This presentation gives you insight of Enron scandal and it's effect globally.

2. ABOUT ENRON
• Enron corporation was an american energy, commodities, and services company based
in houston, texas. It was founded in 1985 as a merger between houston natural gas and internorth,
both relatively small regional companies.
• Enron employed approximately 20,000 staff and was one of the world's major electricity, natural
gas, communications and pulp and paper companies, with claimed revenues of nearly $101 billion
during 2000.
• Fortune named enron "america's most innovative company" for six consecutive years.
• Following the merger, kenneth lay, who had been the chief executive officer (ceo) of houston
natural gas, became enron's ceo and chairman.
• CFO- Andrew fastow

3. DOWNFALL
• When the recession hit in 2000, enron had significant exposure to the most volatile parts of the
market. As a result, many trusting investors and creditors found themselves on the losing end of a
vanishing market cap.
• In december, 2000, enron was valued at more than $60bn, 70 times earnings and 6 times book
value.
• By the fall of 2000, enron was starting to crumble under its own weight. CEO jeffrey skilling had
a way of hiding the financial losses of the trading business and other operations of the company.

4. • Enron's executives employed accounting practices that falsely inflated the company's
revenues, which, at the height of the scandal, made the firm become the seventh-largest
corporation in the united states.
• Once the fraud came to light, the company quickly unraveled and filed for chapter 11
bankruptcy on dec. 2, 2001.
Note:- a Chapter 11 bankruptcy, the individual or business filing bankruptcy has the first
chance to propose a reorganization plan. These plans may include downsizing of business
operations to reduce expenses, as well as renegotiating debts. In some cases, plans involve
liquidating all assets to repay creditors. If the plan is feasible and fair, the courts accept it,
and the process moves forward. The plan must also be in the best interest of the creditors.
If the debtor does not suggest a plan, the creditors may propose one instead.

5. • CEO Kenneth Lay had retired in February, turning over the position to Jeff Skilling; that August,
Skilling resigned as CEO for "personal reasons." Around the same time, analysts began
to downgrade their rating for Enron's stock, and the stock descended to a 52-week low of $39.95.
• By Oct.16, the company reported its first quarterly loss and closed its one of SPV so that it would
not have to distribute 58 million shares of stock, which would further reduce earnings. This action
caught the attention of the SEC.
• Enron changed pension plan administrators, essentially forbidding employees from selling their
shares, for at least 30 days.
• SEC announced it was investigating Enron and the SPVs created by Fastow. Fastow was fired from
the company that day. Also, the company restated earnings going back to 1997.
• Enron had losses of $591 million and had $628 million in debt by the end of 2000.
• The final blow was dealt when Dynegy (NYSE: DYN), a company that had previously announced
would merge with the Enron, backed out of the deal on Nov. 28. By Dec. 2, 2001, Enron had filed for
bankruptcy.

6. WHOM TO BLAME?
 Jeffrey Skilling was the one responsible in implementing mark-to-market accounting in Enron.
Under his management, Enron launched EnronOnline, which is an Internet based service where
contracts on energy commodities could be traded with Enron. In the end, Enron could not cover
the capital costs of their transactions, which is also one of the reasons that sent the company to
bankruptcy.
 Andrew Fastow was the Chief Financial Officer of Enron who was the mastermind of the Special
Purpose Entities like LJM1, LJM2, etc. in Enron. He made the complicated financial structures so
that Enron could hide their losses and debts.

7.  Rebecca Mark was the head of the failed businesses of Enron, which were Enron International
and Azurix. Some of here projects were the $3 billion power plant in Dabhol, India and the
expensive acquisition of Wessex Water. She also used the Enron Jet with her trips around the world.
One executive even mentioned that whenever Mark attends a meeting, it costs the company at least
$60,000 (that would cover just her transportation).
 Kenneth lay- was also involved in SPV transactions and other manipulation.

