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Enron's Corporate Scandal
Transcript of Enron's Corporate Scandal
Karan Enron's Corporate Scandal BY: Charles Overview of the Corporation BY: Charles Brief Summary of Scandal BY: Gurkiran Description of the Scandal Methodology BY: Karan Evading Detection
-Enron began as pipeline company, result of the merger between companies Houston Natural Gas (HNG) and Internorth (Omaha, Nebraska)
-Public company/corporation (energy, commodities, services)
-Based in Houston, Texas
(Enron complex in downtown Houston)
-One of world’s leading companies in electricity, natural gas, communications
-Enron Online: launched 1999, allowed people to buy/sell/trade commodity products globally, at one point, over $6 billion was traded daily on Enron Online
-During peak years: annual revenue $100 billion US in 2000 (6th largest energy company in the world), approximately 90% of income came from trades on the company’s website for trading commodities, Enron Online.
-In 2000, employed approximately 22, 000 employees -Actions revealed in October 2001
-Called “the largest bankruptcy reorganization in American history” at the time, also known as the largest audit failure
-Scandal was possible due to Kenneth Lay (former CEO) being appointed Chairman and the hiring of a team of executives that would be able and willing to misrepresent Enron’s financial positions in a better light
-Hid billions in debts from failed deals and projects (a result of Kenneth Lay’s leadership as CEO) through accounting loopholes and bad financial reporting practices
-Executives such as CFO Andrew Fastow lead the scandal, but also pressured the accounting firm Arthur Andersen to ignore the errors
-Shares plummeted from $90 to less than $1 by the end of November 2011
-Arthur Andersen accounting firm
-Arthur Andersen dissolved as a result of Enron’s actions Effects? Recommendations -Accounting/audit firms should be separate and more independent from companies (to prevent situations similar to how Andrew Fastow pressured Arthur Andersen to ignore errors)
-Chairman should be chosen from people who have less conflict of interest (interests of shareholder’s vs. Company/individuals personal interests). Scandal was party possible due to Kenneth Lay being elected to Chairman after making many mistakes as former CEO, as a result, cared more about personal interests rather than the interests of the share holders Sources http://www.time.com/time/business/article/0,8599,263006,00.html
http://3.bp.blogspot.com/_rW-OJ48AJBU/STmZUWuyLII/AAAAAAAAGp0/zdKRzccXAGc/s320/duncan.jpg Impacts of Stake holders Shareholders:
- invested in Enron stocks
- Tremendous decrease after fraud publicized
-Enron executives ( who were aware of losses) dumped their stocks while telling public to buy more
- Shareholders lost a total of approximately $11 billion Employees:
- employees lost jobs which was considered a minor tragedy
- employees also lost life savings
- October 26- November 8 Enron prevented employees from selling stocks and they dropped from $15.40 to $9
- 4000 employees laid off Arthur Anderson:
- accounting firm that audited Enron
- was once in the world's top 5 accountants
- 2001 had to surrender its license to practice as certified public accountants
- faced damage to reputation
- convicted of obstruction of justice for shredding documents related to its audit of Enron
- over 100 civil suits pending on its audit of Enron and other companies
-lost most of its business
- lost 1/3rd of its 28 000 work force Board of Directors/ Central Management:
Kenneth Lay - Enron formed by him and was aware of scandal
Jeffrey Skilling- developed staff of executives who through the use of accounting loopholes, poor financial statements were able to hide billions in debt
Andrew Fastow- Chief Financial Officer, was able to mislead the board of directors to make it seem as though Enron was doing better than it seemed. Also pressurized Andersen to ignore issues Impact on Economy - August 2000, Enron's stock prices had peaked
- August, 15 2001, stock prices had plummeted down to $42
- Nearing end of October, stocks fell down to $15, tremendous loss for shareholders who were assured that the stocks would go back up
- Stocks fell to less than $1 by the end of November 2001
- collapse of Enron also increased costs on electricity and natural gas
