ENRON

“The smartest guys In the room”

Presented By:
Gaurav Moghe (16)
Tapasvi Dhar (14)
Shuvam Giri (29)
Mayur Panpaliya (50)
About
 Enron Corporation was Enron employed
an American energy, approximately 20,000
commodities, and staff with
services company based claimed revenues of
in Houston, Texas. nearly $101 billion during
2000.

It was founded in 1985 by

Kenneth Lay as the result Fortune named Enron
of "America's Most
a merger between Innovative
Houston Natural Gas and Company" for six
InterNorth. consecutive years.

Enron Corporation was

one of the leading Enron Scandal is
supplier of considered as the top 5
Natural Gas, scandals of all time
Communications , Pulp
and Paper
 What happened?
 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
 Many of Enron’s recorded assets and profits
were inflated or totally fraudulent and non-
existent. Debts and losses were put into
entities formed offshore that were not included
in the company’s financial statements

 Some highlights of the scandal are:-

$30 Million of self dealings by the
Chief Financial Officer
$700 Million of Net earnings
disappeared
$1.2 Billion of Equity Shareholders
disappeared
Over $4 billion hidden liabilities
Why it happened?
 AUDITING AND ACCOUNTING ISSUES

A C
As per federal securities law, Enron’s auditor also violated
accounting statement of publicly GAAP( general accepted
traded corporations be certified accounting
by an independent auditor. principles and permit corporation
to play “number games”.

B D
Enron’s auditor, Arthur Andersen,
turned a blind eye to improper
accounting practices as well as
he was actively involved in
devising
complex financial structures and
transactions.
As an organization of public
accountant, Arthur Andersen
violated the
regulations of the public
Accountant practices because
Andersen was
not only as the internal auditor
but also as the external auditor of
Enron.
 SPE (SPECIAL PURPOSE ENTITIES)

Financing technique

SPE’s reflect a common financing technique for companies.

Companies can cut their risk by moving assets into separate
partnerships that can be sold to outsideinvestors.

Losing Money

In Enron’s case, assets that were losing money were sold to partnerships. Enron
listed the sales of these assets as earnings. However, to be legitimate, accounting
rulesrequire that an SPE be legally isolated from the company that created it.

Leadership

In Enron’s case this was not true. The SPE’s relied upon
Enron managers for leadership and Enron stock for capital.
Pension Plan
Enron sponsored a pension plan for it’s employees that contribute a portion of their pay on
01 deferred tax basis.

02 Almost 62% of assets held in corporation’s 401(k) retirement plan consist of Enron’s stock.

03 Shares traded in Jan 2001 for more than $80\share become worth less than 70% in Jan 2002

04 While the investments grow in the employees 401k account, they do not pay any taxes on it.

05 Employees accounts were wiped out and losses suffered by participants.

 Other Issues
A C

There was a questionable Since the markets in which Enron

relationship between Enron and
Banking Issues
bankers Citigroup and J.P Morgan
Chase also contributed to the
downfall of Enron.
Energy traded are largely unregulated, with no
Derivative Issues reporting requirements, little information
was available about the extent or
profitability of Enron’s derivative
activities.

B D
Enron was lucrative investment The Performance Review committee
banking business for the banks. In fueled a dog-eat-dog environment that
exchange of potential profits, the Banking Issues Management rose up the top employees and axed
banks had lend money to Enron and Issue the lower ranking ones. People were
promote it’s derivative and securities harshly discouraged to ask questions
about the business dealings with the
company.
 What were the lapses?
A D
Due to the lack of corporate social Due to the large discrepancies of
responsibility, situation ethics, and get- attempting to match profits and cash,
it-done business pragmatism. investors were typically given false or
misleading reports

B E
Atmosphere of market euphoria and Deceptive reporting practices—lack of
corporate arrogance. transparency in reporting financial
affairs.

C F
High risk deals that went sour. Excessive interest in maintaining stock
prices.
 Government related issues
ENRON'S COLLAPSE: THE POLITICIANS; Enron Spread
Contributions on Both Sides of the Aisle ~ The New York Times
Senator Joseph I. Lieberman embodied how the Enron Corporation's collapse has tied
the capital in political knots

Enron had written campaign checks to three-fourths of the senators, and nearly half of the
members of the House. Perhaps because of those donations, Democrats and Republicans
had promised to aggressively investigate Enron's financial problems and their impact on
thousands of employees for fear of looking soft on the company.

Enron's decision to seek bankruptcy protection, the biggest in American history, was
corporate scandal. While most politicians say it has the classic elements of a political
scandal, too, they insist it is still too early to declare it one. Many elected officials on
Capitol Hill are proceeding cautiously as they embark on lengthy and complicated
inquiries.

