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Similar to Enron Scandal " A Fundamental Case Study"
Enron Scandal " A Fundamental Case Study"
- 2. Emran Hosain Id. No:M18150203721
- 3.
- 4. Introduction (Enron Co.) EnronCorporation 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. Enron employed approximately 30,000 staff and was a major electricity, natural gas, communications and pulp and paper company, with claimed revenues of nearly $101 billion during 2000. Fortune named Enron "America's Most Innovative Company" for six consecutive years. (1995-2000)
- 5. Water & wastewater Pulp& paper Electricity Broadband Oil Gas & LNG Enron’s Line of Products
- 6. At the endof 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". On December 2, 2001, the Enron Corporation files for Chapter 11 bankruptcy protection in a New York court. Enron Scandal
- 7. Top 8 Bankruptcyin World History
- 8. Behind Enron Scandal KeyPersons Kenneth Lee Lay Founder, CEO & Chairman Jeffrey Skilling President & CEO Andrew Fastow CFO October, 2001
- 9. Richard Causey EVP &CAO Lawrence Greg Whalley President & COO Jeffrey McMahon MD & CFO. Robert Bennett Attorney Representative of Enron in Washington Joseph Berardino CEO of Aurther Andersen Audit.
- 10. Rechard Causey Head ofthe Audit Committee Mark Frevert Vice Chairman There are more, who were directly and indirectly involve in Enron Scandal.
- 11. Reasons Behind EnronScandal 1. Mark-to-Market Valuation, 2. Investments in Special Purpose Vehicles / Entities (SPV or SPE), 3. Failure of Audit Committee, 4. Force Ranking Distribution Scheme, 5. Executive Compensation, 6. Securities Analyses Issue.
- 12. Md. Monurul Islam Id.No: M18150203726
- 13. 1. Mark-to-Market Valuation UnderMark-To-Market accounting, assets can be recorded on a company’s balance sheet at their fair market value as opposed to their book values. With MTM, companies can also list their profits as projections, rather than actual numbers. Enron manipulated this method, since MTM is not based on "actual" cost but on "fair value," which is harder to pin down. Fair values are hard to determine, and even Enron CEO Jeff Skilling found it difficult to explain to financial reporters where all the numbers on the company’s financial statements came from.
- 14. 2. Investments inSpecial Purpose Vehicles / Entities (SPV or SPE) To minimize financial statement losses & volatility, To accelerate profit To avoid adding debt A special purpose vehicle, also called a special purpose entity (SPE), is a subsidiary created by a parent company to isolate financial risk. Enron sponsored hundreds of SPEs with which it did business. Many of these were used to shelter foreign-derived income from US taxes. Its primary motivation was –
- 15. Investments in SpecialPurpose Vehicles / Entities (SPV or SPE) SPV or SPE Andrew Fastow CFO Enron Stocks Debt Investors Equity Investors Money & Note Guarantee of Enron Stock value Obligation to Repay HedgeofthevalueofEnronInvestment Principal
- 16. Abdul Baki Id. No:M18150203735
- 17. 3. Failure TheBoard & The Audit Committee 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. John Wakeham received annual fees of $72,000 in relation to consultancy advice to Enron’s European operations. John Mendelsohn was president of a University of Texas medical centre which had received $1.6 million from Enron. The chair of the audit committee, Robert Jaedicke who sold Enron stock between January 2000 and October 2001 worth over $800,000.
- 18. Enron’s Auditor: AurtherAndersen Andersen's auditors were pressured by Enron's management to defer recognizing the charges from the special purpose entities. The auditors have searched for new ways including loopholes in GAAP to save the company money. One Enron accountant revealed, "We tried to aggressively use GAAP, use it in our advantage and exploited the weaknesses. Though Andersen has a strong control over conflict of interest, it failed in case of Enron.
- 19. o More commonlyknown as rank and yank system. o This system is widely-used, but remains controversial due to the competition it creates, and also the reality that not all employees will fit neatly into one of the three categories and might end up in a category that does not reflect their true performance. 4. Force Ranking Distribution Scheme
- 20. 5. Executives Compensation Apartfrom 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.
- 21. Sadia Sultana Id. No:M18150203748
- 22. 6. Security AnalysesIssue Securities analysts employed by investment banks provide research and make “buy,” “sell,” or “hold” recommendations for the use of their sales staffs and their investor clients. For Personal benefit, some Enron’s executive sell share between January 2000 to October 2001 - 0 50 100 150 200 KENNETH LAY ANDREW FASTOW JEFFREY SKILLING RICHARD CAUSEY JEFF MCMAHAN 183 33 70 13 2 Million USD
- 23. Share price ofEnron Co. (Dec 1991- Dec 2001)
- 24. Consequences of theEnron Scandal 4500 employees lost their jobs. Investors lost some 60 billion dollars within a few days; for many it meant losing their old-age security. The pension fund for the company's employees was obliterated. Losses on the financial market amounted to the worst stock value loss in peaceful times. The auditing firm Arthur Anderson lost its accreditation. The close ties of the company's founder, Kenneth Lay, to US President George W. Bush – Lay was an important financial supporter of Bush – came under sharp criticism.
- 25. Sukanta Roy Id. No:M18150203738
- 26. Recommendations Established well-designedand enforced legislation defines positive and negative incentives, to encourage behavior that strengthens the fair and efficient operation of the marketplace. Personal integrity, good judgment and other essential qualities cannot be prescribed by law, but must be embedded in managers. the majority of the board should not have any material relationship with the company; The audit committee must have sole responsibility for hiring the audit firm; nominating and compensation committees must consist entirely of independent directors;
- 27. Conclusion Enron was amassive failure, because of its size of bankruptcy, complexity, control to protect the integrity of capital market failed, and especially because of the massive greed and collusion of key participants. This multiple failure sent a signal of management structure. This made the corporate authorities to realize the importance of ethics and international control in business.
- 28.