Enron was an energy company that collapsed in 2001 due to an accounting fraud scandal. The document discusses how Enron achieved great success initially by innovating in the energy market. However, it then describes how Enron used complex accounting practices and off-balance sheet entities to hide debts and inflate profits. This allowed top executives to profit through stock sales even as the company's financial situation deteriorated. When the fraud was revealed, Enron declared bankruptcy, destroying the savings of employees and shareholders. The document analyzes the roles of Enron's management, accounting practices, and lax regulatory oversight in enabling the massive fraud.

1. Enron: A reciepe of Corporate
Social Irresponsibility

2. Group Members
Prashant Mahalle
Arya Kulangarathodi

3. Introduction

4. Introduction
• Enron Corporation was an American
energy, commodities, and services
company based in Houston, Texas.
• 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.

5. Achievements
• Fortune named Enron "America's Most Innovative
Company" for six consecutive years.
• It was also an extensive futures trader, including
sugar, coffee, grains, hog, and other meat futures.
• At the time of its bankruptcy filing in December
2001, Enron structured into seven distinct business units.

6. Scandal
• 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.

7. • The Enron scandal was a financial scandal involving Enron
Corporation and its accounting firm Arthur 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

8. Enron’s Business

9. 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.

10. Business
Model
• 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 North America.

11. Products
Gas
Oil
Broadband

12. Electricity
Pulp and Paper
Water
Products

13. Accounting
& The Fraud

14. • 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

15. Bankruptcy
• 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.

16. Why?
• How did it happen?
Accounting method
Management group
US monitor system

17. Accounting
method
• Enron’s nontransparent financial statements did not clearly
depict its operations and finances with shareholders.
• 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 recorded.

18. Example:
• 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.
Accounting
method

19. 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 financing.
• 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

20. Management
group
• Corporate governance
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
true performance.
• 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 risks.

21. 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.

22. Business
Ethic
• How about the CEO and directors deal with fraud?
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 bloom.

23.  Ethics cannot be fragmented… or fragmentation goes
against ethics
 Company governance must integrate the active
participation of all stakeholders who affect the
organization's activities or who are affected by these
activities
 And in all four domains : profitability, equity, dignity
and viability
 WE also encourage this fragmentation (Shadow)
Lessons to Learn from this Case

24. Conclusion

25. 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.

27. 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 ethics.
We see ethic problem would bring a fatal strike to a
company, no matter how it was successful.

28. Recommendations
• Incentives must be paid after a project is done or at
least when the company is really profiting from that
certain project.
• Operational risk should be minimized and there should
be some sort of check up.
• Careful selection of accounting approach and financial
structures to use.
• Minimized payment in stocks.

31. THANK YOU!!!!!