CORPORATE ENRON SCANDAL

GOVERNANCE
Presented by
2122113 Lakshanth K 2122162 Siddharth Vaswani
2122127 Vaibhav 2122166 Asmi Upadhyay
2122157 Pranav Chitkara 2122170 Ishika Agarwal
Know ENRON
Enron Corporation was an American energy, commodities, and
services company based in Houston, Texas.

Enron was formed in 1985 following a merger between Houston

Natural Gas Company and InterNorth Inc.

Kenneth Lay, who had been the chief executive officer (CEO) of
Houston Natural Gas, became Enron's CEO and chairman.

Enron employed approximately 29,000 staff and was a major

electricity, natural gas, communications and pulp and paper
company.

Fortune named Enron "America's Most Innovative Company" for six

consecutive years from 1996-2001.
 Facts & Figures
$60 Market Capitalisation

Billion
70 Price to Earnings Ratio
Times
6
Price to Book Value
Times
 The SCANDAL
• $30 Million of self dealings by the Chief Financial
Officer Andrew Fastow.

• $700 Million of Net earnings disappeared.

• $1.2 Billion of Equity Shareholders disappeared.

• Over $4 billion hidden liabilities.

During 2001, after a series of revelations involving

irregular accounting procedures bordering on fraud
perpetrated throughout the 1990s involving Enron and
its accounting company Arthur Andersen, Enron
suffered the largest Chapter 11 bankruptcy in history
Lack of Governance
Conflicts of Interset and Lack
Weak Board Oversight
of Control

Use of SPEs to Mask off Debt Inadequate External

Complex Financial Structures Auditing
and Lack of Transparency &
Regulatory Failures

Pressure to meet Earnings and Lack of Whistle Blowing

Corporate Culture Controls and Measures
Motives of the Scam
Kenneth Lay as Enron’s chairman and Jeff
Skilling as CEO. Both were focused primarily
on increasing the stock’s value as well as
fulfilling Wall Street’s expectations.
Enron's law firm, Vinson & Elkins, was in a
conflict of interest as Enron was their largest
and most profitable client. This made it
difficult for them to resist signing off on
contracts for Enron.

The Enron accounting scandal involved the Global Finance team and key figures Andy Fastow and Michael
Kopper. Fastow, the CFO, established fraudulent special purpose entities (SPEs) such as LJM1 and 2 to
take out money for personal gain. Kopper, Fastow's deputy, was also involved in managing SPEs and was
considered highly intelligent. They convinced other accountants to adopt their methods.
 IMPACT ON STAKEHOLDERS
EMPLOYEES
The pension fund (about 60%) for the
employees was obliterated.More than
half of employees invested about
$1.2billion in Enron stock. Those shares
are now nearly worthless.After
bankruptcy, Enron fired 5000 workers,
one quarter of its 21000 employees.
Laid off workers received $4500
severance payment, no matter how
many years they had worked for the
company.
SHAREHOLDERS
Eligible shareholder whose Enron
holding became worthless when the
company crumbled in scandal will
receive $7.2billion in settlements under
a distribution plan approved in federal
court.Undermine the investors trust in
the reliability of mandated corporate
filings.At Enron peak, its shares were
worth $90.75 but after the company
declared bankruptcy on
december2,2001, they plummeted to
$0.67 by January 2002.
 IMPACT ON STAKEHOLDERS
COMPETITOR CUSTOMER GOVERNMENT

On November 9, 2001, rival Enron's fraud prompted the

Plans to develop natural
energy trader Dynegy Inc. U.S congress to pass
gas deposits are being
decided to purchase the Sarabanes-Oxley corporate
cut back dramatically.
company for $8 billion in accountability law, which
Lose their source of
stock.By the end of the forces corporate executives
supply.Lose their source
month, Dynegy had backed to take personal
Ultimately it results in
out of the deal, citing responsibility for the
power shortages and
Enron's downgrade to accuracy of company
higher cost in future
"junkbond" status and accounts. Suffered
years, the burden will fall
continuing financial economic losses.
on the consumers
irregularities.
 POST ENRON - RESULT
Corporate
2001 - Declaration of Bankruptcy
Sale of Fixed Assets & of profitable subsidiaries to
competitors

Financial
Shock for international stock markets

Social
Millions of employees lost their savings, pensions & funds for their children studies

Boss charged with fraud

Jeff Skilling and Kenneth Lay have been charged in a federal indictment released in June 2004 for fraud, insider
trading and giving false statements to Auditors
POST ENRON - RESULT
Sarbanes-Oxley Act (SOX):
established the Public Company Accounting Oversight Board (PCAOB) to oversee and regulate accounting
firms that audit publicly traded companies.

Stock Exchange Listing Requirements:

Stock exchanges, such as the NYSE and NASDAQ, introduced listing requirements that reinforced corporate
governance

(FASB) Changes:
FASB made several changes to accounting standards, including the adoption of FAS 133 and
FAS 140, which address the use of special-purpose entities (SPEs) in financial reporting.

Whistleblower Protection:
Whistleblower protections were strengthened, allowing employees to report corporate wrongdoing without
fear of retaliation.

Increased SEC Oversight:

The U.S. Securities and Exchange Commission (SEC) enhanced its regulatory oversight, particularly with
respect to financial reporting, disclosure, and corporate governance.
 LESSON LEARNED FROM ENRON
AUDITING
Arthur Andersen faced a conflict of
interest as both an auditor and
consultant, leading to approval of
Enron's poor practices and failure to
follow GAAP. Destruction of documents
occurred. Mandatory rotation is
suggested, including audit partners
every four years, to avoid becoming too
committed to clients.
SPE’s
Company cannot use special
purpose entity to hedge its losses,
as in this case it can't do it for a
long time. The bubble burst very
easily, that about 4000 SPE's have
been created by Enron
LESSON LEARNED FROM ENRON
BOARD OF DIRECTORS ACCOUNTING REFORMS
The board of directors neglected their
The scandal highlights the
employees and prioritized shareholder
necessity for accounting and
interests. To prevent this, closer
corporate governance reforms and
attention should be paid to
ethical evaluation of business
management behavior and the
culture in the US. Clear and
company's financial practices, even
understandable financial
when shareholders are profiting. It
disclosure is crucial to avoid
should become standard to question
complications.
management closely and not accept
their arrogance. This is a red flag for
investors and the public.
Thank You