Transcript: ENRON PRESENTATION Summary Background American energy company from small gas company to large energy company The company developed, built, and operated power plants and pipelines while dealing with rules of law and other infrastructures worldwide. In just 15 years, Enron grew into one of America's largest companies, but its success was based on artificially inflated profits, dubious accounting practices, fraud Key Person Involved Big picture; optimistic; tended to avoid controversy “Ken gravitates toward good news” Proponent of big ideas; less interested in details “Skilling is a designer of ditches, not a digger of ditches.” Ambitious; unwilling to let the rules get in the way Share Price : $90.56 (Aug 2000) $00.26 (Dec,2001) What is Arthur Andersen Doing Was paid $52 million in 2000, the majority for non-audit related consulting services. Failed to spot many of Enron's losses Should have assessed Enron management's internal controls on derivatives trading; expressed approval of internal controls during 1998 through 2000 Provided both external and internal auditsCFOs and controllers were former Andersen executives accused of document destruction; was criminally indicted; Bankrupt Ethical Issues Mark-to-market Accounting Involves the revaluation of assets and liabilities in a regular basis It works reasonably well in securities trading, but it is less straightforward when applied to non-standardised, over-the-counter transactions, and to complex and long-term contracts Enron build an asset and immediately recorded its projected profits on their books If the actual revenue were less than the projected amount, Enron would transfer this asset to an off-the-books corporation (SPEs), so the losses would not appear on their financial statement Special Purpose Entities SPE is an entity, usually a limited partnership that is created to achieve temporary objectives A company usually transfers assets to the SPE for management or use the SPE to finance a project, so the company can achieve its temporary goals without putting itself in a financial risk Enron transferred their troubled asset that were falling in value to SPE so their losses would be kept off Enron’s books SPE borrowed money to purchase Enron’s assets Enron was liable to repay the loans taken out by the SPEs As long as Enron technically controlled no more than 50% of an SPE, Enron was not required by accounting rules to consolidate the SPE’s assets and liabilities Example: LJM and Raptors Financial Auditing Arthur Andersen performed as Enron’s internal auditor and consultant There is a conflict of interest between Andersen’s auditor and consultant since the consultants did not want to share their large earnings Andersen’s auditor produced inaccurate audited statements and overstated Enron’s profits Andersen has been fined for signing off on false and misleading financial statements issued by another client, Waste Management Andersen fund guilty because they shredded Enron’s documents Culture Risk taking, aggressive growth and creative entrepreneurial activity did not balance with integrity and the creation of customer value Enron used its size to intimidate parties that had different interest The day-to-day managers send clear signals to ignore the law, rules, and accounting practices Enron’s bankruptcy was illustrated by a van crashing retaining wall Theoretical Framework Adam Smith Invisible Hand Argument “It is his own advantage and not that of society that he has in view …(but) by directing that industry in such a manner as its produce may be of the greatest value, he (is) …led by an invisible hand to promote an end that was no part of his intention Enron’s culture: Money and greed Support any actions as long as they can enrich the executives, enrich the shareholders and keep the company appear profitable Government has no right to intervene Shareholders View The only responsibility of business: maximize shareholders wealth Enron's profit increased by billions of dollar by manipulating the accounting records and tax rules share price reached $90 per share in 2000 shareholder view Does Shareholder view really justify Enron’s action? Friedman states: free to maximize shareholders profit, WITHIN THE LAW. Enron executives and managers sent clear signals to ignore the law and accounting practices No genuine intention to maximize shareholders wealth. Freeman : Businesses have responsibility to ALL stakeholders employees, investors, creditors and general public. Enron’s action has destroyed public trust toward businesses in general. Deontology An action is morally wrong because it is intrinsically wrong. Cheating and lying are morally wrong actions morally right action is to refrain from doing those actions that are morally wrong. Manipulation of accounting records: Hidden debts and taxes Days beore bankruptcy: Jeff Skillling resigned: “I swear, the company is still in good shape!” Kenneth Lay (Enron’s Chairman): lied to employees: the loss is temporary
