3. Introduction/Background
Products/Services
Governance Structure
Regulatory Oversight
Key players of Enron’s Scandal
System used in Enron
Rise of Enron
Enron during 1993 to 2001
What went wrong?
Secret Revealed
Whistle blower
Fall of Enron
Reasons of ENEON downfall
Enron Bankruptcy
Reasons of Bankruptcy
End of Enron
Sarbanes-Oxley ACT(SOX) of 2002
End of Enron looters
Fate of Enron employers and investors
Conclusion
4. INTRODUCTION/BACKGROUND
OF ENRON
It was formed in 1932, in
Omaha, Nebraska. It was
reorganized in 1979, Inter North.
Houston-based energy and
energy related products trading
and distribution company
Famous for advocacy of energy
deregulation
In just 15 years, climb to be 7th
largest company in US (Fortune
500, 2000), with 21,000 staff
16th largest company in the
world
Enron complex in Downtown
Houston
5. In 2000, stock has crested at $90 a
share.
Market capitalization: $80 billion
Revenue $139 billion
Arthur Andersen acts as accountant and
consultant
Board of director
14 members, only 2 insiders
Most of the directors owned stock
Employee stock ownership and retirement
planning
Incentive purpose
Enhance company profit
6. Enron traded in more than 30 different products.
Products traded on EnronOnline include
Petrochemicals
Plastics
Power
Pulp and paper
Steel
Weather Risk Management
Oil and LNG transportation
Broadband
Derivative
Principal investments
Risk management for commodities
Shipping / freight
Streaming media
Water and wastewater
It was also an extensive futures trader including sugar,
coffee, grains, hogs, and other meat futures.
It created whole new markets for such oddball
"commodities" as broadcast time for advertisers,
Internet bandwidth.
10. KEY PLAYERS OF ENRON
SCANDAL
1 .Kenneth Lay
Former CEO of Enron, helped
start the company.
Enron extended to him $7.5
million revolving credit line,
which he reportedly used and
repaid with Enron stock 15
times within a period of just
several months
He quit as CEO in February
2001
He returned as CEO in August
2001until he resigned on Jan.
23, 2002
He quit the Enron board
altogether on Feb. 4.
Sherron Watkins said Lay was
"duped" by top executives.
Enron's chief executive in
the first half of 2001
Since joining the
company in 1990, Skilling
helped transform Enron
from a natural-gas pipeline
company into an energy-
trading powerhouse.
Between January and
August 2001 he sold off
about $20 million from
Enron stock
Resigned after the close
of markets on Aug. 14 2001
Charged with conspiracy,
fraud and insider trading.
2. Jeffrey
Skilling
11. KEY PLAYERS OF ENRON SCANDAL
3. David Duncan
Enron's chief auditor
at Anderson
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 Securities and
Exchange Commission
investigators.
4. Andrew Fastow
Former Chief
Financial Officer of
Enron
The mastermind
behind the deceptive
accounting practices
Lea Fastow (his
wife) also plead
guilty to signing and
filing a tax return that
did not include
income the Fastow’s
had received from
Mike Kopper .
3. David Duncan
Enron's chief auditor
at Anderson
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 Securities and
Exchange Commission
investigators.
4. Andrew Fastow
Former Chief
Financial Officer of
Enron
The mastermind
behind the deceptive
accounting practices
Lea Fastow (his
wife) also plead
guilty to signing and
filing a tax return that
did not include
income the Fastow’s
had received from
Mike Kopper .
12. Enron’s Accounting
Firm
The Powers Committee (appointed
by Enron's board to look into the
firm's accounting in October 2001)
came to the following assessment:
"The evidence available to us
suggests that Andersen did not fulfill
its professional responsibilities in
connection with its audits of Enron's
financial statements, or its
obligation to bring to the attention of
Enron's Board (or the Audit and
Compliance Committee) concerns
about Enron's internal contracts
over the related-party transactions”.
- Wikipedia
Key players of ENRON scandal
13. ENRON’S ACCOUNTING METHOD:
MARKET TO MARKET ACCOUNTING
SYSTEM
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. While using the method, income
from projects could be recorded, although they
might not have ever received the money, and in turn
increasing financial earnings on the books.
However, in future years, the profits could not be
included, so new and additional income had to be
included from more projects to develop additional
growth to appease investors.
