This report shows the summarized description of Enron Scandal and its impact on overall impact on US economy. This report is divided into basic two part. First part is showing the mechanism of this fraud. The second part shows its impact on the economy and stock market.

1. A Report
On
“Accounting Fraud: A study on Enron scandal”

2. A Report
On
“Accounting Fraud: A study on Enron
scandal”
Submitted To:
Mohammad Salahuddin Chowdhury, FCA
Assistant Professor,
Department of Finance
University of Dhaka.
Course Name: Auditing
Course Title: F-310
Submitted by: Group No:
Sl. No. Name ID No:
1. Pantho Sarker 20-033
2. Md. Gulam Kibria 20-075
3. Md. Touhidul Islam 20-77
4. Khaleda Yeasmin 20-087
5. Sheikh Sajid Hasan 20-181
Department of Finance
BBA 20thBatch; Section: A
University of Dhaka
DATE OF SUBMISSION: 21 December 2016
i

3. Letter of Transmittal
December 21, 2016
Mohammad Salahuddin Chowdhury, FCA
Assistant Professor
Department of Finance,
University of Dhaka.
Subject: Submission of the term paper on “Accounting Fraud: A study on Enron scandal”.
Dear Sir, “Accounting Fraud: A study on Enron scandal”, successfully as a partial
requirement of the course. We enjoyed preparing this report and it helped us to gain knowledge
about the feasibility study of “Accounting Fraud: A study on Enron scandal". We are also
very grateful for your kind help and advice in completing the study. Moreover, in spite of some
challenges, we have finished this task in a friendly environment and the entire team worked
very hard while preparing this report.
We aspire that this study will fulfill your suggestions and expectation. If you need any further
assistance to interpret this study, please inform us. It will be our pleasure to clarify your
questions.
Sincerely,
Group no:
Sl. No. Name ID No: Signatures:
1. Pantho Sarker 20-033
2. Md. Gulam Kibria 20-075
3. Md. Touhidul Islam 20-77
4. Khaleda Yeasmin 20-087
5. Sheikh Sajid Hasan 20-181
3rd year 2nd Semester (20thbatch), Section: A
Department of Finance
University of Dhaka
ii

4. Acknowledgement
At first we would like to thank the mightiest and our parents. Without their blessing, we could
not be successful in completing the study. We would like to thank our honorable course teacher
of Department of Finance, Mohammad Salahuddin Chowdhury, FCA for providing us such an
opportunity to prepare the Report on “Accounting Fraud: A study on Enron scandal.”
Without her helpful guidance, the completion of this report was unthinkable. During our
preparation of the report work, we have come to very supportive touch of different individuals
& friends and professionals who lent their ideas, time & caring guidance to amplify the report’s
contents. We want to convey our heartiest gratitude to them for their valuable responses.
iii

5. Executive Summary
An audit is an objective examination and evaluation of the financial statements of an
organization to make sure that the records are a fair and accurate representation of the
transactions they claim to represent. This report is prepared on the “Accounting fraud: A study
on Enron Scandal” to achieve practical knowledge on audit and to understand the
implementation of the audit. At first, we will depict the organizational background of the Enron
Company to understand its business and business environment in this report. In second part of
this report, we will discuss process of accounting fraud of Enron Company including
management’s roles and auditor’s roles. In second part of this report, we will depict the
consequence of accounting fraud of Enron on its business as well as on economy. Finally, we
will depict the present status of Enron Company and draw a valid conclusion on accounting
fraud of Enron Company.
iv

6. Table of Contents
List of Figures.............................................................................................................................................. 2
Chapter- One: Introduction....................................................................................................................... 4
1.1 Origin of the Report...................................................................................................................... 4
1.2 Objective of the Report................................................................................................................. 5
1.3 Scope of the Report...................................................................................................................... 6
1.4 Limitations of the Report.............................................................................................................. 7
1.5 Sources and Methodology............................................................................................................ 8
Chapter- Two: Overview of the Company............................................................................................ 10
2.1 Enron Corporation...................................................................................................................... 10
2.2 Corporate highlights of Enron Corporation................................................................................ 10
2.3 Products of Enron Corporation................................................................................................... 11
2.4 Vision of Enron............................................................................................................................ 11
2.5 Corporate values of Enron:......................................................................................................... 12
2.6 Timeline of Enron's collapse....................................................................................................... 13
Chapter Three: The Mechanisms of the Fraud......................................................................................15
3.1 Management's role..................................................................................................................... 16
Mark-to-market accounting:....................................................................................................... 18
Specialpurpose entities to hide debts:......................................................................................... 18
Corporategovernance:................................................................................................................. 19
Other accounting issues:.............................................................................................................. 21
3.2 Enron's Auditor role (Arthur Andersen):.................................................................................... 22
Chapter Four: Consequences of the Fraud............................................................................................ 27
4.1 Enron's stock prices:................................................................................................................... 27
A.................................................................................................................................................... 28
4.2 Impact on major stock indices:................................................................................................... 29
4.3 Effect on economy:..................................................................................................................... 31
4.4 Employees and directors of Enron:............................................................................................. 32
4.5 Effect on the energy industry:....................................................................................................33
4.6 Auditors:...................................................................................................................................... 33
4.7 Laws and regulations:................................................................................................................. 34
Chapter Five: Current Status of the Enron............................................................................................ 36
Chapter Six: Conclusion........................................................................................................................... 37
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7. Chapter Six: Conclusion........................................................................................................................... 38
References.................................................................................................................................................. 39
References.................................................................................................................................................. 40
List of Figures
Figure 1: Corporate highlights of Enron........................................................10
Figure 2: Products of Enron............................................................................11
Figure 3: Timeline of Enron’s collapse...........................................................13
Figure 4: Organizational Fraud Triangle.......................................................15
Figure 5: Auditor’s roles.................................................................................22
Figure 6: Impact on Andersen and conviction.............................................. 24
Figure 7: Scenario of Enron’s stock price..................................................... 27
Figure 8: S&P 500............................................................................................29
Figure 9: Dow jones industrial Average........................................................ 29
Figure 10: Inflation..........................................................................................31
Figure 11: Real interest rate........................................................................... 31
Page 2 of 40

