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on 16 January 2015

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Transcript of Enron

Effects of the Scandal
4,500 Enron employees lost their jobs (9)
Current condition of Enron
Works Cited List
Overview of the corporation
Summary of the scandal
How does it relate to GAAP’s?
Enron Scandal
By: Kiarra Lau

Consumers loved the idea of having a predictable dollar value on the gas purchased and were very enthusiastic about the idea.

Enron was the sixth largest natural gas and electricity company worldwide.

They created a contract, called
gas futures
, which stated that the consumers agree to take a delivery of natural gas in exchange for having a predetermined price on the future delivery date.

The Great Idea
Kenneth Lay
Enron was founded in 1985 by Kenneth Lay.

Enron created a "gas bank". The idea was that they would buy the gas from a network of suppliers then resell it to consumers at a guaranteed supply and price, with a fee for the transaction. (7)

It was created in 1985 when Houston Natural Gas and InterNorth, a Nebraska pipeline company, merged together. (6)

Like many large corporations, Enron used special purpose entities (SPEs). Special purpose entities allowed outside companies to invest their hard assets in exchange for interest from the company. SPEs can then borrow large amounts of money from banks to purchase assets and are not required to show their debts.
Who was involved?

The suppliers were harder to persuade since they believed that the gas price would continue increasing and they would rather sell it on a later date.

The Full Disclosure Principle states that all information of a company's financial statements must be clearly stated with no secrets or surprises.
The Principle of Conservatism states that the accounting for a business should be fair and reasonable where nothing is over and/or understated
Many of their clients and employees lost their pension plans due to Enron's downfall
Investors lost about 60 billion dollars in just a few days (5)
Enron lost the trust of investors

The scandal first became public when it was discovered by two Wall Street journalists, Rebecca Smith and John Emshwiller.

They wrote a article about the inconsistencies in Enron's liabilities and assets. This accusation could have been overlooked until Enron started defending themselves and claiming that journalists were being ridiculous.

Curious about Enron's defensive position, others took a closer look into their accounts. Then, they found the SPEs and the scandal was exposed. (10)
One year after Enron declared bankruptcy, Enron and along with WorldCom and, accounting firm Arthur Anderson lost about 28,500 employees, as well as losing $1.5 trillion from the labor union's retirement fund. (13)

So, I bet you're wondering...
How did they expand so quickly?

Because of this, the company made many high-risk deals.
At first, the merger accumulated massive debts in addition to losing exclusive rights to the pipeline due to state regulations. (8)
In order to survive, Enron needed to invent new and creative ways to produce cash flow and increase profit.
(Journal of Accountancy)
Unfortunately, many of these deals went bad and resulted in the loss of millions.

Eventually the suppliers agreed, and the Enron dominated the market for natural gas.
Since they owned most of the natural gas market, they were able to make accurate predictions on where the market was going and therefore earn the most profit.
History of Enron
Enron increased from 200 to over 2,000 employees and their revenue went from 2 million to 7 million in a few years. (4)
In the beginning of 2001, the economy started heading into recession and the energy prices began to fall.

In panic, many deals were made in the finance division without thinking about the future, or the company's risk management policies.

Enron's credit ratings decreased and they needed to lower their company's debt.
They came up with a complicated accounting solution by reducing the hard assets and converting them into paper profits to increase their return on assets and reduce the debt to total asset ratio. Even some highly experienced accountants had difficulty figuring out exactly how they did this.

This resulted in...
Keeping their debts off their books
Hiding their enormous losses from the investors
Making their accounts look much larger than they actually were

Enron violated these rules when they started hiding all of their debts into the SPEs and increased the value of their assets. Accounting must be done fairly and honestly but they used SPE practices to unfairly hide losses and "cook their books". If everyone followed these unfair practices, the ideology and integrity of the stock market and business would be ruined.

Unfortunately this was not enough.

