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Enron: Questionable Accounting Leads to Collapse

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Natalie Thibodeau

on 21 May 2016

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Transcript of Enron: Questionable Accounting Leads to Collapse

Enron's History: Before the collapse
Created out of the merger of two major gas pipeline companies in 1985.
Provided services related to natural gas, electricity, and communications for its wholesale and retail customers.
Became a $150 billion energy company and a favorite for Wall Street investors.
Was the 7th largest company in the Fortune 500 in the year 2000.

Corporate Culture
Large banner proclaimed Enron to be "The World's Leading Company."
Belief that Enron's employees could handle increased risk without danger.
Less concerned with generating profits for shareholders; more concerned with enriching officer wealth.
"Rank and yank". Employees were rated every 6 months; the bottom 20% were forced out of the company.
Competition was within the company as well as outside the company.
Employees were unlikely to share bad news about the company because they feared the managers would "shoot the messenger."
Rewarded innovation and punished those deemed weak or disloyal to the company.
Integrity was pushed aside, especially by top managers, in favor of high performance.

Accounting Problems
Enron claimed $979 million in net income and $3 billion in cash flow.
In REALITY, they earned $42 million in net income and NEGATIVE $154 million in cash flow.
Enron's bankruptcy was the largest in U.S. corporate history at the time.
Misrepresentation of financial statements that made the business appear more successful in order keep share prices high.
Enron created partnerships called "special-purpose entities" to conceal their loses and debt. These partnerships were entities in name only.

The Whistle-Blower
Sherron Watkins, Vice-President who had been working for Enron for 8 years.
She worked directly with the CFO, Andrew Fastow.
She discovered information about Enron's questionable business practices and was hesitant to confront then-CEO, Jeffery Skilling before finding a secure position at another company.
The Chief Financial Officer
Enron: Questionable Accounting Leads to Collapse
Charlotte Keays, Christine Bullock, Marissa Gesmundo, Natalie Thibodeau
While we go through the details, think of the following questions:
1. How did the corporate culture of Enron contribute to its bankruptcy?

2. Did Enron's bankers, auditors and attorneys contribute to Enron's demise?

3. What role did the company's chief financial officer play in creating the problems that led to Enron's financial problems?
The Chief Executive Officer
When Skilling resigned as CEO and was replaced by Ken Lay, Watkins' arranged a personal meeting with him.
Enron would "implode in a wave of accounting scandals," if nothing was done.

After this warning, her computer was confiscated and she was transferred to a new location where she continued as vice-president in name only.
Andrew Fastow was the brain behind the idea of the off-balance sheet partnerships used to falsify financial records that concealed some of Enron's $1 billion debt.
He was charged with fraud, money laundering, conspiracy and one count of obstruction of justice.
He initially claimed all of his work was reviewed and praised by the board of directors, chair, and CEO.
$37 million dollars of his illegally earned money was confiscated by federal officials.
His wife, Lea Fastow was the former assistant treasurer and she plead guilty felony tax crime for helping her husband's schemes.
Andrew claimed: "At no time did he do anything he believed was a crime."

Jeffery Skilling was the former CEO of Enron.
He was considered Enron's mastermind.
Kenneth Lay was the founding CEO of Enron. He stepped down to make way for Skilling in 2001 but then later resumed the role.
He claimed he was unaware of misconduct in the company.
He claimed in court: "I was not aware of any inappropriate financial agreements.
Skilling was convicted of honest services fraud and was sentenced to 24 years in prison.
When the Enron scandal concluded, many assumed it would serve as a lesson to other companies that they should act legally and ethically, but we continue to see that greed and corporate misconduct continue to be commonplace in the business world.
At first glance, Enron seemed to be a great, successful company.
The case of Enron reminds us that a corporate culture that focuses on high performance rather than integrity is destined to backfire.
He was convicted of 19 counts of fraud, conspiracy and insider trading.
Enron's Image
Enron was an attractive and a respectable career goal
for anyone who wanted to become acknowledged
“as a leader” in their field of study!

But things aren't always what they seem...
Enron hired Arthur Andersen to do their auditing.
They were responsible for ensuring the accuracy of the financial statements and internal bookkeeping.
Arthur Andersen willingly did not identify Enron's fraudulent statements.
Andersen was found guilty of obstruction of justice for destroying relevant documents and was disbarred from performing future audits..
The auditing company no longer operated but was never formally dissolved.
Enron was the top client of the Vinson and Elkins law firm and provided 7% of their $450 million revenue.
Most of Enron's legal department and general counsel members came from Vinson & Elkins.
They structured some of Enron's "special purpose partnerships".
They falsified opinion letters that supported the legality of Enron's deals with the partnerships.
Vinson and Elkins did not admit liability for the opinion letters but agreed to pay $30 million to Enron to settle claims.
Merrill Lynch is a brokerage and investment-banking firm that was involved in a questionable deal with Enron.
Enron sold Nigerian barges to Merrill Lynch for $28 million when, in reality, Enron themselves financed $21 million of it in order to manipulate their own financial statements.
Merrill Lynch denied the transaction was a sham, however the firm agreed to pay $80 million.
Three employees at Greenwich National Westminster Bank were arrested in 2004 for wire fraud involved in an Enron deal.
They used secret investments to take $7.3 million in income that belonged to their employer and subsequently split the income with Enron executives.
Full transcript