ENRON
A GLORIOUS DOWNFALL
Enron An Overview
20,000 staff, $101 B in 2000
1985, Houston, Texas
Houston Natural gas & Internorth
Americas Most Innovative Companies
Energy, commodity, services
25% of Gas business
energy brokering, electronic energy trading, global commodity and options trading, etc.
Electricity, natural gas, communications, pulp &paper
7th largest co., largest natural gas & electricity
Key Players in Enron Scandal
Was CEO of Enron until Feb. 2001 Returned as CEO in Aug. 2001 Approved of the actions of Skilling and Fastow Kenneth Lay Known as the Enron whistleblower Was Enrons VP of Corporate development Wrote a letter to Kenneth about suspicion of accounting improperties
Sherron Watkins ENRON
Jeffrey Skilling
David Duncan
Andrew Fastow
Appointed CEO in first half of 2001 Resigned in Aug 2001 Focused on meeting wall street expectations Advocated mark-to-market accounting Found new ways of hiding debt - SPE
Enrons chief auditor at Arthur Anderson His job was to check Enrons accounts Accused of ordering shredding of Enron related documents
Former CFO at Enron Mastermind behind deceptive accounting techniques Advocated merchant model Created off-balance-sheet vehicles
The Scam in Numbers
SHARE PRICE
IN Yr.2000 $90
SHAREHOLDERS LOST
$ 11 MILLION
IN Yr.2001 $0.3
Tools of Fraud
SPE
MERCHANT MODELREVENUE RECOGNITION
MARK-TO-MARKET ACCOUNTING
SCAM
Merchant Model-Revenue Recognition
AGGRESSIVE
Entire value of transaction recorded as revenue
IMPACT ON REVENUE
Inflated revenue Enron's revenues increased by more than 750%
IMPACT ON COMPETITORS
Same method later adopted by other companies in the energy trading industry to stay competitive
SPE - Special Purpose Entity
WHAT
Limited partnerships or companies created to fulfil a temporary or specific purpose Created to fund or manage risks associated with specific assets
WHY
FRAUD
Enron actually using the company's own stock and financial guarantees to finance these hedges
Enron's balance sheet understated its liabilities and overstated its equity
IMPACT
EXAMPLES
JEDI, Chewco, Whitewing, and LJM
Mark-to-Market Accounting
WHAT
Income is estimated as the present value of net future cash flows
HOW
Income from projects recorded on basis of expected benefit
IMPACT
Large discrepancies of attempting to match profits and cash Increasing financial earnings on the books SEC approved this accounting method for Enron Enron became the first non-financial company to use this method
LAPSE
The Scam
PARTNER ENRON
SPE
MARK-TO-MARKET
MERCHANT MODEL
HIDDEN DEBT
INCREASED REVENUE
INFLATED BOOKS OF ACCOUNTS
[Link]-AUDITOR
BOARD OF DIRECTORS
How they were Caught
Earnings 1997 2000 ($ millions)
Year 1997 1998 1999 2000 Original 105 703 893 979 Restated in 2001 77 570 645 880
Penalties Imposed
Suspension of trading on NYSE
Key Members charged with charges of forgery, money laundering
Monetary Fines
Partial Payment to creditors
Downfall of Enron
Lays efforts were not much successful DECLINE IN Related Party Transactions INVESTORS CONFIDENC E
LIQUIDITY CONCERNS
Enrons stock lost half its value over a week Bonds trading little below making future sales problematic
BANKRUPTC Y
Dynegy Inc. unilaterally disengaged from the proposed acquisition Stock price fell to $0.61 at the end of 28th November 2001
Downfall of Enron (Contd.)
Restructuring losses and SEC investigation
Reduced earnings by $613 million (or 23% of reported profits during the period)
Increased liabilities at the Reduced equity at the end of end of 2000 by $628 million 2000 by $1.2 billion (10% of (6% of reported liabilities reported equity) and 5.5% of reported equity)
Changes in Law
SarbanesOxley Act Implementation
Launching of Public Company Accounting oversight Board(PCAOB) to regulate the auditors of publicly traded companies To ensure corporate financial statements are subject to tough outside scrutiny and that auditor client relationship is free from commercial conflicts of interest
Accounting for Stock Options
Previously, stock options granted to executives and employees were not counted as a cost to the company so as to help companies retain skilled employees. After the scandal, it was required to expense the stock options. Also, an excise-tax was imposed on stock-based compensation
Changes in Law (contd.)
Derivatives Accounting
Financial derivatives are instruments without an intrinsic claim on financial assets. Many of them may not have a trading market and their fair value are calculated according to the firms own valuation model subject to manipulation. Rules and regulations were implemented to account for such derivatives
Principle-based Accounting
Previously, rules-based accounting was used which were not only ignored by companies but were very complex to understand. Accounting based on few principle rules that would not only provide a clear picture of the firms financial status but also prevent the creation of loopholes in the detailed set of rules
Current Situation
Regulations such as Public Company Accounting Reform and Investor Protection Act were amended. The fall of Enron lead to the dissolution of the accounting firm Arthur Anderson which at the time was among the best five accounting firms. In November 2004 Enron emerged from its bankruptcy and on September 2006 they sold Prisma Energy International their last business. As of 2007 Enron changed its name to Enron Creditors recovery Corporation By October 2008, Enron Creditors Recovery Corporation has returned 21.428 billion to its creditors By 2009, Enron will make an additional final distribution of any remaining assets to its creditors.
Thank You!
Shantanu Mittal Taranjit Bhasin Utsav Sharma Vasu Sharma Srishti Baul Vandana Jha