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Enron Scandal

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by

Jim Smith

on 17 January 2014

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Transcript of Enron Scandal

Summary of the Actual Scandal
Specific details of the accounting impropriety
Effects and Results of the Scandal
Recommendation as how to avoid similar accounting improprieties
Conclusion
*Enron at a glance
http://news.bbc.co.uk/2/hi/business/1780075.stm
*Summary
http://finance.laws.com/enron-scandal-summary
*Lessons from Enron
http://www.scu.edu/ethics/publications/ethicalperspectives/enronlessons.html
*Enron Report PDF
http://royce.house.gov/uploadedfiles/rs21135.pdf
Enron was changed to Enron Creditors Recovery Corp.
End of 2001, reported as
creatively
planned account fraud
Enron executives kept their stock price
climbing
by
pumping up

its revenues
and
hiding

so many of its debts
Only a
small
amount money was ever returned
Work Cites
http://en.wikipedia.org/wiki/Enron
http://www.eoearth.org/view/article/152569/
http://en.wikipedia.org/wiki/Prisma_Energy_International
http://na.sage.com/sage-50-accounting-ca/lp/business-resources/accounting-basics/compliance/preventing-employee-fraud-top-ten-tips/

http://www.global-ethic-now.de/gen-eng/0d_weltethos-und-wirtschaft/0d-01-globale-wirtschaft/0d-01-203-enron-folgen.php
Overview of the Corporation

• Kenneth Lay merged the natural gas pipeline companies of Houston Natural Gas and InterNorth to form Enron.
• American energies, commodities, and services Company.
• Enron was founded in Omaha, Nebraska, US in 1985 until December 2, 2004 when Enron filed for bankruptcy.
• Enron was not only known as a energy company, but the corporation expanded into other business areas, including water, fiber optics, newsprint, and telecommunications.
• In 1995, Enron had revenue of about $9 billion. Had claimed revenues of nearly $101 billion during 2000.
• Enron was a major political contributor with $6 billion of campaign contributions. Enron appeared on the list as “best companies to work for” and “most innovative companies”, stated by President George W. Bush.
• Ken Lay was convicted and faced a sentence of 45 years in prison. He died due to a heart attack before the sentencing was scheduled.
• Also affected Prisma Energy International which was the subsidiary of Enron. Prisma Energy International provided the majority of Enron’s overseas assets. The result of the liquidation of Enron, Prisma was sold to Ashmore Energy International on September 7, 2006.
• Enron was changed to Enron Creditors Recovery Corp. (ECRC) by a new board of directors to emphasize liquidation of Enron including certain operations and assets.

A Summary of the actual Scandal

• A problem with corporate and commercial regulation
• ENRON’s earning reports to be extremely skewed – Losses were not illustrated in their entirety prompting more and more investments on the part of investors wishing to partake in what seemed like a profitable company.
• Misrepresenting earning reports while continuing to enjoy the revenue provided by the investors not privy to the true financial condition of ENRON. Reporting fraudulent earnings to those investors. This attracted more investors
• Enron gamed the system in two primary ways: It exploited energy industry accounting rules to record short-term revenue from long-term contracts, and it transferred debts and losses to a dizzying array of outside partnerships.
• By pumping up its revenues and hiding so many of its debts, Enron executives kept their stock price climbing and managed to look like Wall Street geniuses. After all, both strategies would have been legal if not for Enron's impatient financial corner-cutting.
• In February, Enron’s stock price had dropped from $80 per share to $30 per share in early October. The company used its stock values to obtain loans from complicated partnerships.
• Early November, Enron’s stock price fell to less than $10 per share, forcing it to borrow billions of dollars as an attempt to save the company
• At the end of November, Enron’s stocks were considered junk ($0.70 per share)

Specific Details of the accounting impropriety

• At the end of 2001, Enron was reported as a creatively planned accounting fraud.
• Many companies were affected during the scandal including Arthur Andersen who is known as one of the “Big Five” accounting firms providing auditing, tax, and consulting services to large corporations.
• The firm was found guilty of criminal charges relating to handling the auditing of Enron.