Transcript: Mark-To-Market Accounting Braveheart Vinod Jeyaretnam Downward Spiral Consumer Spending Habits Economic Boom Hot weather Power Struggle The electric grid was turned over to a state-created Independent Systems Operator for managing. The Utilities still had to pay off their old uneconomic investments so California froze the prices that the utilities charged consumers until 2002. Utilities were required to sell off all their power plants and buy electricity from a central wholesale pool called the California Power Exchange, but they were forbidden to sign any long-term contracts. Trading Stategies Fallout Several Companies lost Millions California lost $30 Billion dollars in 2000 because of the crisis. Enron- made $50 million on the books, but they booked $1.5 Billion into undisclosed reserves which could be used at a later time to boost quarterly profits. Sean MacRitchie Ethics the body of moral principles or values governing or distinctive of a particular culture or group Morals of, pertaining to, or concerned with the principles or rules of right conduct or the distinction between right and wrong PRC Pump and Dump More money in the pot from the strongest Whistleblower Exposure to economic, personal, and sometimes physical attacks Crisis Management vs Enron: America's Most Innovative Failure The "fair value" approach is very subjective, especially in accounting for future values or in the case of Enron, measureing the value of energy. R.I.P. Enron Bankruptcy Creatively Scandalous The "fair value" of an asset or liability in contrast with the "historical cost" approach Inability to Dissemiante Information Who blames who? A Quartet of entities In the beginning.. Aftermath Andy Fastow CFO Raptors Exxon Who lost what? Checks and Balances Last step Useful when calculating cost of stocks: 10 shares bought at $1.00/share, current price is $2.00 share Historical cost approach = Asset worth $10.00 Mark-To-Market approach = Asset worth $20.00 Joint Energy Development Investments Death Star Get Shorty Richochet Sketchy Procedures State Regulators Finished Sarbanes-Oxley Act of 2002 7th largest corporation in 2001 and was valued at $70 billion. Jedi 2nd step Perception How can Mark-To-Market accounting be misused? Not-so-fun facts.. It took Enron a matter of 16 years to go from $10 billion dollars in assets to $65 billion in assets. It only took them 24 days to go completely bankrupt. What is Enron? Survival of the Fittest Enron was able to inflate it's financial statements, making it more attractive to investors. Honesty in Accounting Fortune & Fame Ken Lay Founder, Chairman and CEO Merger Motivation Johnson & Johnson LJM2 (cc) photo by medhead on Flickr Too little too late Jeff Skilling President and COO
Transcript: "It generated, transmitted, and distributed electricity to the northwestern United States, and marketed natural gas, electricity, and other commodities globally" Ferrell THE ENRON SCANDAL Conclusion Brokerage and Investment banking firm Had a role in ENRON’s sale of Nigerian barges in 1999. allowed ENRON to improperly record 12 million in earnings meet its earning goals in 1999. Merrill Lynch participated despite an internal document that suggested "the transactions might have been construed as aiding and abetting ENRON’s fraudulent manipulation of its income statement" Merill Lynch claims no knowledge transaction was a skam they helped ENRON falsify its financial reports. Agreed to pay 80 million to settle charges Under the Recovery Plan, creditors would receive about 2/3’s of the amount of cash and the rest in equity in 3 new companies CrossCountry Energy Corporation Money was to be used for debt repayment, and represented a substantioal increase over a previous offer Prisma Energy International Inc. Money from sale was given out to creditors through cash distribution Portland General Electric Emerged from bankruptcy as an independent company through a private stock offering to enron creditors The largest in U.S. corporate history Used special purpose entities (SPEs) Stock prices fell in 2001 The Whistle-Blower Was CEO before Jeffrey Skilling Remained chair of board Claimed he knew little of what was going on Participated in allowing the off balance sheet partnerships to be created He thought they were legal because lawyers approved them Sold 80 million worth of his stocks in 2001 while encouraging employees to buy more stock (fishy) Convicted of 19 counts of fraud, conspiracy, and insider trading. Verdict was thrown out in 2006 Lay died of heart failure in his home Ferrell, O. C., John Fraedrich, and Linda Ferrell. Business Ethics: Ethical Decision Making and Cases. Eighth ed. Boston: Houghton Mifflin, 2011. Print. Accountabilty "A 'rank and yank' system" Ferrell Encouraged breaking the rules "Integrity was pushed to the side at ENRON" Ferrell ENRON's mastermind Most difficult to prosecute Claimed to know nothing about : any inappropriate financial arrangements how ENRON fell into bankruptcy so quickly Found guilty Sentenced 24 years in prison ENRON ended up paying 128 million to creditors which brought the total amount of recovery to 21.549 billion dollars. Enron also had to pay California for fraudulent activities. They agreed to pay 47 million for taking advantage of California consumers during an energy shortage. ANDREW FASTOW Fallout Cont. ENRONs auditing company