpose entities) • It is a legal entity
created to fulfill narrow, special or temporary
objectives . They are used to hide debt, ownership
mostly in real market.
• These shell firms were created by a sponsor, but
managed by independent equity investor and debt
• Enron used SPE to manage risks associated with
specific assets and disclose minimal details of its SPE.
• By 2001, Enron had used hundreds of SPEs to hide its
debt. As a result of one violation, Enron’s balance sheet
understated its liabilities, overstated its equity and
profits. Accounting method
Enron had a model board of directors comprising
predominantly outsiders with significant ownership stakes
and a talented audit committee. Even with its complex
corporate governance, Enron was still able to conceal its
• Executive compensation
The setup of the system contributed to a dysfunctional
corporate culture that became obsessed with a focus only
on short-term earnings to maximize bonuses.
• Financial audit
Enron’s auditor firm, Arthur Andersen, was accused of
applying reckless standards in its audits because of a
conflict of interest over the significant consulting fees($27
million). Anderson’s auditors were pressured by Enron to
defer recognizing the charges from the SPE as its credit
US monitor system
• The state accounting committee was an independent
body established in accordance with the state
Accountant Acts. At the national level, the Uniform
Certified Public Accountants Act was just a template
method, does not have binding enforce.
• American institute of CPA and State Certified General
Accountants Association were traditional civil society
organizations, not specifically authorized by law.
• The independence of the CPA
• How about the CEO and directors deal with
Obviously, the top management operated the problem
in very well, but all of they intentionally less of
attention about the fraud. Including the CEO Skilling,
many of the directors were continuing advocated to
rise stock price, but selling the stock at the same time.
• Both of they have no business ethics and no long–
term development.(1985-2001 Enron)
• Where there is a business ethic, there is a long-term
Ethics cannot be fragmented… or fragmentation goes
Company governance must integrate the active
participation of all stakeholders who affect the
organization's activities or who are affected by these
And in all four domains : profitability, equity, dignity
and viability WE also encourage this fragmentation
(Shadow) Lessons to Learn from this Case
Arthur Andersen • In July 2002, the one-time Big 5
accounting firm was found guilty of obstruction of
justice for shredding documents in the Enron case. •
Their Enron connections essentially put the entire firm
out of business, affecting 22,000 workers, most of
whom had no connection to Enron.
Conclusions… In conclusion, Enron was a remarkable
and innovative company in the world, Its success
cannot be neglected.
But there is a interest question for Enron’s bankruptcy:
Is there a company can get success without ethics?
To see from the facts, the answer is “no.” Whether
Enron or Anderson, they finally pay for their fault on
We see ethic problem would bring a fatal strike to a
company, no matter how it was successful.