8. Chapter One: Introduction
Page 3 of 40

9. r
Chapter- One: Introduction
1.1 Origin of the Report
To have an overview of Auditing in practical life we’ve a study on “Accounting Fraud: A
study on Enron scandal”, an energy commodities, and services company and one of the
largest companies in the world. Now a day’s education is not just limited to books and
classrooms. In today’s world, education is the tool to understand the real world and apply
knowledge for the betterment of the society as well as business. From education the
theoretical knowledge is obtained from courses of study, which is only the half way of the
subject matter. Practical knowledge has no alternative. The perfect coordination between
theory and practice is of paramount importance in the context of the modern business world
in order to resolve the dichotomy between these two areas. Therefore, for the B.B.A. program
we are assigned to prepare a report on “Accounting Fraud: A study on Enron scandal” for
Auditing (F-310) course by our honorable course teacher M ohammad Salahuddin
Chowdhury, FCA.
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10. Our objectives are...
> To increase our experience in data collection & analysis.
> To know about the actual picture of Enron Company.
> To have practical knowledge of Auditing and Accounting.
> To know the implications of Auditing on Enron Company.
> To have better analytical abilities regarding Auditing in real world.
> To know Enron Company from a closer view.
1.2 Objective of the Report
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11. 1.3 Scope of the Report
While completing the report we’ve had a lot of scopes of gathering knowledge of real
business world and the wide horizon of business, although the report is only concerned
about the Enron Company. We have collected their information from the internet as it a
multinational company and its head office is outside of Bangladesh. We got almost all the
information we needed because the website of the company is very much updated and
resourceful. We knew about their mission, vision, products, area of operation, accounting
system, managerial and organizational structure etc. We are really grateful to our course
teachers for assigning us such an interesting and knowledgeable topic.
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12. While preparing this report, we have faced some problems. The main problem was to
co-ordination all the group members. Moreover, during data collection we faced several
problems.
• Due to limited access of the data, this study may not be perfect to the scent
percent.
• Lack of enough experience in analyzing of data.
• Due to inadequate information, in-depth analysis could not be done in the report.
1.4 Limitations of the Report
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13. 1.5 Sources and Methodology
This report’s research is based on application of Auditing in Enron Company. The data
types are secondary that were collected from the internet. The company’s updated
information is given on its website and we mainly collected information from there.
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14. Chapter Two: Overview of the
Company
Page 9 of 40

15. r
Chapter- Two: Overview of the Company
2.1 Enron Corporation
Enron Corporation was an American energy, commodities, and Services Company based in
Houston, Texas. It was founded in 1985 as the result of a merger between Houston Natural
Gas and Inter North, both relatively small regional companies in the U.S. Before its
bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff and was one
of the world's major electricity, natural gas, communications and pulp and paper companies,
with claimed revenues of nearly $101 billion during 2000. Fortune named Enron "America's
Most Innovative Company" for six consecutive years. Enron filed for bankruptcy in the
Southern District of New York in late 2001 and selected Weil, Gotshal & Manges as its
bankruptcy counsel. It ended its bankruptcy during November 2004, pursuant to a court-
approved plan of reorganization, after one of the most complex bankruptcy cases in U.S.
history.
2.2 Corporate highlights of Enron Corporation
Former type Public
Industry Energy
Fate Bankruptcy
Predecessor
InterNorth (Northern Natural Gas Company)
Houston Natural Gas
merged in 1985
Successor
Dynegy
Prisma Energy International
Founded 1985 in Omaha, Nebraska, United States
Founder Kenneth Lay
Defunct 2007
Headquarters 1400 Smith Street
Houston, Texas, United States
Number of employees 20,600 during 2001
Website www.enron.com
Figure 1: Corporate highlights ofEnron
Page 10 of 40

