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Formed in 1985 by Kenneth

Enron Lay from a merger of Houston

Compa Natural Gas and Internorth


The first nationwide natural
ny gas pipeline network in
Houston, Texas
Profile
Enron pursued a
diversification strategy by
expanded pipeline business
involved natural gas
trading
Achievemen
ts
Fortune named Enron "America's Most Innovative
Company" for six consecutive years.

It was also an extensive futures trader, including sugar,


coffee, grains, hog, and other meat futures.

At the time of its bankruptcy filing in December 2001,


Enron structured into seven distinct business units.
Busine
ss
Model
Deregulation generally led to lower prices and increased
supply, it also introduced increased volatility in gas prices

Standard contract(old)--- allowed suppliers to interrupt gas


supply without legal penalties.

Creating a natural gas bank(Enron)----Enron began


offering utilities long-term fixed price contracts for natural
gas, typically at prices that assumed long-term declines in
spot prices.
Busine
ss
Model Off-balance sheet financing
vehicles---Special Purpose
Entities(SPE) , to finance many
of these transactions.

Enron Online---The creation of


the on-line trading model

The gas trading model was a


huge success. By 1992, Enron
was the largest merchant of
natural gas in North America.
Produc
ts

Gas

Oil

Broadband
Produc
ts

Electricity
pulp and
paper
water
Accounting and The Fraud
Scand
al At the end of 2001, it was
revealed that its reported
financial condition was
sustained substantially by
institutionalized, systematic, and
creatively planned accounting
fraud, known as the "Enron
scandal".

Enron has since become a


popular symbol of willful
corporate fraud and corruption.
Enron
s Fall The Enron scandal was a financial
scandal involving Enron Corporation
and its accounting firm Arthur
Andersen, that was revealed in late
2001.

After a series of revelations


involving irregular accounting
procedures conducted throughout
the 1990s, Enron was on the verge
of bankruptcy by November of
2001. A white knight rescue attempt
by a similar, smaller energy
company, Dynegy, was not viable.
Enron filed for bankruptcy on
December 2, 2001.
Accounti
ng Enrons nontransparent
financial statements did not
method clearly depict its operations
and finances with shareholders.

Accrual accounting: actual


costs and actual revenues were
received and recorded when
selling it.

Mark-to-market accounting:
income was estimated as the
PV of future cash flow, but
costs were hard to be recorded.
Accounti
ng Example:
In July 2000, Enron and Blockbuster
method Video signed a 20-year agreement to
introduce a new on-line video game to
various cities.

After several pilot projects, Enron


estimated profits of more than $110
million form the deal, even though
analysts questioned the technical
viability and market demand of the
service.

When the net work failed to work,


Blockbuster pulled out of the contract,
Enron continued to recognized future
profits, even though the deal resulted
in a loss.
Accounti
ng SPE(Special purpose entities)
It is a legal entity created to fulfill
method narrow, special or temporary objectives .
They are used to hide debt, ownership
mostly in real market.
These shell firms were created by a
sponsor, but managed by independent
equity investor and debt financing.

Enron used SPE to manage risks


associated with specific assets and
disclose minimal details of its SPE.
By 2001, Enron had used hundreds of
SPEs to hide its debt. As a result of one
violation, Enrons balance sheet
understated its liabilities, overstated its
equity and profits.
Timeline of Enrons Collapse
Date Event

20 Feb, Fortune Magazine story calls Enron a highly


2001 impenetrable Co. and stock was overpriced.

14 Aug, Jeff Skilling resigned as CEO, citing personal reasons.


2001 Kenneth Lay became CEO once again.

12 Oct, 2001 Arthur Anderson legal counsel instructs workers who


audit Enrons books to destroy all but the most basic
documents.

16 Oct, 2001 Enron reports a third quarter loss of $618 million.

24 Oct 2001 CFO Andrew Fastow who ran some of the


controversial SPEs is replaced
Timeline of Enrons Collapse
Date Event

8 Nov 2001 The company took the highly unusual move of


restating its profits for the past four years. It
admitted accounting errors, inflating income by $586
million since 1997. It effectively admitted
that it had inflated its profits by concealing debts in
the complicated partnership arrangements.

2 Dec,2001 Enron filed for Chapter 11 bankruptcy protection and


on the same day hit Dynegy Corp. with a$10 billion
breach-of-contract lawsuit.

12 Dec 2001 Anderson CEO Jo Berardino testifies that his firm


discovered possible illegal acts committed by Enron.

9 Jan 2002 U.S. Justice department launches criminal


investigation.
The Guilty Parties
Andrew Fastow and with Arthur Andersens
Assistance set up a
series of limited Partnership called special purpose
entities

Oct 2, 2002 :
Andrew Fastow is arrested on charges of fraud and
money
laundering. He would eventually face 98 charges

Jan 14, 2004 :


Former Enron CFO Andrew Fastow agrees to a
plea agreement and a 10-year prison
sentence. He pleads guilty to one count of
conspiracy to commit wire fraud and one
count of conspiracy to commit securities 16

fraud. He also agrees to co-operate with Enrons Former CFO, Andrew


federal prosecutors. Fastow
The Guilty
Parties
Jan. 10, 2002: Arthur Andersen says its
employees destroyed a "significant but
undetermined number of Enron
documents
David Duncan were cited as the
responsible managers in this scandal
as they had given the order to shred
relevant documents
On April 9, 2002 he pleaded guilty; the
maximum sentence for his crimes is
ten years, but since he pleaded guilty
and became a witness for the
prosecution he would have presumably
received a much smaller sentence .

Lead Partner for Enron Account, David


Duncan
Arthur
Anders
en
In July 2002, the one-time Big 5 accounting firm was found
guilty of obstruction of justice for shredding documents in
the Enron case.
Their Enron connections essentially put the entire firm out of
business, affecting 22,000 workers, most of whom had no
connection to Enron.
Sarbanes- Between December 2001 and April
Oxley Act 2002, the Senate Committee on
Banking, Housing, and Urban
Affairs and the House Committee
on Financial Services held multiple
hearings about the collapse of
Enron and related accounting and
investor protection issues.
These hearings and the corporate
scandals that followed Enron led to
the passage of the Sarbanes-Oxley
Act on July 30, 2002.The Act is
nearly "a mirror image of Enron:
the company's perceived corporate
governance failings are matched
virtually point for point in the
principal provisions of the Act."
Conclusion
In conclusion, Enron was a remarkable
and innovative company in the world,
Its success cannot be neglected.

But there is a interest question for


Enrons bankruptcy: Is there a company
can get success without ethics?

To see from the facts, the answer is


no.
Whether Enron or Anderson, they finally
pay for their fault on ethics.

We see ethic problem would bring a


fatal strike to a company, no matter
how it was successful.
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Conclusion
Enron was a massive failure, partly
because of its size, partly because of its
complexity, partly because the controls
to protect the integrity of capital
markets failed, and especially because
of the massive greed and collusion of
key participants. Management failed,
auditors failed, analysts failed,
creditors/bankers failed, and regulators
failed. The intersection of multiple
failures sent a signal of structural
problems. Suddenly, the consequence
of deceptive financial data resulting
from structural failure in the capital
markets was not merely a hypothetical
possibility. The speed with which the
system responded indicates the
importance of fairly presented financial
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information.
A presentation by:

AAKAR MANGLA
B.COM(H) SEC A
ROLL NO. 1040
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THANK YOU

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