Responsible for ensuring the accuracy of ENRONs financial statements and internal book keeping The reports show whether to invest in the business or to stop Found guilty Andersen is now banned from performing audits Houston law firm ENRON was their top client Helped structure ENRONs SPE's Paid 30 million to Enron to settle claims that Vinson and Elkins contributed to the firms collapse Lay and Skilling Merrill Lynch Arthur Andersen Vinson and Elkins What about Watkins? Resulted In Loss of confidence in corporate integrity Plagued other markets Created tough examinations of financial practices for businesses Conclusion Cont. What Did ENRON do? The Fallout The Executive Officer Two major gas pipeline companies combine Started in 1985 ENRON One of the top fortune 500 companies Most innovative company in America How was ENRON unethical? Collapse Owned a mountain of debt Worked a complex scheme of off-balance-sheet partnerships Laid off four thousand employees Stockholders lost billions Biggest business scandal of that time Passed legislation to prevent fraud Bankruptcy affected the whole world The misconduct of Lay and Skilling has not been forgotten over the years Key Ethical Terms KEN LAY The History of ENRON Oversight The ENRON creditors recovery corporation was formed to help ENRON creditors. It states that its mission is to "reorganize and liquidate the remaining operations and assets of ENRON following one of the largest and most complex bankruptcies in U.S. history.” Merrill Lynch goes bankrupt Lehman Brothers go bankrupt Fraud- intentional deception made for personal gain to damage another individual Stakeholders- those who have a stake or claim in some aspect of a company’s products, operations, markets, industry and outcomes Corporate culture- a set of values, beliefs, goals, norms and ways to solve problems that members (employees) of an organization share. Vinson and Elkins Indicted in 2002 on 98 federal counts Brains behind the partnership Made $30 million illegally Fastow denied any wrongdoing Eventually pleaded guilty Merrill Lynch Vice president Sherron Watkins warns CEO Jeffrey Skilling of accounting downfall Jeffrey Skilling resigns in August of 2001 Ken Lay takes over as CEO Mistreats Watkins Watkins testifies against ENRON in February of 2002 Learning from ENRON The ENRON Corporation collapsed in 2001 due to fraudulant
Transcript: Decision Consequences http://news.bbc.co.uk/hi/english/static/in_depth/business/2002/enron/timeline/1.stm Short Term bankrupt non existent During All the investors/employees profited Top line managers made millions a day Made up companies to invest into Enron Long Term Stock Depiction What was done? 99% of the employees They were encouraged to put all their investments into Enron All life savings, gone Cover Up Founded by Kenneth Lay Jeffrey Skilling (Former CEO) Andrew Fastow (Former CFO) Enron traders Trading energy 22,000 employees $101 Billion in revenue Who Benefitted? Company went bankrupt Many people arrested Investors/Employees lost all their money not starting it anyways no problem in the first place look further in depth about the companies invested prevent fraud not make up fake companies there would be no consequences Fastow used illegal methods to coverup loses Denied fraud in court Sherron Watkins reviewed all the financial statements Brought it to the media After Who was hurt? American Energy company based in Houston, Texas Works Cited not use market to market accounting method noone else would be involved Started rolling blackouts in California Enron Enron today... What we would have done... Enron lied about income Most major executives were arrested All money earned was taken away Key People http://whatreallyhappened.com/WRHARTICLES/enron.html Lawyers gained business through sueing Traders got away, kept money http://www.time.com/time/specials/packages/0,28757,2021097,00.html Background Information People in California suffered frequent blackouts Regular investors investing into Enron Made alot of money ($101 Billion) Dealing with accusations
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Transcript: Like many companies, Enron sponsors a retirement plan, a “401(k)” – for its employees to which they can contribute a portion of their pay on a tax-deferred basis. As of December 31, 2000, 62% of the assets held in the corporation’s 401(k) retirement plan consisted of Enron stock. Many individual Enron employees held even larger percentages of Enron stock in their 401(k) accounts. Shares of Enron, which in January 2001 traded for more than $80/share, were worth less than 70 cents in January 2002. Consequently, the company’s bankruptcy has substantially reduced the value of its employees’ retirement accounts. The losses suffered by participants in the Enron Corporation’s 401(k) plan have prompted questions about the laws and regulations that govern these plans. Testing the solutions, usually contain two steps. Firstly, The Solution Expectations ‘’TSE’’.TSE tills us , what do we expect from the solution, to see later if it’s Integrate. Secondly ,decide where it’s Long term solution or short term solution.This can till us due what time results