Enron was once one of the largest companies in the US, but faced an accounting scandal in 2001. Through the use of mark-to-market accounting and special purpose vehicles (SPVs), Enron misrepresented losses and inflated profits. This allowed Enron's stock price to rise significantly. However, when analysts began downgrading the stock and Dynegy pulled out of an acquisition deal, Enron was forced to declare bankruptcy by December 2001, becoming the largest such filing in US history at the time. Widespread accounting fraud and failures of corporate governance contributed to Enron's collapse.

1. ENRON SCANDAL
THE DEMOLISH OF AN EMPIRE

2. PRESENTED BY--
BHANU
GURJAR
MBA Hons
2022
SHIVAM
SONI
MBA Hons
2022
SANDEEP
SINGH
MBA Hons
2022
RITIK
GUPTA
MBA Hons
2022
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3. ABOUT ENRON
- Enron Corporation was an American energy, commodities, and
services company based in Houston, Texas.
- It was founded by Kenneth Lay in 1985 as a merger between
Lay’s Houston Natural Gas and InterNorth, both relatively
small regional companies.
- Before its bankruptcy on December 2, 2001
- Enron employed approximately 20,600 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.

4. Once one of the biggest companies in the United States,
Enron faced an ethical accounting scandal in 2001 after
using “mark-to-market” accounting to fake their profits
and misused special purpose vehicles, or SPVs.
Enron misrepresented losses to look like less than they
actually were,
and “cooked the books” to make their income look
much higher than it was.
Enron's $63 billion bankruptcy was the biggest on
record at the time. How Did all this start?
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The Shock Felt Around Wall Street
By the summer of 2001, Enron was in freefall.
CEO Kenneth Lay had retired in February, turning over the position to Jeffrey Skilling.
In August 2001, Skilling resigned as CEO citing 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 October 16, the company reported its first quarterly loss and closed its “Raptor” 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.

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A few days later, Enron changed pension plan administrators, essentially forbidding
employees from selling their shares for at least 30 days.
Shortly after, the 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 Enron, backed out of the deal on November 28.
By December 2, 2001, Enron had filed for bankruptcy.

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9. ENRON BEGAN IN 1985 AS AN ENERGY SUPPLY
COMPANY MAINLY DEALING IN GAS.
AFTER THE DEREGULATION OF THE ENERGY MARKETS,
THEY EVENTUALLY MOVED TO TRADING IN ENERGY.
THEY HAD REVOLUTIONIZED THE TRADING AND
ENERGY MARKET TO AN EXTENT
WHERE THEY WERE ALSO TRADING ON THE WEATHER
FORECAST.
ENRON SHARES TRADED AS HIGH AS $90.56 BEFORE
THE FRAUD WAS DISCOVERED,
BUT PLUMMETED TO AROUND $0.25 IN THE SELL-OFF
AFTER IT WAS REVEALED.
THE FORMER WALL STREET DARLING QUICKLY
BECAME A SYMBOL OF MODERN CORPORATE CRIME.
FUNDAMENTAL ACCOUNTING STANDARDS THAT
WERE EXPLOITED :
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10. 1) MARK-TO-MARKET ACCOUNTING -
IN SIMPLE WORDS MARK-TO-MARKET ACCOUNTING LETS YOU
BOOK YOUR PROFITS ON THE DAY THE DEAL WAS SIGNED
INSTEAD OF WHEN IT IS ACTUALLY REALIZED.
FOR EXAMPLE, IF YOU MAKE A 50CR DEAL OVER TIME,
YOU CAN BOOK IT AS YOUR REVENUE ON THE SAME DAY AS
OPPOSED TO REALIZING IT AS AND WHEN IT HITS THE BANK
ACCOUNT.
IN ENRON'S CASE, IT DIDN'T EVEN MATTER IF THE DEAL FELL
THROUGH,
THEY WERE ALREADY IN THE BOOKS AND THAT REFLECTED ON
THE STOCK PRICE.
MOREOVER, THE DEALS WERE SUBJECTIVE TO REVENUE
ASSUMPTIONS
WHICH MEANS THE DEAL COULD BE WORTH WHATEVER ENRON
THOUGHT THEY WERE WORTH.
JUST TO GIVE YOU A PERSPECTIVE :
Sales
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
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2) SPV (Special Purpose Vehicles) -
A special purpose vehicle, also called a special purpose
entity (SPE), is a subsidiary created by a parent company to
isolate financial risk.
Its legal status as a separate company makes its obligations
secure even if the parent company goes bankrupt.
Enron's stock was rising rapidly, and the company transferred much
of the stock to a special purpose vehicle, taking cash or a note in
return.
The special purpose vehicle then used the stock for hedging assets
that were held on the company’s balance sheet.
To reduce risk, Enron guaranteed the special purpose vehicle's
value.
When Enron's stock price dropped, the values of the special purpose
vehicles followed, and the guarantees were forced into play

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To Sum Up
The Enron scandal drew attention to accounting and
corporate fraud as its shareholders lost tens of billions of dollars
in the years leading up to its bankruptcy,
and its employees lost billions more in pension benefits.
Accounting scandals such as Enron's are sometimes difficult for
analysts and investors to detect before they unravel.
Make sure to do your due diligence and analyse company financial
statements thoroughly in order to spot potential red flags.

15. THEY REPRESENT THERE DEPT AS AN EQUITY
THEY WERE MANAGING THE AUDITORS BY GIVING THEM THEIR SHARES FOR
FUTURE PROFIT
THEY SPENT A LOT OF MONEY OVER THE POLITICIANS FOR TAKING THE
“MARK-TO-MARKET” ACCOUNTING METHOD
THEY ARE NOT FOLLOWING THE HISTORICAL COST ACCOUNTING METHODS
THEY CREATED THEIR OWN ACCOUNTING METHODS WHICH WERE ALL BASED ON ONLY
SHOWING PROFIT
WHEN THEY SIGNED A DEAL/ CONTRACT – THEY ADD THEIR FUTURE PROFIT ON THEIR
CURRENT PROFIT
BY THE HELP OF FAKE PROFIT – THE PRICE OF THEIR SHARES REACHED $20 - $90
WHEN THEY REALISED THAT THEY CAN’T MANAGE THIS ,
THE TOP MANAGING TEAM SOLD THEIR ALL SHARES WITH A BIG PROFIT
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CORPORATE GOVERNANCE FAILURES

16. THANKYOU
BHANU.GURJAR_MBA.H22@GLA.AC.IN
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