The Congressional inquiries focused mainly on accusations of corporate malfeasance, but

investigators for several of the committees looking into Enron's political contacts divided into
three general areas of inquiry, President Bush, Vice President Cheney and Texas
legislators.
What were the
after effects?
 Impact on employees
Thousands of employee lost their jobs as
well as their retirement savings with the
company.
Lower-level employees were prevented
3 3 from selling their stock due to 401k
restriction and many subsequently lost
their life savings.

The pension fund for the employees was Laid off workers received $4500
obliterated. 2 2 severance payment, no matter how many
years they had worked for the company.

After bankruptcy, Enron fired 5000
workers, one quarter of its 21000
employees. The company expects to fire
more workers as it sells or shut s down
business units.
More than half of employees invested
1 1 about $1.2billion in Enron stock. Those
shares are now nearly worthless.
 Enron share holders received limited IMPACT ON SHAREHOLDERS
returns in law suits despite losing
billions in stock prices.

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.

No one wants to do any more investment

in the Enron.

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.
 Other Impacts
IMPACT ON COMPETITORS
a) On November 9,2001,rival energy trader Dynegy Inc. decided to purchase the
company for $8 billion in stock.
b) By the end of the month, Dynegy had backed out of the deal, citing Enron’s
downgrade to “junkbond”status and continuing financial irregularities.

IMPACT ON CUSTOMERS
a) Plans to develop natural gas deposits are being cut
back dramatically. Lose their source ultimately it results in power shortages
and higher cost in future years, the burden will fall on the consumers.
b) Lose their source of supply.

IMPACT ON GOVERNMENT
Enron’s fraud prompted the U.S congress to pass Sarabanes-Oxley
corporate accountability law, which forces corporate executives to take
personal responsibility for the accuracy of company accounts.
Suffered economic losses.
What legislation
improvement was made?
 SARBANES-OXLEY ACT

 In July of 2002,President George W. Bush signed into law the Sarbanes-

Oxley Act.

 The act was passed in response to a number of accounting scandal

between 2000-2002.

 The act heightened the consequences for destroying, altering or fabricating

financial record, or for trying to defraud shareholders.

 It created Public Company Accounting Oversight Board (PCAOB), which is

in charge of registering and inspecting public accounting firms, and for
modifying audit standards.

 This act aims at public accounting firms that participate in audits of

corporation.

 In response to the role of Arthur Anderson firm, in Enron’s fraudulent

behaviour, SOX also changes the way corporate boards deal with their
financial auditors. All companies, according to SOX must provide a year-
end, report about the internal controls they have in place and the
effectiveness of those internal controls.

 Although the Sarbanes-Oxley Act 2000 is generally credited with having

reduced corporate fraud andincreasing investor protection.
 FINANCIAL ACCOUNTING STANDARDS BOARD

 It existed since 1973 as one of the most widely recognized organizations

responsible for establishing standards of financial accounting and reporting.

 The legacy of Enron/Arthur Andersen live on various changes to the

profession.

 Prior to this case the accounting field was supervised by Public Oversight
Board (POB).

 But after this case came to the light SEC (Securities Exchange Commission)
Chairman, Harley L. Pitt, in 2002 made a series of enquiry about the system
of self-regulation in the accounting profession without consulting the POB.

 This ultimately led to the POB voting to disband in May,2002. As a result,

FASB emerged as the leader of the system of self-regulation and has taken a
significant role in the reform of accounting rules.

 In January, 2003, the FASB announced new accounting rules designed to

force US companies to move billions of dollars from off-balance sheet entities
into companies’ balance sheets.
What process improvement
was suggested?
01 CHANGES IN SPE 3% RULE
 SPE 3% Rule: Rule permitting Special Purpose Entities (SPE) created by a
firm to be treated as “off-balance sheet”, i.e. no required consolidation with
firm’s balance sheet-as long as 3% of the total capital of the SPE was
owned independently of the firm.

 Rule raised to 10% in 2003 following Enron scandal.

 After more misuse of rule, Financial Accounting Standards Board

(FASB)replaced this rule in 2009 with stricter consolidation standards on all
asset reporting.

02 COMPANIES TO REPORT LEASES

 After 15 years of the scandal, FASB has issued a final rule that changes
how companies account for most of their leases.

 Regulators started to consider a change in lease accounting after the

collapse in 2001 of Enron, whose executives made the company look
stronger by keeping some of its financial obligations “off-balance sheet”.

 The new rule requires that the most common type of lease be included on
company’s balance sheet, potentially giving investors a more accurate
picture of company’s health.
Thank you