This presentation describes the two biggest scams - Enron Scandal and Lehman Brother Scam which shook the world economy in two different decades.

1. ACCOUNTING SCAMS
PRESENTED BY:
GARIMA GOEL
ANJALI TEWATIA
M.COM SEM 3 GROUP A

2. INTRODUCTION
• We have selected two ACCOUNTING SCAMS as
topic for literature review which are as follows:
 Enron Accounting scam
 Lehman brothers Accounting scam
• Reason- These were the two biggest scams of all
time which shocked the entire world and involves
manipulation of accounting techniques and
practices.

4. ENRON ACCOUNTING SCAM
• Enron is a Houston based energy firm which is
founded by Kenneth Lay.
• In its 16 years lifespan, it becomes the world’s
largest energy trading company with
approximately 37000 miles of pipeline.
• Credited to create market trading in energy.
• 22th rank in the fortune’s 100 best companies list
in America in 2000.
• first foreign company to begin construction of a
power plant in UK

5. OVERVIEW
• Enron has three main business units:
1.Wholesale Services: It was allowed customers to sell or
buy commodities on their own terms by marketing a
number of wholesale commodity products.
• 2. Energy Services: It was the largest Energy services
provider with a total value of $2.1 billion in 2000. It was
used to develop and execute energy strategies of various
companies.
• 3. Global Services: It included North American pipeline
businesses of Enron transportation services with an
international level engineering business. Enron online was
the world’s largest e-commerce sitting which handle real-
time transaction for global commodity.

6. ENRON PROGRESS
• Employees increases from 15076 in 1985 to
18000+ in 2000.
• Operating countries number increases from 4 to
30+ in 2000.
• Its assets value increased from $12.1 billion to
$33 billion in 2000.
• It had 14 power projects under construction in 11
countries and 51 power projects in operation in
15 countries in 2000.

7. “Profit” making formula
ENRON
Partnership
Special
Purpose
Entity
(SPE)
Account
In
Profit
3
4
2
1
5
1. Enron sets up partnership using stock as funding
2. Partnership sets up SPE
3. SPE agrees contract to pay Enron if its
investment declines in value
4. Payment made as investment declines
5. Payment posted as profit, even though it is
Enron’s own money
”“A huge hole had
opened in the
accounts.
-BBC

8. HOW DID THEY HIDE ACCOUNTING
IMPROPRIETIES
• Used some powerful accounting techniques that the price of its
share becomes high.
• These techniques are referred to as aggressive earnings
management techniques.
• It used many manipulative accounting practices especially in
transactions with Special Purpose Entities (SPE) to decrease losses,
enlarge profits, and keep debt away from its financial statements in
order to enhance its credit rating and protect its credibility in the
market.
• It was tried to accomplish favorable financial statement results, not
to achieve economic objectives or transfer risk. These partnerships
would have been considered legal according to “applicable
accounting rules”. The plan fell through, but it helped Enron to
made $110 million venture capital cash as profit.

9. CONTINUED…
• These practices were generally disclosed investors but this
inadequacy may result in conflict of interest to ignoring the
fact that its top management was enriching them, which
simply represents fraud.
• Enron’s structured finance transactions were so complex
that disclosure becomes useless. That is why investors had
to rely on their business judgment of Enron’s management,
but it is failed due to conflicts of interests. It clears when it
was known that most of the senior executives of Enron
served as the SPE’s principals, receiving massive amounts of
compensation and returns, in order to skew their loyalty in
favor of the SPEs.
• In this way Enron managed to hide their accounting
improprieties and made profits through them.

10. Role of Arthur Andersen
•Andersen executives including chief
Enron auditor David Duncan, decided to
consult lawyers over whether or not the
partnerships were legal.
•Andersen told Enron that it had no
•At some point after this, staff in Andersen’s Houston
office began shredding documents relating to Enron.
•Was paid $52mn in 2000, the majority for non-
audit related consulting services.
other choice but to change the way it was accounting
for its special partnerships.