8. ACCOUNTING TACTICS USED BY ENRON
Enron were able to enhance their reported financial performance by the use of:
1. Mark-to-market accounting - Mark to market is an accounting practice that involves
recording the value of an asset to reflect its current market levels. At the end of the fiscal year,
a company's annual financial statements must reflect the current market value of its accounts.
The mark-to-market method requires estimations of future incomes when a long-term contract
is signed. These estimations were based on the future net value of the cash flow, costs related
to the contract were often hard to predict.
2. Special purpose entities- A special purpose vehicle/entity (SPV/SPE) is
a subsidiary company with an asset/liability structure and legal status that makes its
obligations secure even if the parent company goes bankrupt. An SPV/SPE is also a
subsidiary corporation designed to serve as a counterparty for swaps and other credit
sensitive derivative instruments

9. HOW ENRON PLAYED WITH MARK TO MARKET?
• Estimated income from projects were included in enron's accounting even though the money was not
yet received and if there were any changes such as additional income or loss it would show up in
subsequent periods. Investors were given misleading information because of the deviation in the
estimations.
• The company would build an asset, such as a power plant, and immediately claim the
projected profit on its books, even though it hadn't made one dime from it.
• If the revenue from the power plant was less than the projected amount, instead of taking the loss, the
company would then transfer the asset to an off-the-books corporation, where the loss would go
unreported.
• The mark-to-market practice led to schemes that were designed to hide the losses and make the
company appear to be more profitable than it really was.

10. ROLE OF SPECIAL PURPOSE ENTITY
• Fastow and others at Enron orchestrated a scheme to use off-balance-sheet special purpose
vehicles (SPVs), also know as special purposes entities (SPEs) to hide its mountains
of debt and toxic assets from investors and creditors.
• In order to hide losses and fabricate earnings, Andrew Fastow created multiple SPEs.
• When news about the debt hiding surfaced, Enron's stock began to fall and several SPEs began to
collapse as a result of the drop of Enron's stock price.

11. CONTINUE….
For an SPE to legal, they have to satisfy 3 requirements:
 at least 3% of the equity had to come from outside investors (i.E. Not-enron),
 the entity could not be controlled by enron, and
 enron was not liable for any loans or other liabilities.
An internal investigation of the spes showed they were not independent since they were
run by enron employees .
Therefore, they had to be disclosed in enron's financial statements depressing earnings
and debt levels severely

12. ARTHUR ANDERSEN - ENRON’S AUDITOR
• One of the five largest accounting firms in the united states at the time, andersen had a
reputation for high standards and quality risk management.
• In addition to andrew fastow, a major player in the enron scandal was enron's accounting firm
arthur andersen llp and partner david b. Duncan, who oversaw enron’s accounts.
• Following the 2001 scandal in which energy giant enron was found to have reported $100bn in
revenue through institutional and systematic accounting fraud, andersen's performance and alleged
complicity as an auditor came under intense scrutiny.
• 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"

13. TRAILS
 Arthur Andersen:
He was charged with and found guilty of obstruction of justice for shredding the thousands of
documents and deleting e-mails and company files that tied the firm to its audit of Enron.Although
only a small number of Arthur Andersen's employees were involved with the scandal, the firm was
effectively put out of business.The company surrendered its CPA license on August 31, 2002, and
85,000 employees lost their jobs. The conviction was later overturned by the U.S. Supreme
Court due to the jury not being properly instructed on the charge against Andersen.The Supreme
Court ruling left Andersen free to resume operations. However, the damage to the Andersen name
has been so great that it has not returned as a viable business even on a limited scale.
 Andrew Fastow:
Fastow and his wife, Lea, both pleaded guilty to charges against them. Fastow was initially
charged with 98 counts of fraud, money laundering, insider trading, and conspiracy, among other
crimes.Fastow pleaded guilty to two charges of conspiracy and was sentenced to ten years . Lea
was sentenced to one year for helping her husband hide income from the government.