They violated the Principle of Conservatism and the Full Disclosure Principle.
Kenneth Lay
The founder and Chairman of Enron
Retired when he discovered Enron would collapse
Found guilty of lying to investors and employees about disguising Enron's financial position
Charged for 7 accounts of fraud (1)
Died from a heart attack 2 months after being charged (12)
Jeffery Skilling
The brains behind the gas bank
Charged for several accounts of fraud, insider trading and conspiracy
Reduced his prison sentence from 24 to 14 years
$40 million of his fortune was sent to the people effected by Enron's collapse (2)
Andrew Fastow
Chief Financial Officer
Worked with other senior officers to disguise Enron's finances
Pleaded guilty and was sentenced to 10 years in prison. (1)

The Stock opened at $20.72 a share, had an all time high of $90.56 but ended up closing at $0.26 (11).
Enron took advantage of the SPEs and used it to hide all their assets that were not profiting by transferring their losses to one of the SPEs. (4)
Enron was inflating their income by about 600 million dollars by 2001
They filed for bankruptcy on Dec 2, 2001. (14)
This led to the largest bankruptcy filing in all of US history.
Feb 12
Jeffery Skilling becomes CEO
Aug 20
Lay sells 93,000 shares, earns 2 million, urges employees to buy company stock
Oct 16
Enron reveals 1.2 billion dollar decrease in company value
Oct 23
Arthur Anderson accelerates disposal of Enron-related documents
Nov 8
Enron admits to inflating income by almost $600 million
Dec 2
Enron files for bankruptcy
Alex Gibney directed a documentary in 2005 called
Enron: The Smartest Guys in the Room.
When they started moving the accounts and lying about the assets, their company started going downhill but when they continued to do it after so many years, they had accumulated and hidden so much debt that it became irreversible and their downfall became inevitable.

Sure, if they hadn't hid their debts their stocks wouldn't have skyrocketed as quickly. However the company could have lasted a lot longer and could have searched for legal ways to raise capital.

Enron is no longer in business.
1. http://www.nytimes.com/2006/01/29/business/businessspecial3/29profiles.html?pagewanted=all&_r=1&
2. http://www.huffingtonpost.com/2013/06/21/jeffrey-skilling-prison-sentence-reduced_n_3480145.html
3. http://content.time.com/time/interactive/0,31813,2013797,00.html
4. http://www.journalofaccountancy.com/Issues/2002/Apr/TheRiseAndFallOfEnron.htm
5. http://www.global-ethic-now.de/gen-eng/0d_weltethos-und-wirtschaft/0d-01-globale-wirtschaft/0d-01-203-enron-folgen.php
6. http://news.bbc.co.uk/hi/english/static/in_depth/business/2002/enron/timeline/1.stm
7. http://enron-online.com/2010/06/28/the-gas-bank/
8. http://www.referenceforbusiness.com/history2/57/Enron-Corporation.html
9. http://www.wsws.org/en/articles/2002/01/enro-j14.html
10. http://www.nieman.harvard.edu/reports/article/101334/Not-Every-Journalist-Missed-the-Enron-Story.aspx
11. https://caraellison.files.wordpress.com/2009/09/enron-historical-data.pdf
12. http://www.washingtonpost.com/wp-dyn/content/article/2006/07/05/AR2006070500523.html
13. http://abcnews.go.com/Business/story?id=86817
14. http://www.forbes.com/2001/12/03/1203topnews.html
If Enron was honest from the beginning and did not try to hide their debts, they might still be around today.

Arthur Andersen
founder of the Accounting corporation Arthur Anderson
formerly one of the "Big Five" accounting firms among PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG
provided auditing, tax, and consulting services to large corporations.
told secretary to shred Enron audit documents amid an investigation into covering up billions in losses at the energy firm.
convicted of obstructing justice, but the verdict was overturned in the U.S. Supreme Court
the damage to his reputation effectively put an end to all of the companies audit activities in 2002.
The safety measures in place to help protect the investors and the public as a whole were not followed properly. These safety measures included:
Generally Accepted Accounting Principles (GAAP), Generally Accepted Auditing Standards (GAAS), Statements on Auditing Standards (SAS), and all professional ethics
When Enron declared bankruptcy they had $13.1 billion in debt on Enron’s books, $18.1 billion on their subsidiaries’ books, and an estimated $20 billion more off the balance sheets (Zellner).
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