Daphne Quiquin Widmaeir Gallimor Michael Milana Alfred Zeiler The collapse of Enron has been described as offering the same sort of opportunity for reflection for the business community as the Challenger disaster did for the engineering profession. Companys Profile By early 2001, Enron was the 7th largest U.S. company, and the largest U.S. buyer/seller of natural gas and electricity Employed approximately 22,000 employees One of the world's leading electricity, natural gas, pulp, paper, and communications companies, with claimed revenues of nearly $101 billion in 2000 Named "America's Most Innovative Company" for six consecutive years Houston-based natural gas pipeline company formed by merger in 1985 of Houston Natural Gas Company and InterNorth, Inc Areas of Business Enron Wholesale Services Energy Services Transportation Services Enron Online Broadband Services Wholesale Services Global wholesale businesses that market, transport and provide energy commodities
Two business lines: 1. Commodity Sales and Services
2. Assets and Investments Retail arm of Enron that sells or manages the delivery of natural gas, electricity, liquids and other commodities.
Energy Services Transportation Services Oversees Enron's natural gas pipelines Broadband Services Provides broadband intermediation capabilities including network services, such as: dark fiber circuits Internet Protocol service data storage Enron Online Web-based system Gave access to more than 1,200 products o Petrochemical, Plastics, Power, Pulp & Paper, Steel, Weather Risk Management Transacting directly with Enron Set prices Enron We have metamorphosed from an asset-based pipeline and power generating company to a marketing and logistics company whose biggest assets are its well-established business approach and its innovative people.
Kenneth Lay, Chairman Enron What Happened On October 16, 2001 - the first major public sign of trouble - Enron announces a huge third-quarter loss of $618 million On October 22, 2001 - the SEC begins an inquiry into Enrons accounting practices On December 2, 2001 - Enron files for Post Enron Era 22 Enron executives & partners plead guilty or were convicted of criminal charges Arthur Andersen was found guilty of fraud; the conviction was later overturned on appeal Several Andersen partners were also personally convicted of crimes Post Enron Era Contd. 20,000 employees of Enron lost most of their savings and pension plans In 2004 Enron's name was changed to Enron Creditors Recovery Corporation with the mission to liquidate any remaining assets and operations of Enron Upon completion of its mission and final distribution to creditors, the company would no longer exist Conditions Allowing Fraud to Occur Deregulation of gas and electric utilities Change in Management Culture Change in Accounting Practices o Special Purpose Entities Deregulation Regulated & Inefficient Monopolies Create Competition Increase Efficiency Cheaper Energy Happy Consumers Change in Management Culture Richard Kinder - Enrons president from 1986 to 1996 Enron operated with a highly effective management control system Change in Management Culture Formal code of ethics Elaborate performance review and bonus structure Risk Assessment and Control group Big-5 auditor Conventional powers of boards and related committees Change in Management Culture Jeff Skilling - Enrons president from 1997 to 2001 Exercised control over almost all facets of the organization, particularly its accounting procedures Change in Management Culture Change in Accounting Practices Change in Accounting Practices On trading activities, Enron used the merchant model
Other firms used the agent model Change in Accounting Practices During the last four years before Enron filed for bankruptcy it reported an annual growth of 16.9 % on average for net income and 164.6% annual growth for revenue. This decreased Enrons net profit margins to a very low percentage.
Change in Accounting Practices
In 1991-2001 Enron reported negative free cash flows, high operating cash flows with decreasing and low profit margins. Change in Accounting Practices Discovery of the Financial Fraud On August 2001, Sherron Watkins, VP wrote an anonymous letter to Ken Lay stating that Skilling had left because of accounting improprieties and other illegal actions. She questioned Enron's accounting methods and mentioned the Raptor (SPEs) transactions. She also mentioned CFO, Fastow and other Enron employees had made their money, leaving Enron in danger for the support of the Raptors. Sherron Watkins The Whistleblower Discovery of the Financial Fraud Weeks later, Chung Wu, a UBS PaineWebber broker in Houston, sent an e-mail to 73 investment clients saying Enron was in trouble and advising them to consider selling their shares. Enron would compensate SPE investors shares of Enrons common stock for the losses. Discovery of the Financial Fraud The accounting firm Arthur Andersen was paid one million dollars a week for signing off the annual reports of Enron and being their consultant. A lawyer firm, Vinson and Elkins examined the business partnerships of Enron and was paid $900,000 a week to make the investments of Enron look legitimate. Discovery of the Financial Fraud On October 16 2001, Enron declared a third quarter loss of $618 million. During 2001, Enron's stock fell from $86 to 30 cents. On October 22, the SEC began an investigation Enron's accounting methods and partnerships. In November, Enron representatives admitted to overstating company earnings by $57 million since 1997. Discovery of the Financial Fraud Descriptions of the Fraud Valuation estimates overstated earnings Unrealized trading gains accounted for slightly more than half of the companys $1.41 billion reported pretax profit for 2000 Used special purpose entities (SPE) to access capital or hedge risk Descriptions of the Fraud Sold leveraged assets to the SPE, then booked profit Only 3% of the SPE needed to be owned by an outside investor Extremely complex derivative financial instruments Descriptions of the Fraud Transferring troubled assets to SPEs From 1999 through July 2001, these entities paid Fastow more than $30 million in management fees Descriptions of the Fraud Enron failed to consolidate SPEs into their financial statements Very confusing footnotes Bragging that the stock should be trading higher
Descriptions of the Fraud On August 14, six months after being named CEO, Skilling resigned for personal reasons Legal Ramifications of the Fraud Andrew Fastow Faced 98 counts Plead guilty to one charge of conspiracy to commit wire fraud Plead guilty to one charge of conspiracy to commit securities fraud Agreed to serve 6 years in prison Legal Ramifications of the Fraud Named in 35-count indictment Pleads not guilty to wire fraud Pleads not guilty to securities fraud Pleads not guilty to conspiracy Pleads not guilty to insider trading Pleads not guilty to making false statements on financial reports
Jeffrey Skilling
Jeffrey Skilling was sentenced to 24 years in prison.
His sentence was reduced to 14 years.
He has been in jail since 2006.
Ken Lay, was convicted of 10 counts of fraud and conspiracy in two cases He died of a he died a heart attack before sentencing was scheduled In all 16 people pleaded guilty
Legal Ramifications of the Fraud Was charged and found guilty for obstruction of justice The sec is not allowed to accept audits from convicted felons The company surrendered it s CPA license The conviction was later over turned Ramifications for Accountants Passed by congress in 2002 The PCAOB was created to develop standards for preparing audit reports This was to protect the interest of investors All rules and standards must be approved by the sec Sarbanes Oxley act The Process Conclusion and Group Reaction Ethics Increased regulation Fraud Reputation Independence