16. 2.3 Products of Enron Corporation
Online marketplace
services
Energy and
commodities
^ services
Capital and risk
management
Iservices
Commercial and
industrial
outsourcing
^____ services____
Project
development and
management
services
Figure 2: Products ofEnron
2.4 Vision of Enron
The vision is anything that is considered the long-term plan implemented by any
individual or any corporate figure. We have come to the knowledge of the corporate vision
of Enron that is shown below:
“Enron's vision is to become the world's leading energy company— creating innovative and
efficient energy solutions for growing economies and a better environment worldwide.”
Page 11 of 40

17. 2.5 Corporate values of Enron:
Corporate image is the source of value of intangibles considerably. So, creating value and
obtaining value in return is also important for any corporate body.
Enron had been wanted to implement the following corporate values in its business life:
Respect: We treat others, as we would like to be treated ourselves. We do not tolerate abusive
or disrespectful treatment. Ruthlessness, callousness and arrogance don't belong here.
Integrity: We work with customers and prospects openly, honestly and sincerely. When we
say we will do something, we will do it; when we say we cannot or will not do something,
then we won't do it.
Communication: We have an obligation to communicate. Here, we take the time to talk with
one another...and to listen. We believe that information is meant to move and that
information moves people.
Excellence: We are satisfied with nothing less than the very best in everything we do. We
will continue to raise the bar for everyone. The great fun here will be for all of us to discover
just how good we can really be.
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18. 2.6 Timeline of Enron’s collapse
Date Event
20 February, 2001 Fortune Magazine story calls Enron a highly impenetrable
company and stock was overpriced.
14 August, 2001 Jeff skilling resigned as CFO, citing personal reasons.
Kenneth Lay became CEO once again.
12 October, 2001 Arthur Anderson legal counsel instructs workers who audit
Enron’s books to destroy all but the most basic documents.
16 October, 2001 Enron reports a third quarter loss of $618 million.
24 October, 2001 CFO Andrew Fastow who ran some of the controversial
SPE’s is replaced
8 November, 2001 The company took the highly unusual move of restating its
profits for the past four years. 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.
2 December, 2001 Enron filed for chapter 11-bankruptcy protection on the
same day hit Dynegy corporation with a $10 billion breach
of contract lawsuit.
12 December, 2001 Anderson CEO Jo Berardino testifies that his firm
discovered possible illegal acts committed by Enron.
9 January, 2002 US justice department launches criminal investigations.
Figure 3: Timeline ofEnron’s collapse
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19. Chapter Three: The
Mechanisms of the Fraud
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20. r
Chapter Three: The M echanisms of the Fraud
In this section of our report we will discuss about the process or mechanism of the fraud and
the roles that had been played by the management and the auditor. How management did this
huge misrepresentation, or how came they did not find out the fraud or at least something is
wrong. The role of auditors will be also pointed out, how could they skip the misstatement or
get involved with the fraud.
How fraud occurs within organizations can be understood by examining the elements that
comprise such actions. At an individual level Auditing Standards Board indicates that the
occupational fraud triangle comprises three conditions that are generally present when a fraud
occurs. These conditions include an incentive or pressure that provides a reason to commit
fraud (personal financial problems or unrealistic performance goals), an opportunity for fraud
to be perpetrated (weaknesses in the internal controls), and an attitude that enables the
individual to rationalize the fraud. While the fraud triangle focuses on individual-level
constructs of fraud, such as localized instances of cash or other asset appropriation by
employees, the Enron example highlights fraud at the organizational level - systemic
organization-wide fraud and corruption. At the organizational level, leadership,
organizational culture and management control systems form the three points of the
organizational fraud triangle shown below:
Figure 4: Organizational Fraud Triangle
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21. The fraud triangle illustrates that the most important lessons from Enron lie in the way that a
corporate culture championed by CEO Skilling overcame a sophisticated and widely lauded
set of management controls and in the importance of carefully balancing the core concepts of
leadership, organizational culture and control within organizations. Organization wide fraud
is only possible when these three variables are configured in a way that enables and even
fosters manipulation and fails to prevent compliance failure.
3.1 Management’s role
The management played the most significant role in the process of fraud. Some managerial
executives were directly or indirectly involved with the process of the fraud. The
management intentionally took some actions to benefit them from the fraud. Moreover there
were some inherent risks of the business to be misstated. Like;
> Extremely volatility of business.
> The uniqueness of business.
> The diversification of business increased the risk of fraud.
> Complex accounting system.
> Complex business model.
For these inherent risks of the business and some greedy managerial executives the fraud
actually happened with the help of the auditors. The combination of these issues later resulted
in the bankruptcy of the company, and the majority of them were perpetuated by the indirect
knowledge or direct actions of Kenneth Lay, Jeffrey Skilling, Andrew Fastow, and other
executives such as Rebecca Mark. Lay served as the chairman of the company in its last few
years, and approved of the actions of Skilling and Fastow although he did not always inquire
about the details. Skilling constantly focused on meeting Wall Street expectations, advocated
the use of mark-to-market accounting (accounting based on market value, which was then
inflated) and pressured Enron executives to find new ways to hide its debt. Fastow and other
executives created off-balance-sheet vehicles, complex financing structures, and deals so
bewildering that few people could understand them.
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22. Now let’s have a look at the actual process how did they did it, before going for a further
discussion we will first see the total fraud process in a diagram:
From the diagram we can see how the management executives embezzled the fund that was
collected from the selling of shares, bonds and other securities. The main concern of the
management was to overstate the company’s financial condition and thus increase the share
Page 17 of 40

