Enron filed for bankruptcy in December 2001. It had grown to be the 7th largest company in the US through energy brokering and trading but collapsed due to accounting fraud. Executives received substantial pay even as the company failed and faced lawsuits for insider trading. An internal whistleblower warned of hidden losses through off-balance sheet entities but the ineffective audit committee failed to investigate. As losses mounted and credit ratings fell, Enron had a cash crisis and finally filed for bankruptcy when its stock price collapsed. The fallout included Arthur Andersen being shut down and criminal charges against top executives.

1. Enron

2. Submitted to:
Shaikh Masrick Hasan
Assistant professor,
Department of Finance
Jagannath University, Dhaka.
Submitted by:
MD. Asif Ibne Ahsan
On behalf of Group
MBA 6th Batch
Department of Finance
Jagannath University, Dhaka.
.

3. Members of Group:
SL No. Name ID no
1 MD. Asif Ibne Ahsan M150203047
2 Alim Ehsan Dipon M150203056
3 Akib Hossain Chowdhury M150203066
4 MD. Tariqul Islam Mukith M150203075
5 Tanvir Mahmud M150203083

4. Now Presenting …
MD. Asif Ibne Ahsan
Id: M150203047

5. ENRON
• By early 2001, Enron had morphed into the 7th
largest U.S. company, and the largest U.S.
buyer/seller of natural gas and electricity.
• For seven years in a row, Enron had been ranked
as Fortune’s most innovative company.
• Enron was heavily involved in energy brokering,
electronic energy trading, global commodity and
options trading, etc.
• On December 2, 2001, Enron files for
bankruptcy.

6. OECDPrinciplesof CorporateGovernance.
The 1999 OECD Principles cover five basic subjects:
• Section I: The Rights of Shareholders ( 6 )
• Section II: The Equitable Treatment of Shareholders (3 )
• Section III: Role of Stakeholders in Corporate Governance
( 4 )
• Section IV: Disclosure and Transparency ( 4 )
• Section V: The Responsibility of the Board ( 6 )

7. ENRON
• Formed in 1985 by Kenneth Lay from a merger of Houston
Natural Gas and Internorth . The first nationwide natural gas
pipeline network in Houston, Texas
• Started trading futures in Gas Contracts.
• Soon got the control of over 25% of the all Gas business.
• Entered into the derivatives business.
• Began trading in commodities like steel, coal, weather risk etc.
• By 2000, even stepped into the dot.com business.

8. 1990
• stock price was rising steadily.
1999
• stock price increased dramatically
2000
• Price stood at over $70 at beginning of the year
• price peaked at just over $90 by the end of the year
End of 2000
• stood at just over $80
2001
• stock price declined sharply
• beginning of December 2001 the stock stood at less than $1.

9. Enron’s Accounting Fraud
Diagram

10. Now Presenting …
Alim Ehsan Dipon
Id: M150203056

11. EXECUTIVE
REMUNERATION

12. • Apart from their salaries, Enron executives received
substantial benefits. In 2001 the compensation committee
gave approval to plans to award 65 executives a total of $750
million for their work in 2000, which compared with Enron’s
net income in that year of $975 million.
• It was also alleged that executives may have benefited from
insider trading, that is, dealing in Enron’s shares using
privileged information.
• In October 2001 the law firm of Milberg Weiss Bershad Hynes
and Lerach filed a class action law suit against Enron, alleging
insider trading.
• Enron employees (many of whom were also Enron
shareholders) were invited to join the class action which
accused 29 officers and directors of insider trading.

13. THE BOARD AND
THE AUDIT
COMMITTEE

14. Enron’s audit committee appeared to be ineffective in
preventing Enron’s collapse.
• Of the six people on the audit committee, the independence
of two members was questionable. Three members of the
audit committee were located outside the United States,
Finally, the chair of the audit committee had held the position
since 1985 and in October 2001.

15. • It could be argued that employees as a group were more
seriously affected by the fall of Enron than were shareholders,
since the employees not only lost their jobs, but found their
pension entitlements were also seriously affected.
• ‘Enron’s workers have lost not just their jobs, but their
pensions and savings too.