14.  Jeffery Skilling : (COO)
He went on trial for his part in the Enron scandal in January 2006 for a broad range of financial
crimes, including bank fraud, making false statements to banks and auditors, securities fraud, wire
fraud, money laundering, conspiracy, and insider trading. Skilling was sentenced to 24 years and 4
months in prison. In 2013 the United States Department of Justice reached a deal with Skilling, which
resulted in ten years being cut from his sentence.
 Kenneth Lay :
He pleaded not guilty to the eleven criminal charges, and claimed that he was misled by those around
him. He attributed the main cause for the company's demise to Fastow. But he was subject to a
maximum total sentence of 45 years in prison. However, before sentencing was scheduled, Lay died
on July 5, 2006.

15. CORPORATE GOVERANCE FAILURE
• Corporate governance is the system of rules, practices and processes by which a company is
directed and controlled.
• Corporate governance essentially involves balancing the interests of a company's
many stakeholders, such as
 shareholders
 management
 customers
 Suppliers
 financiers
 government and the community.

16. • The role of a company’s board of directors is to oversee corporate management in order to
protect the interests of shareholders.
• However, in 1999, Enron’s board waived conflict of interest rules to allow chief financial officer,
Andrew Fastow, to create private partnerships to do business with the firm. These partnerships
appear to have concealed debts and liabilities that would have had a significant impact on
Enron’s reported profits.
• Auditors failed by not maintaining their integrity and independence.
• audit committee did not ask enough questions about large transactions conducted or related party
transactions, failing even to insist upon full disclosure.

17. AFTERMATH OF ENRON’S BANKRUPTCY
• The Sarbanes-Oxley Act of 2002 (SOX) is an act passed by U.S. Congress in 2002 to protect
investors from the possibility of fraudulent accounting activities by corporations. The SOX Act
mandated strict reforms to improve financial disclosures from corporations and prevent
accounting fraud.
 Section 302- Section 302 is a mandate that requires senior management to certify the
accuracy of the reported financial statement.
 Section 404- Section 404 is a requirement that management and auditors establish internal
controls and reporting methods on the adequacy of those controls.

18. • Financial Accounting Standards Board (FASB) substantially raised its levels of ethical conduct.
Moreover, company's boards of directors became more independent, monitoring the audit
companies and quickly replacing bad managers.
• In the UK, two committees were set up, leading to:
–Review of the role and effectiveness of non-executive directors 2003
–Audit committees – combined code guidance 2003

19. CONTINUE..
• Once Enron's Plan of Reorganization was approved by the U.S. Bankruptcy Court, the new board of
directors changed Enron's name to Enron Creditors Recovery Corp. (ECRC). The company's new
sole mission was "to reorganize and liquidate certain of the operations and assets of the 'pre-
bankruptcy' Enron for the benefit of creditors." The company paid its creditors more than $21.7
billion from 2004-2011. Its last payout was in May 2011.
• On September 7, 2006, Enron sold Prisma Energy International Inc., its last remaining business, to
Ashmore Energy International Ltd. (now AEI)

20. DABHOL POWER COMPANY
 The Dabhol Power Company (now called RGPPL - Ratnagiri Gas and Power Private
Limited) was a company based in Maharashtra, India, formed in 1992 to manage and operate
the controversial Dabhol Power Plant.
 The Dabhol plant was built through the combined effort of Enron, GE, and Bechtel.
• GE provided the generating turbines to Dabhol,
• Bechtel constructed the physical plant, and
• Enron was charged with managing the project through Enron International.
 From 1992 to 2001, the construction and operation of the plant was mired in controversies
related to corruption in Enron and at the highest political levels in India and the United
States.

21.  In 2001, the power plant ran into trouble due to Enron scandal leading to the
bankruptcy of Enron.
 In 2005, it was taken over and revived by converting it into the RGPPL (Ratnagiri Gas
and Power Private Limited), a company owned by the Government of India.

22. SUMMARY