Enron Corporation, once a leading energy company, filed for bankruptcy in December 2001, resulting in massive job losses and a devastating impact on employees' retirement funds. The company's downfall was attributed to deceptive accounting practices, particularly the use of mark-to-market accounting, which allowed it to report inflated profits while hiding significant debts. Whistleblower Sherron Watkins' testimony unveiled these practices, leading to a federal investigation and the eventual collapse of the company.

1. A CASE STUDY ON THE RISE
AND FALL OF AMERICA’S
LARGEST ENERGY
COMPANY

2. 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 ofnearly $101 billion
in 2000.

3. INCUBATION
• Enron's life began asan interstate pipeline company through the merger of
Houston Natural Gasand Omaha-based InterNorth. Kenneth Lay,the
former chief executive officer of Houston Natural Gas,became CEO,and
the next year won the post of chairman.
• It was a result of deregulation of the energy services in America by
the Reagan Government.
• Kenneth Lay was being seen as the ambassador of deregulated
energy services and received billions in subsidy be the then
President George Washington Bush.

4. ACHIEVEMENTS
• It was entailed as the most innovative American company
by the fortune 500 6 times.
• Growth for Enron was rapid. 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.
• It had a net worth of 70 billion dollars until bankruptcy.
• It had diversified outside the energy sector with 4 other
subsidiaries.

5. ALLIED VENTURES
– EnronOnline (EOL), the firm's energy trading business that
became the world's largest business-to-business web site. In
– Enron Broadband,
– Enron NetWorks (focusing on eCommerce), and
– Enron Energy Services (providing retail energy products and
services to business customers) were created and appeared to
be adding to the firm's bottom line.

6. THE YEAR OF BANKRUPTCY : 2001
• In August 2001, Jeffery Skilling, CEO, Enron Corporation
resigned citing personal reasons. December 2001, Kenneth
Lay, Chairman, Enron Corporation filed for bankruptcy.
• Over 20,000 employees lost their jobs
• Top executives paid bonuses worth $ 55 billion dollars
• Employees lost $1.2 billion of retirement funds
• Retirees lost $2 billion pension funds
• Enron’s top executives cashed $116 million dollars worth
stock

7. • The stock price literally fell to 0.6 by October 2001.
• Investment worth $53 billion in the company has almost
become of no value.
• Kenneth Lay sold stocks worth $300 million dollars
• Jeffery Skilling sold stocks worth $200 million dollars
• Lau Pai sold stocks worth $250 million dollars, all of which
later got devalued to nothing.
• Employees were still encouraged to keep their stocks.

8. THE SCANDAL: WHAT EXACTLY WAS HAPPENING AT ENRON ?
• After Louis Bougat was sacked as the CEO of Enron due to
his harsh trading practices and deployment of corporate
funds into his personal account, termed as the Vahalla
Scandal, Jeffery Skilling in 1990 was appointed as the CEO.
• He was termed as guy with big ideas and vision.
• He agreed to accept the position with the acceptance of
incorporating mark to market accounting policy.
• The policy was approved by Arthur Anderson , the firm’s
auditor and hence, approved by the S.E.C

9. MARK TO MARKET ACCOUNTING
• It is a policy wherein the profits of a transaction can be
recorded before they are realised. It is also termed as
Hypothetical Future Valuation.
• For example, with acquisition of an XYZ firm, the acquirer
estimates a revenue of “x” amount, this amount can find it’s
place in the income statements of the company, even if they
are not realised.
• Enron under Skilling moved to become a stock market for
natural gases.

10. • Skilling was much of an aggressive gambler and had good
selling tactics. In his tenure as CEO, he became a
personality benchmark for the employees.
• He introduced a Performance review committee for
employees the evaluated the performance of employees in
line with the objectives of the company and this resulted in
15% employee termination every year.
• This shows the aggressive and risky attitude of the CEO,
which also channelled to its’ employees

11. • Due to this accounting policy Enron always looked good on
paper.
• Much of the income in the energy sector is generated by
trading, hence, Enron’s earnings came by keeping its’ stock
prices high.
• This is the major flaw in the working of the company,
instead of managing its’ operations and effectively delivering
profitable energy services, the motive was to keep up the
stock price.

12. • Enron had powerplant operations all over the world, and
none of them were turning profitable.
• Enron decided to open a Powerplant in Dhabol, India with an
investment of $1 billion dollars.
• The plant could not fall through as the services were too
expensive for the Indian Market.
• Owing to the accounting policy, Enron distributed $53
million dollars to it’s executives based on the profits earned
on paper by the power plant which wasn’t real.

