Professional Documents
Culture Documents
“Enron Scandal”
Presented by-
Anushka Gupta
B.Com(Hons.) 3rd Year
The Company Profile
• In 1985, Enron was born from the merger of Houstan
Natural Gas and InterNorth.
• Kenneth Lay, the former chief executive officer of
Houston Natural Gas, became CEO, and the next year
won the post of chairman.
• Started trading futures in Gas Contracts.
• Soon got the control of over
25% of the all Gas business.
• Began trading in
commodities like steel,
coal, weather risk, etc.
Sequence of Events that followed
Partners in Crime
• Kenneth Lay- the Chairman
• Andrew Fastow - The CFO
• Jeffrey Skilling- The President and COO
• Arthur Anderson- The accounting Firm
Causes of the Enron Scandal
• Dubious Accounting Practices
• Enron’s misleading Accounts
• Mark to market accounting
• Special Purpose Entities
• Executive compensation
• Financial Audit
• Over-statement of Profits
• On an annualized basis between 1995 and 2000:
C
O Overstated
Original
Forecasted M
Price
Future Price P
paid for the
A
contract
R
E
Debt
Understated
Profit Debt
& Sales
Failing Revenue
Investment
The Whistle Blower
• On Feb 14, 2002, Sherron Watkins, the Enron
whistleblower, testifies before a
Congressional panel against
Skilling and Lay. Sherron
Watkins is an Enron vice president.
She wrote to Lay in the past expressing
concerns about Enron's accounting practices.
The Down Fall
The Rise and Fall of Enron
2
1998
1
1999
0 2000
2001
-1
-2
3 6 9 Year
months months months
Negative Cash Flows: 1st three quarters in 1999, 2000 & 2001
The True Picture
Opportunities
Weak Board of Directors
Weak Internal Controls
Role of Auditor
The Internal Audit Department
• Should have ensured the compliance of SA 240, SA 520.
• Should maintain a tight internal control system established by the
board members & directors
• Report directly to the CEO
• Direct consultation with the board director
• Submit a quarterly report to the board and the supervisory
committee .
Statutory Auditor
• Ensured compliance with SA 700 and SA 720.
• Independent from the company and the board
• Abides with accounting principles and rules
• Should hold neutral opinions
Enactment of Sarbanes Oxley Act
In response to the Arthur Anderson, Enron, The
Sarbanes Oxley Act seeks to
• Restore the public confidence in both public
accounting and public traded securities.
• Assure the ethical business practices through
heightened levels of executive awareness and
accountability.
What is SOX ?
• US Law,
• Enacted in July 2002,
• By a bill sponsored by Mr. Paul Sarbanes & co-
authored by Mr. Michael Oxley, under whose
name the act was enacted,
• Consists of 11 chapters and 69 articles,
• Also Known as “Public Company accounting
Reform and Investor Protection Act”.
How did SOX try to amend the
situation?
Sarbanes-Oxley provides for increased corporate
governance and corporate accountability.
Therefore, SOX is in place to be sure that fraud on
the scale of Enron never takes place again.