ENRON SCANDAL

Team Members:
Amit Dohre 2014B34
Esha Nevse 2014B09
Vijeta Kavthekar 2014B06
Vivaswata Mohapatra 2014B07
Kopal Gupta 2014A31
Aghamarshana 2014D49
Shardool Rastogi 2014C33

Agenda
Who was Enron?
Background
Business Model
Product Line
OECD- Principles
Cause of Down fall
The Whistle-blower
Timeline
Conclusion

Who was Enron?

One Of The World's Leading Supplier Of Electricity, Natural Gas,
Communications, And Pulp And Paper .
Development Of Power Plants ,Pipelines .
Enron's predecessor was the Northern Natural Gas Company, which was
formed during 1932, in Omaha, Nebraska

Background
Former Type: Public Company
Industry: Energy
Founded: Omaha ,Nebraska(1985)
Founder(s): Kenneth Lay
Defunct: December2,2001
Headquarters: Houston United States
Key People: Kenneth Lay, Founder , Chairman And CEO
Jeffrey Skilling, Former President, CEO & COO
Andrew Fastow, Former CFO

Background
Famous for advocacy of energy deregulation
In just 15 years, climb to be 7th largest company in US (Fortune 500,
2000), with 21,000 staff
16th largest in the world
In 2000, stock has crested at $90 a share
Market capitalization: $80 billion
Revenue $139 billion
Employees: 22000 (Year-2000)

Business Model
It introduced increased Volatility in gas prices- as deregulation generally led to lower
prices and increased supply.
Standard Contract(old)- allowed supplier to interrupt gas supply without legal penalty
Enron began offering utilities long term fixed price contracts for natural gas
Off-balance sheet financing vehicle- Special Purpose Entities (SPE), to finance many
of these transactions
Enron online- The creation of online trading model
Gas trading model was huge success. By 1992, Enron was the largest merchant of
natural gas in North America.

Product Line
Enron traded in more than 30 different products, including the
following:

1.

Petrochemicals

2.

Plastics

3.

Power

4.

Pulp and paper

5.

Steel

6.

Weather Risk Management

7.

Oil and LNG transportation

8.

Broadband

9.

Shipping / freight

ORGANIZATION FOR ECONOMIC CO-OPERATION &

DEVELOPMENT- CORPORATE GOVERNANCE

The 1999 OECD Principles cover five basic

subjects:
protection of the rights of shareholders
equitable treatment of shareholders, including full disclosure of material
information and the prohibition of abusive self dealing and insider trading
recognition, and protection of the exercise, of the rights of other stakeholders
timely and accurate disclosure and transparency with respect to matters material
to company performance, ownership and governance, which should include an
annual audit conducted by an independent auditor
A framework of corporate governance ensuring strategic guidance of the
company and effective monitoring of its management by the Board of Directors
as well as the Boards accountability to the company and its shareholders.

Causes of Down-fall
Enrons complex financial statements were confusing to shareholders
& Analyst.
In addition, its complex business model and unethical practices
required that the company use accounting limitations to misrepresent
earnings and modify balance sheet to indicate favourable
performance.
CFO Andrew Fastow and other executives "created off-balance-sheet
vehicles, complex financing structures, and deals so bewildering that
few people could understand them.

THE WHISTLE BLOWER: AS-IS Incidence

In JUNE 2001,ENRON Vice President Sherron Watkins was given the task of finding some assets
to sell off but it was very difficult for her.
Watkins prepared a Memo regarding the various problems and placed it into the box but this Memo
was not taken into consideration.
On August 22,Watkins handed CEO Lay a seven page letter and told him that ENRON would
implode in a wave of accounting scandals if no further action was taken.
Against Watkins letter Lay, the CEO ,arranged to have a ENRONS Law Firm Vinson and Elkins
that looked after all questionable deals.
Watkins continued to do her work and sold stock of 30000 dollar in August,2001 and some in late
September.
In February 2002,she revealed the various facts regarding ENRON partnerships and finally resigned
in November. But Watkins Revealed iall the facts only after ENRON filed for bankruptcy.

Enron - What Happened?

