This document outlines key people involved in the Enron scandal and what went wrong. It describes Ken Lay as the optimistic CEO who avoided controversy, and Jeffrey Skilling as a proponent of big ideas less interested in details. It notes Arthur Andersen violated public accounting practices by auditing Enron internally and externally. The main causes of Enron's collapse are described as deception through off-balance sheet entities used to hide debts and losses, and a complex accounting scheme involving thousands of partnerships to inflate profits and hide risks.

1. Ken Lay, Chairman and CEO
Big picture; optimistic; tended to avoid
controversy
“Ken gravitates toward good news”
Jeffrey Skilling, President
Proponent of big ideas; less interested in
details
“Skilling is a designer of ditches, not a
digger of ditches.”

2. David Duncan, Chief Auditor
His job was to check accounts.
He was an Andersen employee for 20 years,
who was in charge of the Enron account
since 1997.
Andrew Fastow, CFO
Ambitious; unwilling to let the rules get in the way
“I don’t know that he ever had a moral compass”

3. Sherron Watkins Vice President
She is considered by many to be the
whistleblower who helped to uncover
the Enron scandal in 2001.
Richard Causey
Enron's former chief accounting
officer, Causey handled Enron audits
for Arthur Andersen LLP before
joining Enron.

4. WHAT WENT WRONG

5. WHAT WENT WRONG
In Enron
The Enron deception was practicing the accounting
fraud by creating the SPS (Special Purpose Entity) which
exchange the debt and failing investment into sales
revenue in financial statement.
This Fraud is done by the cooperation of Enron CFO, few of
Enron people and Andersen’s chief auditor for Enron

6. WHAT WENT WRONG
In Arthur Andersen Public Accountant
As an organization of public accountant
Arthur Andersen violated the regulation
of the Public Accountant practices
because Andersen was not only as the
internal auditor but also as the external
auditor of Enron.

7. 1993-2001: Enron also used complex &
dubious accounting schemes
• to reduce Enron’s tax payments;
• to inflate Enron’s income and profits;
• to inflate Enron’s stock price and credit rating;
• to hide losses in off-balance-sheet subsidiaries;
• to engineer off-balance-sheet schemes to funnel
money to themselves, friends, and family;
• to fraudulently misrepresent Enron’s financial
condition in public reports.

8. Accounting Scheme
Enron’s rapid growth in late 1990s involved
large capital investments not expected to
generate significant cash flow in short term.
 Maintaining Enron’s credit ratings at an
investment grade (e.g., BBB- or higher by
S&P) was vital to Enron’s energy trading
business.
One perceived solution: Create partnerships
structured as special purpose entities
(SPEs) that could borrow from outside
investors without having to be consolidated
into Enron’s balance sheet.
SPE 3% Rule: No consolidation needed if
at least 3% of SPE total capital was owned
independently of Enron.

9. Accounting Scheme
Enron’s creation of over 3000 partnerships
started about 1993 when it teamed with Calpers
(California Public Retirement System) to create JEDI
(Joint Energy Development Investments) fund.
Enron initially thought of these partnerships as
temporary solutions for temporary cash flow
problems.
Enron later used SPE partnerships under 3%
rule to hide bad bets it had made on speculative
assets by selling these assets to the partnerships in
return for IOUs backed by Enron stock as collateral!
(over $1 billion by 2002)

10. Accounting Scheme
• In Nov 1997, Calpers wants to cash out of JEDI.
• To keep JEDI afloat, Enron needs new 3% partner.
• It creates another partnership Chewco (named
for the Star Wars character Chewbacca) to buy out
Calpers’ stake in JEDI for $383 million.
• Enron plans to back short-term loans to Chewco to
permit it to buy out Calper’s stake for $383 million.
• Chewco needs $383 million to give Calpers
• It gets…..
— $240 mil loan from Barclay’s bank
guaranteed by Enron
— $132 mil credit from JEDI (whose
only asset is Enron stock)
•Chewco still must get 3% of $383 million
(about $11.5 million) from some outside
source to avoid inclusion of JEDI’s debt on
Enron’s books (SEC filing, 1997).

11. Accounting Scheme
Chewco Capital Structure: Outside 3%
$125,000 from William Dodson & Michael
Kopper (an aide to Enron CFO Fastow)
$11.4 mil loans from Big River and Little
River (two new companies formed by Enron
expressly for this purpose who get a loan
from Barclay’s Bank)

12. Conclusion
• With the fall of Enron due to the accounting fraud, many began to
question the accounting practices corporations throughout the United
States.
• The fall of Enron lead to the dissolution of the accounting firm Arthur
Anderson. Which at the time was one of the “Big Five” accounting
firms.
• Following the collapse of Enron the Sarbanes-Oxley Act was passed on
July 2002. The act established the Public Company Accounting
Oversight Board to oversee the auditors of public companies and to
protect the interst of investors.
• In November 2004 Enron emerged from its bankrupsy and on
September 2006 they sold Prisma Energy International Inc. their last
buisness.
• As of 2007 Enron chenged it name to Enron Creditors Recovery
Corporation.
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