23. price. The business was not running well and there was lack of internal control too. Now let’s
discuss the process in details:
Revenue overstatements and weak internal control in revenue recognition:
Enron and other energy suppliers earned profits by providing services such as wholesale
trading and risk management in addition to building and maintaining electric power plants,
natural gas pipelines, storage, and processing facilities. When accepting the risk of buying
and selling products, merchants are allowed to report the selling price as revenues and the
products' costs as cost of goods sold. In contrast, an "agent" provides a service to the
customer, but does not take the same risks as merchants for buying and selling. Service
providers, when classified as agents, are able to report trading and brokerage fees as revenue,
although not for the full value of the transaction.
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. This extensive expansion of 65% per year was
unprecedented in any industry, including the energy industry, which typically considered
growth of 2-3% per year to be respectable. For just the first nine months of 2001, Enron
reported $138.7 billion in revenues.
Mark-to-market accounting:
When Skilling joined the company, he demanded that the trading business adopt mark-to-
market accounting, citing that it would represent "true economic value." Enron became the
first non-financial company to use the method to account for its complex long-term contracts.
Mark-to-market accounting requires that once a long-term contract was signed, income is
estimated as the present value of net future cash flow. Often, the viability of these contracts
and their related costs were difficult to estimate. Due to the large discrepancies of attempting
to match profits and cash, investors were typically given false or misleading reports.
Special purpose entities to hide debts:
Enron used special purpose entities limited partnerships or companies created to fulfill a
temporary or specific purpose to fund or manage risks associated with specific assets. The
company elected to disclose minimal details on its use of "special purpose entities" These
shell companies were created by a sponsor, but funded by independent equity investors and
debt financing. For financial reporting purposes, a series of rules dictate whether a special
Page 18 of 40