14. Enron Named America's Most
Innovative Company
By 1993, Enron had set up a number of
limited liability special purpose entities
that allowed Enron to hide its liabilities
while growing its stock price. Analysts
were already criticizing Enron for
"swimming in debt," but the company
continued to grow developing a large
network of natural gas pipelines, and
eventually moving into the pulp and
paper and water sectors. Enron was
named "America's Most Innovative
Company" by Fortune for six consecutive
years between 1996 and 2001.
15. JEDI & CALPER
In 1993, Enron established a joint venture in
energy investments with CALPERS, the
California state pension fund (organization)
called the Joint Energy Development
Investments (JEDI).
16. HOW DID THE COLLAPSE
BEGIN?
JEDI
50 %
Interest
50 %
Interest
$ 250
Million
in Enron
Stock
High- risk
Asset
ENRON
CALPER1993
17. CHEWCO
In 1997, Skilling, asked CALPERS to join Enron in a
separate investment. CALPERS was 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
Investment 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.
19. CALPER
ENRON
Kopper
Chewco: An entity
supposedly independent of
Enron
125
383
JEDI
Enron
sole
partner
Big River
Little River
11.4
----
132
Barclay’s Bank
--
----
240 Enron
guarantee 6.6
11.4
Enron
aide
2001
20. PROGRESS OF ENRON
Growth for Enron was rapid in 2000, the company's
annual revenue reached$100 billion US. It ranked as the
seventh-largest company on the Fortune 500 and the sixth-
largest energy company in the world. The company's stock
price peaked at $90 US.
Enron build many SPE(Special Purpose Entities) to get the
investment for the Enron while showing to the investors
that these SPE were independent from Enron but in fact
these SPE raised the debt, investment and projects for the
Enron. These SPE gave the guaranty for the Enron which
increased the trust of the investors.
Enron stock exchange increased to the highest from the
companies existed between 1997 -2001.
In just 15 years, climb to be 7th largest company in US
(Fortune 500, 2000), with 21,000 staff and 16th largest
company in the world.
Market capitalization increased to $80 billion with
revenue $139 billion.
22. POLITICAL SUPPORT TO
ENRON BY BUSH GOVT.
Skilling and Kenneth contributed
in Bush government for the
political support from Bush to
make money and many unethical
laws.
Skilling's boss, the late Kenneth
"Kenny Boy" Lay, gave $531,800
to the campaigns of George W.
Bush, and Bush appointed two
justices to the Supreme Court --
John Roberts and Samuel Alito --
who may now have the power to
return the favor to one of Lay's key
lieutenants to help them in fraud.
24. SECRET REVEALED
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.
25.
26. Against Watkins letter Lay, the CEO ,arranged to
have a ENRON’S Law Firm Vinson and Elkins
that looked after all questionable deals.
Watkins continued to do her work and sold stock
of 30000 dollar in August,2001 and some in late
September.
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.
27. FALL OF ENRON :1
In 2001
October 2001 : Securities And Exchange Act Launches
A Formal Investigation Into Its “Related Party
Transactions”
November 8,2001 : Enron Restates Its Earning For
First Three Quarters Of 2001
December 2, 2001 : Enron Files For Protection From
Creditors In New York Bankruptcy Court
December 3, 2001 : Lays Off Five Thousand
Employees
28. FALL OF ENRON:2
In 2002
January 9 : The Justice Department
Announces That It Is Pursuing A
Criminal Investigation Of Enron
January 24 : The Hearings On Enron
Begin
February 4 : Improper Financial
Transactions And Self Dealing
October 31 : The CFO , Fastow Is
Indicted Of Being The Mastermind
Behind The Scandal .
29. FALL OF ENRON:3
In 2003
February3:TheCreditorsSueLayAndHisWifeToRecover$70
MillionInTransfers
July11:ItSettledItsAllegationsOfSECPaying$300Million.
January 14, 2004 : Fastow Agrees To Serve 10 Years In
Prison .
July 8 : Lay Surrenders After Being Indicted .