11. The True Picture
Year Reported
Income
Revised
Income
True debt
restated by
True equity
restated by
1997 $105m $77m Up $771m Down $258m
1998 $733m $600m Up $561m Down $391m
1999 $893m $645m Up $685m Down $710m
2000 $979m $880m Up $628m Down $754m
Reported and revised income, debt and shareholder equity 1997-2000
following special partnership revelations.
Enron’s Accounts: The Company announced the restated figures

12. EFFECT ON ACCOUNTING
ENVIRONMENT
• Enron’s scandal effected both inside and outside accounting
profession domestically and globally. This can be explained as
below:
 In Relation to the Exchange
Great care is undertaken in the listing of foreign companies. It
does not allow a company until it conducts due diligence
analysis of prospective issuers prior to their listing.
 In Relation to the Regulator
Regulations passed to ban practices to hide losses from
investors and report unrealized profits. Capital market
regulators (Central Bank as well as CMA) publish a list of
auditing firms that are licensed to carry out auditing for listed
companies on CASE and exert effort in the regulation on
credit rating agencies, their competency and the credibility of
the ratings they publish to the market

13. CONTINUED…
In Relation to Auditing & Accounting
Practices: Expected changes in the
international accounting standards and the
way information is presented in financial
statements or corporate report modeling.
Now more emphasis placed on the value of
reporting where it is expected that capital
markets will punish companies whose
financial statements are regarded opaque or
uncommunicative.

14. CONTINUED…
In Relation to Investors: Investors understand
the underlying reasons for the rise and fall in
stock prices. Now investors reviews the board
of the company, its strategy, its industry, its
competitive position, analyze long term
projections, cash flows, financial terms and
changes in the share price before investing in
company

15. CONTINUED…
In Relation to Board of Directors &
Management: The Board understand the nature
of and strategy behind major transactions,
including complex business structures and is
willing to challenge whether such transactions
are beneficial to the company and make good
business sense. It is fully aware of major risks
inherent in the business, especially in complex
financial instruments and structured financial
transactions and monitors the
integrity of the financials to ensure transparency
and disclosure of the firm’s financial position

16. RECOMMENDATIONS
• Educating investors about the importance of
disclosure of listed Companies .
• Great care should be undertaken in the listing of
foreign companies to avoid having improprieties.
• Ensure timely and full disclosure of information
from issuers
• Market regulators should be aware of
sophisticated accounting practices.
• Capital market regulators should have published
a list of auditing firms that are licensed to carry
out auditing for listed companies

17. CONTINUED…
• Pension funds regulations should be revised to ensure
that investments are properly placed.
• Barriers should be reinforced between commercial
banking, investment banking and insurance arms of the
same financial institution to avoid potential conflict of
interest.
• Separate investment analysts from the underwriters of
initial public offerings.
• The board should ensure the effective performance of
its role to oversee the general performance of the
company and its strategy in the market

18. CONCLUSION
Enron’s fall is known as the world’s biggest fraud ever. It embarked
several issues for the attention of reformers. It suggests
 Look at the role of business funds in political campaigning,
 Influence of energy companies on national energy policy,
 Over-exposure to one stock and preventing a company from
investing its pension funds in its own stock.
 To implement these restriction ,reformers should have
 higher standards of transparency and disclosure in the audit
profession,
 potential conflicts of interest between consultancy and auditing
work undertaken by financial houses.
 Needs tighter regulation on financial derivatives trading.
These are the only way that could be done to avoid such Enron like
crisis in today emerging markets of accountancy.

19. BIBLIOGRAPHY
• Websites:
 http://news.bbc.co.uk/1/hi/in_depth/business/2002/enron
/
 http://specials.ft.com/enron/index.html
 http://en.m.wikipedia.org/wiki/EnroN
 http://www.termpaperwarehouse.com/essay-on/Enron-
Scandal/125570
 http://www.rivernorthflyfishing.com/?p=8
 http://m.journalofaccountancy.com/CurrentIssue/Article/2
002%247%24apr%247%24theriseandfallofenron.jofa

20. • Journal:
• Benston, G .J. & Hartgreaves, A.L. (2002) Enron: what
happened and what can we learn from it. Journal of
Accounting and Public Policy, vol.21, no.2, pp.105-127
• Clark, W.W. Demirag, & I. Enron (2002): The failure of
corporate governance .The Journal of Corporate
Citizenship, vol. 8, p p. 105-122
• Anon. (2002).Four committees in search of scandal: the
politics of Enron. The Economist, vol.362, no.8256,
2002, pp.41-42