24. purpose entity is a separate entity from the sponsor. In total, by 2001, Enron had used
hundreds of special purpose entities to hide its debt. Enron used a number of special purpose
entities, such as partnerships in its Thomas and Condor tax shelters, financial asset
securitization investment trusts (FASITs) in the Apache deal, real estate mortgage investment
conduits (REMICs) in the Steele deal, and REMICs and real estate investment trusts (REITs)
in the Cochise deal. As a result of one violation, Enron's balance sheet understated its
liabilities and overstated its equity, and its earnings were overstated. Enron disclosed to its
shareholders that it had hedged downside risk in its own illiquid investments using special
purpose entities.
JEDI and Chewco misstatement of investment:
In 1993, Enron established a joint venture in energy investments with CalPERS, the
California state pension fund, called the Joint Energy Development Investments (JEDI). In
1997, Skilling, serving as Chief Operating Officer , asked CalPERS to join Enron in a
separate investment. CalPERS were interested in the idea, but only if it could be terminated
as a partner in JEDI. However, Enron did not want to show any debt from assuming
CalPERS' stake in JEDI on its balance sheet. Chief Financial Officer (CFO) Fastow
developed the special purpose entity Chewco Investments limited partnership (L.P.) which
raised debt guaranteed by Enron and was used to acquire CalPERS's joint venture stake for
$383 million. Because of Fastow's organization of Chewco, JEDI's losses were kept off of
Enron's balance sheet.
In autumn 2001, CalPERS and Enron's arrangement was discovered, which required the
discontinuation of Enron's prior accounting method for Chewco and JEDI. This
disqualification revealed that Enron's reported earnings from 1997 to mid-2001 would need
to be reduced by $405 million and that the company's indebtedness would increase by $628
million.
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.
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25. Executive compensation:
Although Enron's compensation and performance management system was designed to retain
and reward its most valuable employees, the system contributed to a dysfunctional corporate
culture that became obsessed with short-term earnings to maximize bonuses. Employees
constantly tried to start deals, often disregarding the quality of cash flow or profits, in order to
get a better rating for their performance review. Additionally, accounting results were
recorded as soon as possible to keep up with the company's stock price. This practice helped
ensure dealmakers and executives received large cash bonuses and stock options. The
company was constantly emphasizing its stock price. Management was compensated
extensively using stock options
Risk management:
Before its scandal, Enron was lauded for its sophisticated financial risk management tools.
Risk management was crucial to Enron not only because of its regulatory environment, but
also because of its business plan. Enron established long-term fixed commitments which
needed to be hedged to prepare for the invariable fluctuation of future energy prices. Enron's
bankruptcy downfall was attributed to its reckless use of derivatives and special purpose
entities. By hedging its risks with special purpose entities which it owned, Enron retained the
risks associated with the transactions. This arrangement had Enron implementing hedges with
it.
Abandon ofselling ofshares hold by the non-executives employees:
When the actual financial condition of the company was being revealed the employees tried
to sell their shares because till then the share price was high, but the management body
refrained them from doing so. Management body did not allowed the employees to sell their
shares because they were still trying to collect fund from the market through shares and to
keep market share price high they refrained employees from selling their shares.
Selling executives shares:
In one side, the management refrained the non-executives from selling their share, on the
other side the executives were selling out their share and planning to get out of the market.
This was a conspiracy act of the management body. Their intention was clear from the
beginning. With this act their intention got revealed.
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26. Other accounting issues:
Enron made a habit of booking costs of cancelled projects as assets, with the rationale that no
official letter had stated that the project was cancelled. This method was known as "the
snowball", and although it was initially dictated that such practices be used only for projects
worth less than $90 million, it was later increased to $200 million.
In 1998, when analysts were given a tour of the Enron Energy Services office, they were
impressed with how the employees were working so vigorously. In reality, Skilling had
moved other employees to the office from other departments (instructing them to pretend to
work hard) to create the appearance that the division was larger than it was. This ruse was
used several times to fool analysts about the progress of different areas of Enron to help
improve the stock price.
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
Andersen to ignore the issues.
Many executives at Enron were indicted for a variety of charges and some were later
sentenced to prison. Enron's auditor, Arthur Andersen, was found guilty in a United States
District Court of illegally destroying documents relevant to the SEC investigation, which
voided its license to audit public companies, effectively closing the business. By the time the
ruling was overturned at the U.S. Supreme Court, the company had lost the majority of its
customers and had ceased operating. Employees and shareholders received limited returns in
lawsuits, despite losing billions in pensions and stock prices. As a consequence of the
scandal, new regulations and legislation were enacted to expand the accuracy of financial
reporting for public companies. One piece of legislation, the Sarbanes-Oxley Act, increased
penalties for destroying, altering, or fabricating records in federal investigations or for
attempting to defraud shareholders. The act also increased the accountability of auditing
firms to remain unbiased and independent of their clients.
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27. 3.2 Enron’s Auditor role (Arthur Andersen):
Aurther
Andersen
One of the 5
accounting
Figure 5: Auditor's roles
About Andersen:
Arthur Andersen, one of the world's five leading accounting firms, was Enron’s auditing
firm. Andersen was among the most prestigious international accounting firms in the world.
Accounting students in the US often viewed it as the most glamorous and desirable employer.
Andersen marketed itself as having fewer offices than its competitors have because it
operated with larger offices to serve prominent clients. Although Andersen’s client base was
diversified, it often had “high flying” companies such as Enron and WorldCom as clients.
Enron was Andersen’s second largest client, and the largest client in Andersen’s Houston
office.
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 generated by
Enron. During 2000, Arthur Andersen earned $25 million in audit fees and $27 million in
consulting fees (this amount accounted for roughly 27% of the audit fees of public clients for
Arthur Andersen's Houston office). The auditor's methods were questioned as either being
completed solely to receive its annual fees or for its lack of expertise in properly reviewing
Enron's revenue recognition, special entities, derivatives, and other accounting practices.
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28. How auditors did that:
Enron hired numerous Certified Public Accountants (CPAs) as well as accountants who had
worked on developing accounting rules with the Financial Accounting Standards Board
(FASB). The accountants searched for new ways to save the company money, including
capitalizing on loopholes found in Generally Accepted Accounting Principles (GAAP), the
accounting industry's standards. One Enron accountant revealed "We tried to aggressively use
the literature [GAAP] to our advantage. All the rules create all these opportunities. We got to
where we did because we exploited that weakness."
The
Ways
How
They
Did It
The auditors have searched for new ways including loopholes in
GAAP to save the company money
One Enron accountant revealed, "We tried to aggressively use GAAP,
use it in our advantage and exploited the weaknesses
Andersen's auditors were pressured by Enron's management to defer
recognizing the charges from the special purpose entities.
They pressured Andersen into meeting Enron's earnings expectations
Enron occassionally brought Ernst & Young or
PricewaterhouseCoopers to complete accounting tasks to create the
illusion of hiring a new company to replace Andersen
Though Andersen has a strong control over conflict of interest, it failed in
case of enron.
Andersen's auditors were pressured by Enron's management to defer recognizing the charges
from the special purpose entities as its credit risks became known. Since the entities would
never return a profit, accounting guidelines required that Enron should take a write-off, where
the value of the entity was removed from the balance sheet at a loss. To pressure Andersen
into meeting Enron's earnings expectations, Enron would occasionally allow accounting
companies Ernst & Young or PricewaterhouseCoopers to complete accounting tasks to create
the illusion of hiring a new company to replace Andersen. Although Andersen was equipped
with internal controls to protect against conflicted incentives of local partners, it failed to
prevent conflict of interest. In one case, Andersen's Houston office, which performed the
Enron audit, was able to overrule any critical reviews of Enron's accounting decisions by
Andersen's Chicago partner. In addition, after news of U.S. Securities and Exchange
Page 23 of 40

