Aarju Kumari

Abhinav Chaudhary
Abinash Das
Ahana Das
Akarsh Deep
Akash Bhadra
Amal Jain
Amit

The Fall of Enron

 • Enron Corporation was an American energy
company based in Houston, Texas.
• Enron employed around 21,000 people and was
one of the world's leading electricity, natural gas,

Enron pulp and paper, and communications company,

with claimed revenues of $111 billion in 2000.

Company • Fortune named Enron "America's Most Innovative

Company" for 6 consecutive years.

Profile • It was formed in 1985 when Houston Natural Gas

merged with InterNorth.
• After several years of international and domestic
expansion involving complicated deals and
contracts, Enron went into billions of dollars into
debt.
 • Started from gas transport
• Ventured into long term fixed pricing

History &
contracts.
• Expanded to Broadband Services

Expansion • Capital and Risk management services

• Ventured into foreign countries
starting from the UK
• Started projects in several countries.
 Enron’s Business
Energy trading model
• Largest interstate pipeline firm
• Entered into long-term fixed-
price contract with its customers
• 1993 largest seller of natural gas
in North America
Trading model
• Focused on markets that were
highly inefficient
• Electric power in 1997
• Enron Broadband Services (EBS)
in 2000
 Enron’s Business
International business
• International energy-asset
construction business
• $1.4 billion Treeside power plant
in United Kingdom
• $2.9 billion Dabhol Power
Project in Mumbai.
Promoting Deregulation
• It entered market which were
recently deregulated
• Personal connection with high
ranking government officials
• Contributed heavily in
presidential campaigns of
George Bush.
 Major focus on the deregulated market who are highly
inefficient market, complex distribution channels, low
supply and services quality, etc.

Recruited scientists and engineers, lured with attractive

signing bonuses, free movement in the Organization.

Managing
Talent Biannual feedback system based on 360-degree review
system, PRC.

This process was used to drive employee compensation

and $750m annually paid to employees as cash bonus.

Superior originators had average salary of $150,000 to

$200,000.
 Analysed significant Evaluated the aggregate
financial and risks and rewards of the
nonfinancial risks for all company’s investments
its business, projects and using a variety of
transactions. information tools.

Risk Measured sudden

RisktRAC separated all
Management economic shocks
through Monte Carlo
trades and contracts into
1217 trading portfolios.
Practices simulations.

64-page code of Ethics

which laid out accepted
behaviours.
 From
1993-2001
Enron used complex & dubious accounting schemes:
• to reduce Enron’s tax payments;
• to inflate Enron’s income and profits;
• to inflate Enron’s stock price and credit rating;
• to hide losses in off-balance-sheet subsidiaries;
• to engineer off-balance-sheet schemes to funnel
money to themselves, friends, and family;
• to fraudulently misrepresent Enron’s financial
condition in public reports.
The Disaster
Stock
• Enron had a very complex business model,
which stretched the limits of the accounting. Financial Reporting
• The issue that was most challenging for the
company was, Enron’s non transparent financial Challenges
statements that did not clearly depict its operations
and finances with shareholders.
• The company followed Mark-to-market accounting,
in which the income was estimated as the PV of
future cash flow, but costs were hard to be recorded.
• Another important area of concern was over the
financial reporting for Special Purpose Entities
(SPEs).
• SPEs were legal entities created to fulfill narrow,
special or temporary objectives.
Financial
• These shell firms were created by a sponsor, but
managed by independent equity investor and debt
Reporting
financing.
• Enron used these to manage risks associated with
Challenges
specific assets and disclosed their minimal details in
financial reporting.
• By 2001, Enron had used hundreds of SPEs to hide
its debt. As a result of one violation, Enron’s balance
sheet understated its liabilities, overstated its equity
and profits.
 • Chairman – Ken Lay
• Review & oversight of the SPEs created to hedge
investment gains
• Andrew Fastow, CFO was granted the permission
Further to create LJM1 followed by 2&3 for hedging the
gains on Rhythms stock and so as to increase the

Actions
proportion of his own compensation under these
transactions, reason being that his SPEs were
making earnings in millions.
• Finance Committee analysed the risk for Raptors
from decline of Enron’s stock price and report said
that if stock price fell to $40, the company will
have to produce 35 million shares (approx.) to
meet the Raptor commitments.
 • Compensation & Management Development
Committee chaired by Charles LeMaistre
reviewed Fastow’s remuneration as well as
outside income sources for all senior officers.
• Lay and Skilling were the highest compensation

Further
earners including bonuses and stock options.
• Lay got an added advantage and received line of
credit of $7.5 million and used that to obtain more
Actions than $77 million in cash which he repaid using
company’s stock. This was reported to SEC and
the committee claimed that they were unaware of
the transactions occurring.
• Compensation policies also focussed on earnings
growth and stock prices more which led to conflict
of interests.
 An Audit & Compliance Arthur Andersen, the There was a lack of
Committee came to picture external auditor indicated independent oversight of
because of all such issues, risks associated with management by the Board
consisting of a professor of Enron’s accounting and which contributed to
accounting and former mentioned that nine Enron’s collapse.
CAUSES &
dean of Stanford Business accounting practices used
CONSEQUEN-CES
School. Some of the by the company were
reviews made were on: classified risky and
declared them company’s
“leading edge”.
Enron’s compliance with GAAP
Adequacy of reserves and
related party transactions
Disclosures relating to litigation
risks and credit risks
Overview of key business
trends and changes in Internal
Control System
EXTERNAL  The external auditors had to make sure whether a firm’s
AUDITOR financial statement is in accordance with GAAP
standards.
 The audit industry became competitive in 1970’s which
imposed challenges on the audit firms to apply consisting
accounting and auditing standards to develop low cost
audit procedures.
 Enron outsourced its internal audit functions to Arthur
Anderson who was Enron’s external auditor since 1985.
 Mr. Anderson classified Enron in its maximum risk
category.
 Enron’s employees entered into numerous complex
transactions and sometimes structured those
transactions in a way to achieve financial reporting
objectives.
 Over the years, 86 Anderson employees joined Enron
including its CAO, CEO and many Enron employees
were on the payroll of Anderson.
 • In 2001, Enron’s CEO Jeffrey Skilling resigned
and Kenneth Lay took over again as CEO.
During 1999-2001 many other top executives
resigned.

Enron’s • Sherron Watkins, VP of corporate development

suggested that Enron should infuse money to

Rapid satisfy capitalization requirements.

• Enron terminated hedges by Raptor and LJM

Demise SPE’s which costed them $544 million.

• In 2001, the shareholders equity was reduced
by $1.2 billion and Mr. Andrew Fastow was
fired for unfairly earning $45 million from LJM
transactions.
 • Enron’s earning from 1997-2000 were reduced
by $586 million and owners’ equity were
reduced by $929 million during same period.
Enron’s • Dynegy, Enron’s competitor agreed to acquire
it for $9 billion but later pulled out of the
Rapid proposed merger because credit agencies
downgraded Enron’s debt to junk-bond status,

Demise forcing the firm to retire $4 billion of its $13

billion debt.
• On December 2, 2001 Enron filed for
bankruptcy and sued Dynegy for breach of
contract.
THANK YOU