Effects and results of the Scandal

• In the year 2000, subsequent to the discovery of the crimes listed in the above ENRON Scandal Summary, ENRON had announced that there was a critical circumstance within California with regard to the supply of Natural Gas.
• Due to the fact the ENRON was a then-widely respected corporation, the general populace were not wary about the validity of these statements.
o While the ENRON executives were pocketing the investment funds from unsuspecting investors, those funds were being stolen from the company, which resulted in the bankruptcy of the company.
o Due to the actions of the ENRON executives, the ENRON Company went bankrupt. The loss sustained by investors exceeded $70 billion.
o Furthermore, these actions cost both trustees and employees upwards of $2 billion; this total is considered to be a result of misappropriated investments, pension funds, stock options, and savings plans
(ECRC) by a new board of directors to emphasize liquidation of Enron including certain operations and assets.
Ken Lay was convicted and faced a sentence of 45 years in prison. He died due to a heart attack before the sentencing was scheduled.

Recommendation as how to avoid similar accounting improprieties

• Have monthly/bi-monthly employee background checks – This will help maintain verification of each employee’s history of what they have done to ensure that no previous illegal activities exist.
• Control payroll distribution – Being able to manage your employees’ payroll means you can keep track of people who are working for the company. Keeping track also means that people who have worked for the company or friends of your employees’ should not be getting paid to avoid fraud and stealing money from the company.
• Manage bank statements – As a large company like Enron, you will constantly having money coming in. You want to make sure all of your money is going into your company and you’re not missing any cheques or statements, and also make sure they’re not being misused by another person/company. Even if you did not know that your money was being taken by someone else, the fault is still yours for not thoroughly checking.

Conclusion

• As a result of the government regulation and the limited liability status of the ENRON Corporation, only a small amount of the money lost was ever returned.

Enron gamed the system in
TWO
primary ways:
The fact the ENRON was a then-
widely
respected

corporation
meant that it was
easier
for them to pull such an act.
Tommy Huynh
Tony Nguyen
Enron's earning reports were
extremely skewed
.
Have monthly employee
background
checks
Control payroll distribution – Avoid "
ghost
" employees
Enron found a Loop-Hole in
Corporate
and
Commercial
regulation.
They managed to look like Wall Street geniuses.
This attracted more investors.
The
executives
made
millions
from investors who were simply
tricked
.
The loss sustained by investors exceeded
$70 billion

These actions also cost both trustees and employees upwards of $2 billion
Enron
shares
were worth:
http://www.cnn.com/2013/07/02/us/enron-fast-facts/
The Enron Company went
completely bankrupt
in November, 2004
Introduction
Tommy - How did the 6th largest company in the world fall so quickly?
Tony - How did anyone not notice Enron was a huge fraud sooner?
Tommy - Executives made over $1 million/week
Tony - Yet, it was the employees who suffered the most.
Tommy - My name is Tommy
Tony - My name is Tony and we're going to explain how the scandal came about, what went wrong, what resulted, and how it could be prevented .
Tommy - So I am going to start with a brief overview of the corporation.