29. Commission (SEC) investigations of Enron were made public, Andersen would later shred
several tons of relevant documents and delete nearly 30,000 e-mails and computer files,
causing accusations of a cover-up.
Impact on Andersen and conviction:
Andersen’s job was to check that the company’s accounts were a fair reflection of what was
really going on. As such, Andersen should have been the first line of defense in the case of
any fraud or deception. Arguments about conflict of interest had been thrown at Andersen
since they acted as both auditors and consultants to Enron. The company earned large fees
from its audit work for Enron and from related work as consultants to the same company.
When the scandal broke, the US government began to investigate the company’s affairs,
Andersen’s Chief Auditor for Enron, David Duncan, ordered the shredding of thousands of
documents that might prove compromising. That was after the Securities and Exchange
Commission (SEC) had ordered an investigation into the speculative actions of Enron.
Duncan said he was acting on an e-mail from Nancy Temple, a lawyer at Andersen, but
Temple denied giving such advice. While Andersen fired Duncan, its Chief Executive
Officer, Joseph Berardino, insisted that the firm did not act improperly and could not have
detected the fraud. Berardino conceded that an error of judgment was made in shredding
documents, but he still protested Andersen’s innocence.
Figure 6: Impact on Andersen and conviction
In June 2002, Andersen was convicted in a US federal court of the crime of obstructing
justice by shredding working papers related to Enron audits because Andersen personnel
knew that the papers would be evidence in a SEC investigation. A criminal conviction would
mean that Andersen could not audit SEC registrants. Andersen announced its intent to go out
Page 24 of 40

30. of business before the SEC took formal action to bar it from auditing SEC clients. In a
symbolic action, in August 2002, the Texas State Board of Public Accountancy revoked
Arthur Andersen’s license to practice accounting in the State of Texas because of the firm’s
professional and ethical misconduct. In June 2005, the US Supreme Court overturned
Andersen’s conviction on a legal technicality, but did not absolve Andersen from guilt.
Page 25 of 40

