THE FALL OF ENRON

GROUP 1 – ABHISHEK GHOSH|AKANKSHA JAISWAL|ANURAG SHARMA

 Enron’s story In short : Origin

 Enron was formed in 1985 following a merger between Houston Natural

Gas Company and Omaha-based InterNorth Incorporated. Following
the merger, Kenneth Lay, who had been the chief executive
officer (CEO) of Houston Natural Gas, became Enron's CEO and
chairman, who quickly rebranded Enron into an energy trader and
supplier.
 Deregulation of the energy markets allowed companies to place bets
on future prices, and Enron was poised to take advantage.
 In 1990, Lay created the Enron Finance Corporation and
appointed Jeffrey Skilling, whose work as a McKinsey & Company
consultant had impressed Lay, to head the new corporation.
 Skilling joined Enron at an auspicious time. The era's minimal regulatory
environment allowed Enron to flourish. Revolutionary internet stocks
were being valued at preposterous levels and, consequently, most
investors and regulators simply accepted spiking share prices as the
new normal.

Source: Case study from IMI-Docket and https://www.investopedia.com/updates/enron-scandal-summary/ , accessed on

10/07/2019
KENNETH LAY
 Enron’s story In short : Growth
 One of Skilling's early contributions
was to transition Enron's
accounting from a traditional
historical cost accounting
method to mark-to-market (MTM)
accounting method.
 Enron created Enron Online (EOL)-
1999: an electronic trading website
that focused on commodities.
Enron offered its reputation, credit,
and expertise in the energy sector.
 Enron was praised for its
expansions and ambitious projects,
and it was named "America's Most
Innovative Company"
by Fortune for six consecutive
years between 1996 and 2001.

Sourced from http://www.cba.uc.edu/faculty/sale/sale.htm

By Professor J.Timothy, accessed on 10/07/2019
 Enron’s story In short : The Downfall
 By the fall of 2000, Enron was starting to crumble under its own weight.
CEO Jeffrey Skilling hid the financial losses of the trading business and
other operations of the company using mark-to-market accounting.
 The mark-to-market practice led to schemes that were designed to
hide the losses and make the company appear more profitable than it
really was.
 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.
 A few days later, Enron changed pension plan administrators,
essentially forbidding employees from selling their shares for at least 30
days. 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.

Source: https://www.investopedia.com/updates/enron-scandal-summary/ accessed on 10/07/2019

 CAUSES FOR ENRON’S BANKRUPTCY
 Absence of Truthfulness ( Audit and compliance committee).

 Conflict of interests

 Mark to Market approach: In order to keep appeasing the investors to create a

consistent profiting situation in the company, Enron traders were pressured to forecast
high future cash flows on the long-term contract with Enron. The projection of the
long-term income was overly optimistic and inflated.

 SPE —Special Purpose Entity: Enron would transfer some of its heavy assets to the SPE
in order to Show up as ‘Asset light’. SPE was used as a vehicle to transfer debts.
 CONSEQUENCES

• Losses on the financial market amounted to the worst stock value loss in peaceful
times.(90$ in sep 2000 to 67 cents in dec 2001 )

• 4500 employees lost their jobs.

• The auditing firm Arthur Anderson lost its accreditation.

• Investors lost some 60 billion dollars within a few days; for many it meant losing their old-
age security.

• The pension fund for the company's employees was obliterated.

 CONSEQUENCES….

• Citizen’s trust in the American economic system was destroyed.

• The rules for company financial reporting were drastically sharpened: Sarbanes-Oxley
Act (2002).

• The close ties of the company's founder, Kenneth Lay, to US President George W. Bush –
Lay was an important financial supporter of Bush – came under sharp criticism.
 LESSONS LEARNT
 A company should report accurately and adequately to its shareholders, its regulators, its
suppliers, and its communities.
 A company should keep its employees & Investors informed of developments that would
affects its customers, the marketability of its products and services, and the employees' own
financial position.
 A good corporation develops and implements a practical code of ethics, including fair play
in dealing with customers, fair treatment and training of employees, and respect for human
rights and dignity.
 When Enron's bubble burst, most of its key executives seem to have taken care of themselves
and not their partners, their customers, or their employees.
 At root, there is an ethical backbone in American capitalism. Enron broke its own ethical
back.
 REFORM INITIATIVES (SOX ACT AFTER
REFORM)
 The U.S. Congress passed the Sarbanes-Oxley Act of 2002 on July 30 of that year to help
protect investors from fraudulent financial reporting by corporations. Also known as the
SOX Act of 2002 and the Corporate Responsibility Act of 2002 . The Sarbanes-Oxley Act of
2002 came in response to financial scandals in the early 2000s involving publicly traded
companies such as Enron Corporation, Tyco International plc, and WorldCom.
 The act created strict new rules for accountants, auditors, and corporate officers and
imposed more stringent recordkeeping requirements.
 The act also added new criminal penalties for violating securities laws.
 Corporate Responsibility -Certification by CEO/CFO
 Corporate and Criminal Fraud Accountability
THANK YOU