The Enron scandal, one of the largest accounting frauds in history, involved the company's dramatic rise from $60 billion to bankruptcy in a month, resulting in thousands of job losses and significant financial ruin for shareholders. Key figures like CEO Kenneth Lay, CFO Andrew Fastow, and auditor Arthur Andersen played pivotal roles, utilizing misleading accounting practices such as mark-to-market and special purpose entities to hide debts. The scandal, revealed in October 2001, ultimately led to changes in accounting regulations and heightened scrutiny of auditing practices.

1. ENRON SCANDAL

2. Introduction to the Business
• Enron was an American energy, commodities, and services company.
• Formed in 1985
• A merger between Houston Natural Gas Company and Inter North Incorporated
CEO was Kenneth Lay
• Auditor was Arthur Anderson

3. What Happened and the story of the scandal
• Story of world largest accounting scandal
• This is a story how a company grow 60 billion dollar within 10 years and
bankrupt within a month
• The price of Enron’s shares went from $90.75 at their peak to $0.26 at
bankruptcy
• 20,000 employee get unemployed
• 1 Suicide
• Shareholder are lose money

4. Company’s Condition
⊸ Investor: Healthy company.
⊸ Stock price increases double. ( Stock 88dollar, per share)
⊸ Large money-Financial institution.
⊸ Positive response- Shareholders.

5. The fall of a wall street
⊸ Debt-2million dollar per day
⊸ Stock- Less than 1 dollar.

6. Main players
⊸ Kenneth Lay (CEO)
⊸ Jeffrey Skilling
⊸ Andraw Fastow ( CFO, 3rd main player).
⊸ David Duncan (Chief accountant).
⊸ Auditor ( Arthur Anderson).

7. Policies Used
⊸ Wrong accounting system.
⊸ Overestimate profit.
⊸ Debt remain hidden.
⊸ Losses on the stock.
⊸ SPE( Special purpose entities).
⊸ Mark to market.

8. Enron Effect-
⊸ On common people.
⊸ Government.
⊸ Shareholders and investors.
⊸ Employees. ( Cliff Baxter- Suicide by gun shoot).

9. Related Accounting Term
Revenue RecognitionMark-To- Market

10. Related Accounting Term
Non Transparent Accounting

11. Related Accounting Term
Special Purpose Entities

12. How The Scandal Got Out
Some highlight of scandals are :
1. $30 million of self dealings by the chief financial officer.
2. $700 million of net earnings disappeared.
3. $1.2 Billion of Equity shareholders disappeared.
4. Over $4 billions hidden liabilities .

13. How The Scandal Got Out(Con.)
⊸ Key Players of scandals :
⊸ Kenneth lay
⊸ Jeffrey skilling
⊸ Andrew Fastow
⊸ David Duncan
⊸ Enron’s Accounting firm-Arthur Andersen

14. How The Scandal Got Out(Con.)
Informal Inquiry

15. Penalties & Consequences
Impact on employees
 Thousands of employees lost their jobs as well as their requirement savings
with the company.
 The pension fund for the employees was obliterated.
 After bankruptcy, Enron fired 5000 workers, one quarter of its 21000
employees.
 Laid off workers received $4500 severance payment.

16. Penalties & Consequences
Impact on shareholders
Enron share holders received limited returns in law suits despite losing billions in
stock exchange.
Impact on competitors
On November 9,2001, rival energy trader Dynegy Inc. decided to purchase the company
for $8 billion in stock.

17. Pre scandal business situation
1.Enron received $10 million in guarantee fee based on loan balance to JEDI.
2.Enron received a total of $25.7 mil revenues from this source.
3.In first quarter of 2000, the increase in price of Enron stock held by JEDI resulted in $126
million in profits to Enron.

18. Post scandal business situation
1.But everything fell apart when Enron’s share price started to drop in Fall 2000 (dot.com bubble burst ).
2.In November 2001, Enron admitted to the SEC that Chewco was not truly independent of Enron
3.Chewco went bankrupt shortly after this admission by Enron.
4.The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation.
5.On October 16, 2001 Lay announced losses of $618 billion.

19. Post scandal business situation (Cont.)
6.On November 2001 it admitted accounting errors, inflating income by $586 million.
7.It start losing 2 billion in a week.
8.It stock price dropped to 61 cents.
9.It had to payback $690 million in 2 weeks.
10.It was delisted from New York Stock Exchange.

20. Impact on Accounting and related practices
1.Auditing companies often consult for the companies they audit (conflict of interest).
2.Audit company partners often later accept jobs from their client companies
3.Companies often retain the same auditing company for long periods of time.
4.Auditing companies have been allowed to police themselves.
5.Appointment of auditor company is in theory by shareholders but in practice by senior
management

21. Impact on Accounting and related practices (Cont.)
6.Audit Committee members often are not independent of senior management insiders are the ones with the most
accurate understanding.
7.Audit Committee members have typically been required to own company stock to align their incentives with those of
company
8.Enron had used hundreds of special purpose entities to hide its debt Enron used a number of special purpose
entities, fraudulently misrepresent 9.Enron's financial condition in public reports.

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