Script
Overview of the Corporation - Enron is an energy, commodity, and service company. The company did not enlarge until the early 1990s.
In 1992, Indian experts came to America to find energy investors because India had power shortage problems. So, Enron created a 2015 megawatt power plant for them, in which they made $20 billion by rebuilding and stabilizing India's power grid.
8 years later in 2000, Enron had a revenue of nearly $101 billion
You might be wondering, how did Enron make over $80 billion in 5 years? Well, Enron was not only known as an energy company, the corporation expanded into other business areas, including water, fiber optics, newsprint, and telecommunications.
Enron was also a major political contributor with $6 billion of campaign contributions. Enron appeared on the list as "best companies to work for" and "most innovative companies", stated by the current president at that time; George W. Bush.
There were three main people who made Enron successful. Starting off with:
Kenneth Lay, who founded Enron in 1985, merged the natural gas pipeline companies of Houston Natural Gas and InterNorth to form the company.
Next is Jeffrey Skilling - Chairman and CEO (Chief Executive Officer). Ken Lay hired him because he was able to create a forward market in natural gas. The forward market is basically the financial market but without any supervision of the exchange between the companies.
And thirdly, Andrew Fastow - CFO (Chief Financial Officer). Fastow was in charge of buying cheap energy from producers and selling it to the market with floating prices. Now, floating prices are, in this case, is when the energy was bought from the producers, he would put them back on the market and leave them there for people to bid higher.
The summary of the actual Scandal
Enron found a Loop-Hole in Corporate and Commercial regulation.
Enron gamed the system in TWO primary ways
They transferred debts and losses to outside partnerships.
They exploited Industry accounting rules to
record short-term revenue from long-term contracts
Enron's earning reports were extremely skewed.
Losses were not illustrated in their entirety prompting more and more investments on the part of investors wishing to partake in what seemed like a profitable company.
Enron executives kept their stock price climbing by pumping up its revenues and hiding so many of its debts
This attracted more investors.
The fact the ENRON was a then-widely
respected corporation meant that it was easier for them to pull such an act.
The executives made millions from investors who were simply tricked.
They managed to look like Wall Street geniuses.
Specific Details of the account impropriety - Now moving onto the accounting improprieties.
At the end of 2001, Enron was reported as a creatively planned accounting fraud.
The reason why it was reported as creatively planned is because of a man named Arther Andersen, who is known as one of the "Big Five" accounting firms provided auditing, tax, and consulting services to large corporations such as Enron. He was able to hide this information to make Enron have a larger revenue than what it actually had.
The firm was found guilty of criminal charges relating to handling the auditing of Enron.
Effects and Results of the Scandal
In the year 2000, subsequent to the discovery of the crimes listed in the above ENRON Scandal Summary, ENRON had announced that there was a critical circumstance within California with regard to the supply of Natural Gas.
Enron shares were worth:
$90.75 at their peak in August, 2000
Dropped to $0.67 in January, 2002
The Enron Company went completely bankrupt in November, 2004
The loss sustained by investors exceeded $70 billion
These actions also cost both trustees and employees upwards of $2 billion
Enron was changed to Enron Creditors Recovery Corp.
(ECRC) by a new board of director to emphasize liquidation of Enron including certain operations and assets.
Ken Lay was convicted and faced a sentence of 45 years in prison. He died due to a heart attack before the sentencing was scheduled.
Recommendation as how to avoid similar accounting improprieties - Some ways to avoid similar accounting improprieties are:
Have routinely employee background checks - This will help maintain verification of each employee's history of what they have done to ensure that no previous illegal activities exist.
Control payroll distribution - Manage your employees' payroll and make sure there are no "invisible" employees. Invisible employees could include friends of your employees and people who do not work for the company anymore but are still getting a payroll out of the company.
Manage bank statements - As a large company like Enron, you will constantly have money coming in. You want to make sure you're not missing any cheques or statements, as well as to know if anyone is stealing money from your company.
Conclusion
The Executives of the company KNEW that the company was going under
They lied to all of their employees and encouraged them to buy more ENRON stocks
As a result, a huge number of families had their life savings in ENRON stocks
The executives SOLD their stock just before the stock price crashed.
The executives, because they sold the stock when the value was high, made billions collectively.
After they sold their stock, the price crashed, and the families lost out.
People who worked for Enron lost everything, including their homes.
Only a a small amount money was ever returned
As a result of the government regulation and the limited liability status of the ENRON Corporation, only a small amount of the money lost was ever returned
In 1992 - Revenue of
Jeffrey Skilling
Kenneth Lay
Andrew Fastow
Enron
expanded
into other business areas
Enron contributed over $6 billion dollars in campaigns
Overview of Enron
Former American
Natural Gas
and
Electricity
Marketer
In 2000 - Revenue of
The Masterminds
CFO
Founder (1985)
Chairman
CEO
They
exploited
Industry accounting rules to
record
short-term revenue
from
long-term contracts
They
transferred
debts and losses to
outside
partnerships.
$
20 Billion
$
101

Billion
Fakes and Lies
Deception
$90.75
at their
peak
in August, 2000
Dropped
to
$0.67
in January, 2002
Arthur Andersen - provided auditing, tax, consulting services
Firm was found guilty of
criminal
charges
The executives
SOLD
their stock
just before
the
stock price
crashed
.
The
Executives
of the company
KNEW
that the company was

going under
They
lied
to all of their
employees
and encouraged them to
buy more
ENRON
stocks
As a result, a
huge
number of families had their
life savings
in ENRON stocks
Manage bank statements
After they
sold
their stock, the
price crashed
, and the families lost out.
The executives, because they
sold
the stock when the value was
high
, made
billions
collectively.
People who worked for Enron
lost everything
, including their homes.
Full transcript