13. • Kenneth and Skilling’s believe in free markets brought about
a new ideology in the traders of Enron.
• They were taking enormous risks on the prices of enron
stocks and making money for their company.
• In the energy business in America, you earn through
trading, sometimes you win and sometimes you loose.
• But Enron never lost, it’s stock price was always up, and
only made it’s traders make money

14. • As failure was not an option, and Enron had to ensure real
money to cash into the organisation after the power plant
disaster, Enron acquired Portland General Electric, that
made it enter the electric services business.
• All the stocks of PGE which were highly priced got converted
into Enron’s and it gave Enron control over the newly
deregulated electricity market of California.
• Deregulation for the PGE meant they had to join hands to
withstand competition and hence the merger with Enron

15. • Analysts rated Enron highly in the stock market.
• Whoever did not rate Enron highly became its’ enemy, one
such was John Oslon who did not rate the company’s buying
recommendations.
• He was sacked by Merill Lynch, and Andrew Fastow, CFO,
Enron Corporation in return gave 2 jobs worth $50 million
dollars to the bank executives in the company.
• While Enron’s stock prices kept soaring, its’ businesses kept
loosing money

16. • With the coming of the dotcom boom in the late 90s, Jeffery
decided to enter the cyberspace market.
• Enron decided to turn bandwidth into a commodity from 7 AM
TO 7 PM for its customers.
• It associated itself with “Blockbuster Company” to provide
bandwidth services and deliver movies on demand
• With this association the stocks soared 34% in 2 days.
• But the truth was, Enron was struggling with the technology
and the demand was bleak.

17. • The deal with Blockbuster flunked, but Enron had already
booked its’ profits from the deal and future projection of $53
million dollars of profit in books.
• With nearing 2000, Enron lost out of ways to look profitable
in broadband business.
• It’s executives began to sell the stock. Ken Rice who was an
employee for 15 years sold stock worth $53 million dollars.
• Cliff Baxter, the sales officer sold $35 million dollars worth
of his stock, as they could see the downfall.

18. FINANCIAL FANTASYLAND OF ANDREW FASTOW
• Andrew Fastow was the CFO of Enron Corporation and had
the responsibility to propping up stock price by hiding its’
debt.
• Enron was $30 billion dollars worth debt and Fastow had to
burry the same.
• Fastow created 100s of phony companies for writing off its’
debt to them, companies which never existed.
• Fastow was made partner of these companies while he was
CFO of Enron, which meant he was making transactions with
himself

19. • Fastow’s best creations was LJM, a phony company to hide
debts of Enron. It was meant to trade only with Enron.
• Using loan attached securites of Enron as collateral, Fastow
generated funds for LJM from various banks and financial
institutions.
• With promised return of 2000%, 96 financial institutions
invested in LJM with a minimum investment of $25 million
dollars each.
• He could guarantee profits from LJM using assets of Enron.
• Fastow was skimming a little bit for himself from every
transactions , and ended up making $45 million dollars.

20. SELLING TO PURCHASE BACK
• To maintain its’ cash balances, Enron took some bizarre
steps.
• Meryll Lynch at the end of the fourth quester of 1999, bought
3 Nigerian power barges owned by Enron, which was
blatantly illegal as it had nothing to do with Meryll Lynch’s
Business.
• It was only to get them off the books of Enron and then buy
it back again from the bank.

21. CALIFORNIA: THE ELECTRICITY MAGNET
• With collaboration with PGE, Enron had access to the
deregulated market of electricity in California.
• To make the numbers in the quarterly balance sheets,
California played a major role.
• Tim Beldon, a west coast manager of Enron, came up with
loopholes to make money from the electricity market for
Enron.
• With complete deregulation Enron had complete access to the
power plants of California.

22. • California began to see a lot of power cuts in the winter
months of 2000, wherein the electricity usage was half.
• Complete Blackouts had become regular.
• It was an idea of creating Artificial shortage to soar up
electricity prices in California and make money.
• With power cuts of 3-4 hours in a day prices soar by 30-
35%.
• With top electricity companies having major maintenance
issues regularly and returning when prices were booming,
only arose doubts in the minds of the governor.

23. • A betting of $2 Billion dollars had been made on electricity
price in California, Governor Davis declared emergency and
seizure of Power Plants in California.
• Along the same time, George Walker Bush was sworn in as
President.
• Kenneth Lay having good relations with his Father, who had
helped him having subsidies during his tenure as president,
Bush refused to federal pricing of electricity in California
• FERC(Federal Electricity Regulation Council) refused to look
into the matter as his chief was appointed with Lay’s
recommendation.

24. • Enron exploited California’s condition completely to make
money through artificial shortage.
• There was complete blackouts in California at times.
• People had to be rescued from elevators by the police in
various residential areas.
• The electricity bills of the common man kept on increasing.
• Enron began to earn a bad name for itself with people
showcasing their anger in California.
• Protests happened when Jeffery came to san fransisco for a
conference.

25. • Realising that the downfall was near, CEO Jeffery Skilling
sold his stock worth $200 million dollars and resigned from
his position in August 2001. Kenny Lay, took over as CEO.
• Enron ran out of ways to keep the stock price soaring.
• With the resignation of Jeff, confidence in the stock market
became bleak.
• Before filing for bankruptcy, Kenneth Lay, also sold his stock
worth $300 million dollars. Only the poor employees were
encourages to keep stock only to have nothing left in their
kitty.

26. THE WHISTLEBLOW
• OnFeb14, 2002, Sherron Watkins, the Enron whistleblower, testifies
before aCongressional panel against Skilling and Lay.Sherron Watkins is an
Enron vice president. Shewrote to Layin the past expressing concerns
about Enron's accounting practices.
• She with resignation of Cliff Baxter began to work directly
under Andrew Fastow, and came across bizarre accounting
practices with Fastow’s companies.
• This lead to SEC announcing enquiry and therefore Arthur
Anderson shredded 1 ton of paper records of Enron
Corporation.