Enron = Enron was regarded as the most innovative company. ® ltis the largest buyer/ seller of natural gas and electricity. ® Itserves as a Gas Bank where producers sold their natural Gas to the Enron and ten Enron sell this natural gas to the customers = Enron was heavily involved in the energy brokering , electronic energy trading and global commodityEnron history ® Enron was formed in 1985 when InterNorth acquired Houston Natural Gas. ® Enron was the merger of two gas pipeline companies(Houston natural Gas (HNG) & Internorth Natural / Gas) / » Ken lay the CEO of HNG sold his company to Internorth for $2.4million = The company a heavy debt of 4.3 billion to manage Its activities ® Ken lay was hired as a CEO of Enron.Enron’s line of Businesses Enron was originally involved in transmission of natural gas and electricity but it also start trading in more than 30 products including: = Petrochemicals ® Plastics » Power ® Pulp and paper = Steel = Weather risk management ® Oil and LNG transportationConti... ® lt acquires 41 other companies. ® In 1999 Enron succeeded General Electric as the winner fortune magazine's best managed company of America. ® In 2000 the Enron revenue was more than $100 billion ® Itwas ranked on the 7" on the fortune 500 list. ® Enron's stock increased from the start of the 1990s until year- end 1998,Mark to Market Method ® Enron uses Mark to Market Method ® With mark to market accounting, the price or value of a security is recorded on a daily basis to calculate profits and losses. ® Using this method allowed Enron to count projected earnings from long-term energy contracts as current income. This was money that might not be collected for many years.Special Purpose Entities ® SPEs are the entity that protect company asset from risky business projects. ® SPE is a separate entity rather than a subsidiary. ® Ifan SPE fails, the sponsoring company’s assets are legally protected from the SPE creditors. ® SPEs are used to finance the purchase of assets.Conti... According to Accounting standards the SPE status can be declared if the business entity meets two criteria » An independent owner maintains at least 3% equity investment tat remains at risk at all times » The independent owner exercises managerial control of the SPE.Conti... ® Andy Fastow was hired for cutting edge finance activities. ™ He become an expert on Special Purpose Entity (SPEs). ® He generated large finance for both Enron and SPE. ® The SPE was vey attractive for outside investors because of increasing economic value of SPE. ® SPEs was also used by Fastow to add revenue and decrease liabilities from Enron which improves the financial statement of Enron.Violation of Accounting Rules ® Enron uses Mark to Market accounting method. = Fastow created an SPE called RADR to purchase the asset from Enron which protected Enron from tax. ® By purchasing a asset for Enron use , the debt associated with purchase appear on the SPE balance sheet. ® Another SPE Chewoo was 99% funded by Enron, which was against Accounting rules.Why Enron violate accounting rules Enron use complex accounting schemes ® To reduce Enron's tax payments ® To inflate Enron's income and profits ® To inflate Enron's stock price and credit rating ® To hide losses in balance sheets ® To fraudulently misrepresent Enron's financial condition in public reportsEnron’s Fall = The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation. = On October 16, 2001 Lay announced losses of $618 billion. ® On November,2001 it admitted accounting errors, inflating income by $586 million. ® Itstart losing 2 billion in a week. ® Itstock price dropped to 61 cents. ® Ithad to payback $690 million in 2 weeks. ® Itwas delisted from New York Stock Exchange.Key Elements involved in Enron’s Scandal = Ken Lay: Chief Executive Officer ® Jeffery Skilling: Chief Operating Officer ® Andy Fastow: Chief Financial Officer ® Michal Kopper: chewco's managing director ® Richard Causey : Chief Accounting Officer ® Arthur Andersen: AuditorConti... ® David Duncan: Enron's chief auditor at Andersen who shredded key documents relating to the case. ® Sherron Watkins: Enron employee and "whistleblower" of the scandal.Conclusion ® The Enron was a massive failure which shook entire US economy ® This action is still considered as an unethical behavior in business, because the basic intention for conducting this action is fraudulence. ® This made the authorities to realize the Importance of ethics and internal control in business