16. Now Presenting …
Tanvir Mahmud
Id:M150203083

17. SHERRON WATKINS –
WHISTLEBLOWER
• In mid-2001, Sherron Watkins, an accountant at
Enron, was becoming increasingly alarmed about the
use of off-balance sheet financing schemes.
• In June 2001 Watkins was working for Andrew
Fastow and came across a number of entities
(known by Enron staff as ‘Raptors’) that were hiding
losses amounting to hundreds of millions of dollars.
• The Raptors were capitalized by Enron stock, and as
Enron’s stock price fell during 2001, Enron had to add
more stock.

18. • Skilling abruptly resigned on 14 August 2001 and the
following day Watkins decided to send an
anonymous memo to Kenneth Lay, outlining her
concerns.
• Watkins revealed in the memo that she had worked
at Enron for eight years. Months later, following
Enron’s bankruptcy, the memo was revealed in the
media and Watkins became widely regarded as a
whistleblower.

19. Extracts from Sherron Watkins’
anonymous memo to Enron CEO Ken
Lay
• Enron has been very aggressive in its accounting –
most notably the Raptor transactions and the
Condor vehicle.
• According Watkins statement, the valuation issues
can be fixed and reported with other goodwill write-
downs to occur in 2002.
• Condor and Raptor deals in 1999 and 2000, enjoyed
a wonderfully high stock price, many executives sold
stock, then tried and reversed or fixed the deals in
2001 and it was a bit like robbing the bank in one
year and trying to pay it back 2years later.

20. • Watkins did manage to arrange a meeting with Lay
on 22 August 2001 and subsequently wrote a
number of further memos to him.
• Watkins advised that a law firm should be hired to
investigate the Condor and Raptor transactions.
• By 29 August 2001, Fastow had discovered that
Sherron Watkins was the author of the anonymous
memo wanted her fired.

21. Now Presenting …
Akib Hossain Chowdhury
Id:M150203066

22. ENRON’S CASH CRISIS
• Enron’s cash crisis mainly started in Aug 14, 2001.
• When Jeff Skilling resigned and Kenneth Lay became CEO once
again.
• Stock prices began to fall, as investors were uncertain about
the company’s stability.
• This started a chain reaction: Enron had hedged against its
own stock, so as long as the stock price was declining, it could
not recover its losses.

23. • In September 2001, when Enron was desperately seeking sources of
cash, it was thought that a wealthy equity investor might be able to
help save the company.
• Three Enron executives flew to Omaha to see, if Warren Buffet, the
head of Berkshire Hathaway, would be prepared to invest in Enron.
• Buffet’s apparent response was that he was not interested and
would only invest in businesses that he could understand.

24. • During October 2001 Enron was becoming desperate to negotiate
additional credit.
• Although the company was trying to maintain in public that its
trading was strong.
• Credit agencies such as Moody’s Investors Service began to
downgrade Enron’s debt.
• As a result of the lower credit ratings, Enron’s financing costs
increased and lenders demanded early repayment.

25.  December 2001,
Enron finally filed
for bankruptcy.
 It’s share price
had collapsed from
about $95 to under
$1.

26. Now Presenting …
MD. Tariqul Islam Mukith
Id:M150203075

27. CONSEQUENCES OF ENRON’S
COLLAPSE
• The remnants of Enron were due to be restructured as Prisma
Energy International Inc.
• The major audit firm Arthur Andersen became one of the
casualties of the Enron collapse
• Other casualties of the Enron saga included JP Morgan Chase
and Citigroup, which were each fined nearly $300m for deals
with Enron
• Merrill Lynch, which was fined $80m for a transaction on
which it made a profit of only $500,000

28. DISCUSSION
• Deakin and Konzelmann (2004: 136) argue that part of Enron’s
problems could be attributed to its decision to become
involved in derivatives trades, particularly in markets such as
broadband.
• Enron was known as a very competitive company, which
rewarded its staff with high salaries and large bonuses, but at
the same time used aggressive job evaluation and firing
policies.
• As regards the auditors, Arthur Andersen had carried out both
audit and non-audit services, giving rise to a potential conflict
of interest.

29. • The firm of Arthur Andersen had received from Enron $25m for
audit services and $27m for non-audit services. Arthur Andersen
also acted illegally by shredding and deleting documents.
• Ben Glisan, former Treasurer at Enron, became the first executive to
be sentenced to prison after pleading guilty to criminal fraud and
admitting to manipulating Enron’s financial statements.
• In July 2004, Lay was indicted on eleven criminal counts of
securities and bank fraud.
• Apart from the court trials which involved Lay, Skilling, Fastow and
others, the US authorities began to take action against Enron’s
bankers.

30. Thank You!!!