30. REASONS OF ENRON DOWNFALL
Bad investments in “new economy”
ventures
Off-balance-sheet entities created to
eliminate losses from the ventures
Rather than face the write-offs, they tried
to hide them with accounting
Many off-balance-sheet loans
collateralized by Enron stock
Opaque reporting encouraged short sellers
Form over substance in reporting
Self –dealing as CFO trading with the
company in troubled assets
Corporate ego overwhelmed control
systems
Restatements, corrections and new
disclosures
Collapse of confidence in reporting and
integrity of management
“Run on the bank”
31. ENRON’S BANKRUPTCY
Major reason of bankruptcy?
A substantial fraction of Enron’s reported profits
over a 4
year period (1996-2000) had been the result of
accounting manipulations
--- investigation by special committee of the Enron
board
Reported profit Actual profit
32. Bankruptcy Filing Came After Series Of
Revelations' That Giant Energy Trader Had
Been Using Special Purpose Entities
Company’s CFO In 2001 Stated That
Enron Has Established SPEs To Move Assets
And Debt Off Its Balance Sheet And To
Increase Cash Flow.
According To John, a University Law
Professor ,Once SPE Is Formed By Enron, It
Will Then Borrow Debt From Banks And
Enron Would Guarantee That Debt .
33. REASON FOR BANKRUPTCY (1)
Accounting gimmickry:
Unable to spot bad accounting practices and
company’s overstatement of profits
Conflict of auditor:
The multiple conflicting roles of auditor
Automatic renewal of auditing contracts
Affecting the independence of auditor
Accounting and staff policy failure:
Although a professor of accounting and a
dean for monitoring the company, but they all
fail in their profession
Disastrous loss in employees’ retirement fund,
but the ex-CEO has cashed his own stock
much earlier.
Political confusion:
Ironical relationship between governmental
monitoring parties and political parties.
34. REASON FOR BANKRUPTCY (2)Managerialism
Managers tend to build up their own
empires and scarify the
profits/benefits of the organization
Conflict of the board
Enron’s board of directors fail to
control and oversee the
management
The board had been benefited in
various relationship with the
company
Lack of independence of the
board
35. END OF ENRON
After all the red flags that indicated
Enron was up to no good, it was
later discovered that Enron
recorded assets as profits inflated,
or even fraudulent and nonexistent.
Offshore accounts were used to
cover debts and losses and were
excluded from the firm’s financial
statements. Enron also hired
public accountants to find
loopholes. This chart shows the
stock price dramatically drop when
the corruption was discovered.
36. SARBANES-OXLEY ACT(SOX) OF
2002
Sarbanes-Oxley ACT(SOX) of 2002 is a United
States federal law as a reaction to a number of
major corporate and accounting scandals.
The act contains that companies must “enlist and
track performance of their material risk and
associated control procedures”.
CEOs are require to vouch for the financial of
their companies.
Board of Directors must have audit Committees
whose members are independent of company senior
management.
Companies can no longer make loans to a
company director.
In addition, penalties for fraudulent financial
activity made much more severe.
37. END OF LOOTERS OF ENRON
Arthur Anderson: The company
surrendered its CPA license on August 31,
2002, and 85,000 employees lost their jobs.
Jeffrey Skilling: He was sentenced to 24
years and 4 months in prison.
Kenneth Lay: He was sentenced of 10-
years jailed with millions of fine.
Fastow and Lea: Fastow and Lea
both pleaded guilty to two charges of
conspiracy and was sentenced to ten
years.
David Duncan: He pleaded giulty
with the maximum sentence for his
crimes is ten years.
38.
39. END OF ENRON'S EMPLOYEES
The day after filing for bankruptcy, Enron fired
5,000 workers, one quarter of its 21,000
employees and they have lost their health care
and life savings.
Laid-off workers received a mere $4,500
severance payment.
More than 20,000 of Enron's former employees won a
suit of $85 million for compensation of $2 billion that
was lost from their pensions.
$7.2-billion settlement from a $40-billion lawsuit,
was reached on behalf of the shareholders.
Workers had received one week’s pay for each
year of work and one week’s pay for each $10,000
a year in salary.
Enron paid $55 million in retention bonuses to
about 500 top executives.
ENRON’s employees Retirement System lost $24
million and smaller retirement investment funds
lost another $3.3 million.
40. 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 ethics.
We see ethic problem would bring a fatal strike to a
company, no matter how it was successful.
There is something money cannot buy, integrity
is one of them.