can be notable ,and how long the process going to take time . these two steps are very important in any testing solution process. Implementing the results will help to determine which activities effectively support goals and objectives, it’s also needed for staff to prepare and effectively communicate change. After the time and effort spent on developing a solution , taking the next step with Implementing the results, will help the company to focus on the profit-building strategies that will keep their income high. Starting at the employee level and moving up.It's a belief that's increasingly gaining acceptance: employees are the most important and over-looked link in the company profit chain. Securities analysts employed by investment banks provide research and make “buy,” “sell,” or “hold” recommendations for the use of their sales staffs and their investor clients. These recommendations are widely circulated and are relied upon by many investors throughout the markets. Analyst support was crucial to Enron because it required constant funding from the financial markets. On November 29, 2001, after Enron’s stock had fallen 99%, and after rating agencies had downgraded its debt to “junk bond” status, only two of 11 major firm analyses rated its stock a “sell.” This performance added concerns that were raised in 2000 in the wake of the “dot.com” stock crash. Implementing the results. Defining the problem The role of a company’s board of directors is to oversee corporate management to protect the interests of shareholders. However, in 1999 Enron’s board waived conflict of interest rules to allow chief financial officer Andrew Fastow to create private partnerships to do business with the firm. These partnerships appear to have concealed debts and liabilities that would have had a significant impact on Enron’s reported profits. Enron’s collapse raises the issue of how to reinforce directors’ capability and will to challenge questionable dealings by corporate managers. Developing a Solution: The Model: Y= a + b1 x1 + b2 x2 + b3 x3 + b4 x4 + b5 x5 + b6 x6 As in: X1: Auditing Issues X2: Accounting Issues X3: Pension Issues X4: Corporate Governance Issue X5: Securities Analyst Issue X6: Derivative Issues Testing the solution Developing a Solution: Developing a Solution: The Enron situation involves several accounting issues. One concerns the rules governing whether the financial statements of special purpose entities established by a corporation should be consolidated with the corporation’s financial statements; for certain special purpose entities partnerships at issue, consolidation is not required if among other things an independent third party invests as little as 3% of the capital, a amount some consider too low. A second issue concerns the latitude allowed in valuing derivatives, particularly non exchange traded energy contracts. Third, there are calls for improved disclosure, either in notes to financial statements or a management discussion and analysis, especially for financial arrangements involving contingent liabilities. External audits do not prevent corporations from making financial mistakes and bankruptcy, problems with recent Enron audits may have contributed to both the rise and the sharp fall in its stock price. Outside investors, including financial institutions, have been misled about the corporation’s net income and contingent liabilities which were far larger than generally known. In order to test your solution ,we need to look at the solutions from different prospective, that would guarantee that the solution is going throw the right direction. The key term here is, Study or Testing the solution ,after we have done enough research,the solution developers, must learn from other companies mistakes ,and consider their experiences as a major role on testing there next solutions .The solution developers ,must also ask them selves, why this solution will fix
Transcript: The Enron scandal is considered on of the most notorious by far in American history and is an excellent example of white collar crime. The actions of Enron costed their investors over $70 billion and their employees and other affliated persons over $2 billion, and as a result of their limited-liability policy, very little of that money was ever returned. Later on, these very same representatives announced an energy crisis in an attempt to cover up the soon-approaching bankruptcy of the company The Enron Scandal Enron representatives carried out their scheme by embezzling money from their own providers and investments and through access to their financial and business records, they recorded a substantial increase in revenue in the company's profit, while, in fact, they were sucking their funds dry. Enron By Brian Reeves
Transcript: ENRON "In the Titanic, the captain went down with the ship. And Enron looks to me like the captain first gave himself and his friends a bonus, then lowered himself and the top folks down the lifeboat and then hollered up and said, 'By the way, everything is going to be just fine.' " U.S. Senator Byron Dorgan Houston Natural Gas + InterNorth =
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