31. Chapter Four:
Consequences of the Fraud
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32. Chapter Four: Consequences of the Fraud
The Enron scandal not only shook the Wall Street and the whole U.S economy but also shook
the whole world. Enron, a company which reached highest of peaks latter was down to ashes
due to holocaust of its own internal frauds and poor governance. Enron scandal has a huge
effect on the world, which greatly affected investor sentiment and global legislations
regarding financial market trade and reporting standards. Here we discuss the consequences
that the Enron fraud had from the perspective of the company, the U.S economy and the
whole world.
4.1 Enron’s stock prices:
Here we see the journey of Enron from its rise and fall.
This Candlestick chart shows the journey of Enron from its rise and to its miserable ending.
Here we have indicated major events and its effects on its stocks prices from a timeline of
1996 to 2001.
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33. Event Timeline Description
A 1996-2000 Enron was regarded as “darling of Wall Street” by
market participants.
• Share prices were rising.
• Fortune magazine called Enron “America’s
Most Innovative Company” for six consecutive
years.
B 2000 - early 2001 Enron executives and directors received $1.1 billion
by selling 17.3 million shares
C April 17, 2001 Enron reported first quarter profits of $536 million
D August 14, 2001 Jeffrey K. Skilling abruptly resigned as chief
executive, citing “personal reasons,” Mr. Lay
reassume the position of CEO.
E August 20, 2001 Kenneth Lay sold 93,000 shares for about $2 million.
At the same time, he urged employees to buy company
shares sending e-mail to employees assuring them that
the company was on solid footing, and predicted
"significantly higher stock price.”
F September 26, 2001 In an online chat with employees, Mr. Lay said that
Enron stock was a good buy and that the company’s
accounting methods were “legal and totally
appropriate.”
G October 16, 2001 Enron reported a third-quarter loss of $618 million.
H October 22, 2001 The Securities and Exchange Commission opened an
inquiry into Enron’s accounting
I December 2, 2001 Enron filed for bankruptcy protection.
After filing for bankruptcy Enron’s stocks were delisted from the NYSE (New York stock
exchange) was traded in pink sheets or OTC markets before the whole liquidation process
completed. Stock, which was traded for more than $90 per share, ended up as 50 cents per
share within a week.
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34. 4.2 Impact on major stock indices:
The S&P 500 and Dow jones industrial average are one of the most renounced and talked
over indices on which investors and analysts all over the world keep a close eye to analyze
U.S stock market condition.
From the start of 2000 to the end of 2002, U.S stock market went through a bearish trend
where both the S&P 500 and Dow jones industrial average dropped significantly breaking the
market perceived support level creating a negative vibe in the minds of investors.
Figure 8: S&P 500
11000
10000
9000
3000
7000
Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03
Dow Jones Industrial Average (2002)
Figure 9: Dowjones industrialAverage
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35. Now our concern is it related to Enron scandal?
The Dow Jones has dropped by 25 percent since its March 19 peak, and almost 14 percent
since its June 24 close, when a brief rally was interrupted by the news of WorldCom’s $3.9
billion earnings restatement. The Standard and Poor 500 index, closing at 848 on July 19, has
lost a bit more: nearly 28 percent and 15 percent, respectively, since its March peak at 1170.
In the absence of obvious causes of stock market decline— such as oil embargoes or the threat
of an interest rate increase—we can assume that part of the drop in the stock market’s value
since March can be attributed to the Enron crisis, and a higher proportion of the drop since
June can be attributed to WorldCom and subsequent scandals.
Well there another alternative theory exists. According to the Eliot wave theory, trends in
social mood produce Elliot wave patterns that have substantial effects on the market.
According to a theory of socialists, it was the investors who precipitated the Enron scandal.
The accounting scandal that emerged within Enron could not have been what discouraged
investors and collapsed the company. The stock market was declining in the period before the
malpractice came to light, and most investors knew nothing about the shady dealing prior to
or anytime during the stock market’s fall. And while the scandal unfolded, primarily from
November to March, the market actually grew again. It’s clear that even as the Enron drama
developed, investor and consumer psychology actually improved and stock prices rose.
Stock prices had been falling for a full 18 months prior to the event. Enron stock also
retreated, undermining investor support. By the time the controversy came to light, the trend
toward an increasingly negative mood was already over. In fact, by late September of last
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36. year, it was time for the market to make its largest move upward in over a year-and-a-half.
The psychological climate of this bull market encouraged companies to mislead investors.
So we can say the Enron scandal definitely had an impact on the stock market along with
other variables.
4.3 Effect on economy:
Enron as being a major player in the U.S energy industry, its bankruptcy automatically had an
effect on the overall economy. As Enron was regarded as one of the most potential companies
of U.S.A its scandal negatively affected the investors and the general market conditions.
As we can see the real interest rate and inflation dropped from one of the highest peaks in
U.S economic history to a lowest. This was due to poor market conditions and recession to
which Enron just added more. Although the economy and market was already in a bad
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37. condition the Enron scandal not only affected investor sentiment but also had a long lasting
effect on the economy as it was a major player in energy sector. The energy sector was under
severe pressure due to Enron’s fraud as banks were reluctant to provide loans and many
projects were postponed which resulted in higher energy prices for the future and most
importantly a negative mindset about the energy sector to the general investors which took a
long for the companies to regain.
The GDP growth rate was also slow compared to other years but it was mostly due to
economic downturn than Enron as although it was one of the biggest bankruptcies in the
history but wasn’t a too significant as a variable that can affect the GDP of a country.
4.4 Employees and directors of Enron:
After the day Enron filed for bankruptcy Enron fired 5000 employees and it was followed by
more as the company went through the process of liquidation. Laid-off workers received a
mere $4,500 severance payment, no matter how many years they had worked for the
company. Enron also canceled all health and medical insurance for the 5,000 laid-off
workers. Employees who saved in 401(k) plan, which is a defined benefit pension plan
usually in the form of common stock also lost all of their money. Most of the employees were