Bad investments in new economy ventures
Off-balance-sheet entities created to eliminate losses from the ventures
Rather than face the write-offs, they tried to hide them with accounting
Many off-balance-sheet loans collateralized by Enron stock
Opaque reporting encouraged short sellers
Form over substance in reporting

Enron - What Happened?

The Shell Game : Stocks were inflated based on the companys
image and not bank account
Enrons executives, aided by timely deregulation of the powerutility industry, turned this loophole into a gold mine.
They posted profits based on how much a given business venture
could make, not how much it was actually worth
Concealed losses with the help of Arthur Anderson LLP.

The Collapse
The company had real assets in 1985 but by the late 1990s
they existed as numbers in balance sheets.
In 2000 they created an artificial energy crisis.
Enron drove up the prices of electricity and its profits.
This brought the attention of the media and federal
investigators.
August 2001, the company achieved 100 million in revenues
but CEO resigned selling his shares for a massive profit.
Investors begin to loose confidence. Share value reduces to
below one dollar.(from 90 dollar)
Company files for bankruptcy.38 billion outstanding debts.
US Justice Department initiates a criminal investigation.

Effects of the Scam!!!

Catalysts
to the Scam!!!
90,000 people lost their jobs
Enrons 401(k) pension scheme: Almost 62% of this pension
scheme was Enrons stock which crashed drastically from over $80 in
early 2001 to a mere few cents by the end of the same year.
Stockholders lost another $70 billion in the Enron
scandal,
state of California sued for $6 billion in energy losses.
Sarbanes Oxley Act : to develop standards for the
preparation of audit reports.
Chief executive Ken Lay escaped justice, dying of a
heart attack before he could be sentenced.
Skilling, Fastow and another dozen executives went to
prison.

Corporate governance : 1) Executive

Compensation
Although Enron's compensation and performance management system was
designed to retain and reward its most valuable employees, the system contributed
to a dysfunctional corporate culture that became obsessed with short-term earnings
to maximize bonuses.
Management was compensated extensively using stock options.
This policy of stock option awards caused management to create expectations of
rapid growth in efforts to give the appearance of reported earnings to meet Wall
Street's expectations.

2. Risk Management
Enron established long-term fixed commitments which needed to be hedged to
prepare for the invariable fluctuation of future energy prices.
Enron's bankruptcy downfall was attributed to its reckless use of derivatives and
special purpose entities.
Enron's aggressive accounting practices were not hidden from the board of
directors.
Although not all of Enron's widespread improper accounting practices were
revealed to the board, the practices were dependent on board decisions.
Even though Enron extensively relied on derivatives for its business, the
company's Finance Committee and board did not have enough experience with

3. Ethical and political analysis

Commentators attributed the mismanagement behind Enrons fall to a variety of
ethical and political-economic causes.
Ethical explanations centred on executive greed and hubris, a lack of corporate
social responsibility, situation ethics, and get-it-done business pragmatism.
Political-economic explanations cited post-1970s deregulation, and inadequate
staff and funding for regulatory oversight.
A more libertarian analysis maintained that Enrons collapse resulted from the
companys reliance on political lobbying, rent-seeking, and the gaming of
regulations.

Timeline
October 2001 : Securities And Exchange Act Launches
A Formal Investigation Into Its Related Party
Transactions
November 8,2001 : Enron Restates Its Earning For
First Three Quarters Of 2001
December 2, 2001 : Enron Files For Protection From
Creditors In New York Bankruptcy Court
December 3, 2001 : Lays Off Five Thousand
Employees

2002
January 9 : The Justice Department Announces That It Is
Pursuing A Criminal Investigation Of Enron
January 24 : The Hearings On Enron Begin
February 4 : Improper Financial Transactions And Self
Dealing
October 31 : The CFO , Fastow Is Indicted Of Being The
Mastermind Behind The Scandal .

2003
February 3 : The Creditors Sue Lay And His Wife To
Recover $70 Million In Transfers
July 11 : It Settled Its Allegations Of SEC Paying $300
Million .
January 14, 2004 : Fastow Agrees To Serve 10
Years In Prison .
July 8 : Lay Surrenders After Being Indicted .

Conclusion

Enron challenges some of the core beliefs and

practices that have underpinned the
academic analysis of corporate law and
governance
We rely on assumptions of the efficacy of
corporate governance/control in monitoring
managerial performance

Thank You!!!