left with miserable conditions, while most of them had to depend on social security service.
However the top executives and the directors had a different scenario as they knew the
correct condition of the company and were involved in the process. Between January 1 and
August 31, 2001, 20 top executives and directors sold 2,989,178 shares of Enron stock for a
total of $116,977,511. At the top of the list was Lou L. Pai, chairman and CEO of Enron
Xcelerator, who made $33,629,380. Next came Kenneth L. Lay, chairman and CEO, who
made $16,103,181. Lay was followed by former president and CEO, Jeffrey K. Skilling, who
made $15,554,700. Skilling abandoned Enron in August after holding the top job at the
company for only six months.
Over the past four-year period, Enron’s top executives and directors took in nearly $600
million through the sale of company stock.
Kenneth Lay, former chairman and CEO of Enron, and Jeffrey Skilling, former CEO and
COO and other 16 people were convicted by the court and were proven guilty. Jeffrey
Skilling was sentenced to 24 years, 4 months in prison, and cannot be released before serving
less than 20 years, 4 months. In addition, he must pay $630 million to the government, which
includes a $180 million fine. Lay however died of a heart attack on July 5, 2006, prior to
sentencing. She could have faced a 45 year sentence otherwise.
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38. 4.5 Effect on the energy industry:
Repercussions for the energy industry from the Enron Corp. debacle are bound to be
numerous and complex for years to come. One of the immediate results was fewer
opportunities for exploration and production companies to arrange long-term commodity
price risk hedges.
Due to Enron fraud the energy sector was affected the most. Electricity and natural gas
companies are facing higher costs. Projects to build power plants, pipelines and transmission
lines are being put on hold. More than $12 billion of investment in new power plants were
postponed as financial markets, unnerved by Enron's sudden descent into bankruptcy,
effectively raised the cost of capital for energy projects. Plans to develop natural gas deposits
also were being cut back dramatically.
Affected companies and industry participants:
Name Loss / effects ($) Reason
W iser Oil Co. 6 million oil and gas hedges that it had
placed with Enron
Dominion Resources Inc. a special after-tax
charge of $97 million
estimated Enron exposure
Dynegy Inc. $67 million after-tax
charge
Exposure to Enron's bankruptcy
and costs related to the terminated
merger agreement.
4.6 Auditors:
In June 2002, Andersen was convicted in a US federal court of the crime of obstructing
justice by shredding working papers related to Enron audits because Andersen personnel
knew that the papers would be evidence in a SEC investigation. A criminal conviction would
mean that Andersen could not audit SEC registrants. Although only a small number of Arthur
Andersen's employees were involved with the scandal, the firm was effectively put out of
business; the SEC is not allowed to accept audits from convicted felons. The company
surrendered its CPA license on August 31, 2002, and 85,000 employees lost their jobs. In a
symbolic action, in August 2002, the Texas State Board of Public Accountancy revoked
Arthur Andersen’s license to practice accounting in the State of Texas because of the firm’s
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39. professional and ethical misconduct. In June 2005, the US Supreme Court overturned
Andersen’s conviction on a legal technicality, but did not absolve Andersen from guilt.
However, the damage to the Andersen name has been so great that it has not returned as a
viable business even on a limited scale.
4.7 Laws and regulations:
In response to the Enron fraud, which raised questions about the effectiveness of the AICPA
and auditing standards and the regulations of the SEC. Representative Michael Oxley, drafted
the Sarbanes-Oxley Act. The intent of the SOX Act was to protect investors by improving the
accuracy and reliability of corporate disclosures by
• closing loopholes in recent accounting practices
• strengthening corporate governance rules
• increasing accountability and disclosure requirements of corporations, especially
corporate executives, and corporation's public accountants
• increasing requirements for corporate transparency in reporting to shareholders and
descriptions of financial transactions
• strengthening whistle-blower protections and compliance monitoring
• increasing penalties for corporate and executive malfeasance
• authorizes the creation of the Public Company Accounting Oversight board to further
monitor corporate behavior, especially in the area of accounting
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40. Chapter Five: Current
Status of the Enron
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41. Chapter Five: Current Status of the Enron
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.The U.S. Securities and Exchange Commission (SEC) began an
investigation, and rival Houston competitor Dynegy offered to purchase the company at a
very low price. The deal failed, and on December 2, 2001, Enron filed for bankruptcy under
Chapter 11 of the United States Bankruptcy Code. Enron's $63.4 billion in assets made it the
largest corporate bankruptcy in U.S. history. After filing for bankruptcy Enron’s stocks were
delisted from the NYSE (New York stock exchange) was traded in pink sheets or OTC
markets before the whole liquidation process completed.
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42. r
| C hapter Six: Conclusion |
I______________________________________________________________________________________________________ I
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43. Chapter Six: Conclusion
The ENRON Scandal is considered to be one of the most notorious within American history;
an ENRON scandal summary of events is considered by many historians and economists
alike to have been an unofficial blueprint for a case study on White Collar Crime. Finally, we
conclude that the shareholders have lost $74 billion, thousands of employees and investors
have lost their retirement accounts, and many employees have lost their jobs due to
accounting fraud of ENRON. The main culprits of this fraud are CEO Jeff Skilling and
Former CEO Ken Lay.
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44. References
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45. r
References
> Assurance. (2016). 1st ed. Dhaka: institute of Chartered Accountants of Bangladesh.
> Bogni, R. (2016). Of Scale and Scandal. Wilmott, 2016(84), pp.10-11.
> Li, Y. (2010). The Case Analysis of the Scandal of Enron. International Journal of
Business andManagement, 5(10).
> Nelson, K., Price, R. and Rountree, B. (2008). The market reaction to Arthur
Andersen's role in the Enron scandal: Loss of reputation or confounding
effects?. Journal ofAccounting and Economics, 46(2-3), pp.279-293.
> Neuman, E. (2005). THE IMPACT OF THE ENRON ACCOUNTING SCANDAL
ON IMPRESSIONS OF MANAGERIAL CONTROL. Academy ofManagement
Proceedings, 2005(1), pp.S1-S6.
^ Saxena, R., Srinivas, K., Rai, U. and Rai, S. (2010). Auditing. 1st ed. Mumbai [India]:
Himalaya Pub. House.
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