- many other cancellations of power plant, pipelines and transmission lines
- major loss of employment Punishment? Kenneth L. Lay (Chairmen and Chief Executive)
Suffered heart attack and died before sentence was assigned
Reason(s): Bank Fraud, Conspiracy Jeffrey k. Skilling ( Chief Executive)
convicted and sentenced for 24.3 years in prison
Reason(s): conspiracy, securities fraud, inside trading Andrew S. Fastow: (Chief Financial Officer)
6 years in prison
Reason: conspiracy Still "Alive"? - The corporation declared bankruptcy on December 2, 2001
post bankruptcy, sold assets, last asset sold to Prisma Energy in 2006 leaving Enron Asset-less
- March 1 2007 changed name to Enron Creditors Recovery Corporation
- new goal to pay off Enron's remaining creditors and deal with affairs
Sarbanes- Oxley Act
- introduced in 2002
- contained 11 sections ranging from criminal penalties to corporate board responsibilities
-created new quasi public agency ( Public Company Accounting Oversight Board) who were charged with inspecting, disciplining and regulating accounting firms in their role as auditors The Key Players: Kenneth Lay
Role in the company: the founder and chairman of Enron Jeffrey Skilling
Role in the company: CEO Andy Fastow
Role in the company: Chief Financial officer Arthur Andersen LLP firm
Firm: -The firm was convicted of obstruction of justice for destroying Enron related documents When did it take place?
- The Scandal was revealed in October 2001, eventually led to one of the largest bankruptcies in U.S history. What was the scandal?
-Enron misled the public into believing that it was gaining profits from legitimate trading of its natural gas to energy distributors.
- Enron’s financial reports of year 2000, disclosed revenues of over $100 billion, which made the company the 7th highest revenue earner among America’s largest corporations. In the same year, Enron’s stocks went up to $90 per unit, which placed Enron’s market value at $700 billion.
- Enron’s top executives made a lot of money during this period.
- President Bush also gained because Enron contributed $2 million in his election campaign.
- However, there was one problem in all this: NO ACTUAL MONEY WAS COMING IN FROM REAL REVENUES. -All the revenues reported were products of accounting manipulations by Enron’s Chief Finance Officer Andrew Fastow.
- All the money paid out as dividend to stockholders came from the investors themselves and not from energy trading transactions.
- Arthur Anderson accounting firm turned a blind eye to all these accounting manipulations
-Instead he supported the company’s financial statement with audit reports that certified Enron’s financial statements as all in accordance with the GAAPs.
-Fake companies were used as fronts to unload some of the company’s losses without hurting Enron’s reputation. Why did they do it?
-Enron executives wanted to gain profits for themselves in America’s deregulated economy where business entities were afforded tax cutbacks.
-These tax cutbacks were intended as incentives for businesses to deliver the best quality in their products at competitive prices.
- This way, both the company and the executives could generate profits it would also give investors encouraging outputs on their funds. -Explain the specific accounting impropriety that occurred?
-The financial executives of Enron overstated their revenue value
- Fake companies were used as fronts to unload Enron’s losses
- Therefore, expenses and losses were understated
-The Owner’s equity was also overstated by a lot since the liabilities were understated David Duncan
Role: supported the company’s financial statement HOW THEY HID THE SCANDAL:
-The accounting scandal was a major means by which Enron hid it poor performance in the market.
-The financial fraud committed by the accounting firm Arthur Andersen, has been identified as the biggest audit failure ever.
-Enron’s CEOs Kenneth Lay and Jeffery Skilling managed to hide the company’s poor performance by making false reports, presenting it to the board of directors and the shareholders.
-They were able to hide billions of dollars in debt from the executives of the company and shareholders and at the same time they were gaining millions in revenues.
-Their main purpose of doing this fraud was to raise their stock market value.
-They hid their debts with the help of special entities. DID THE ACCOUNTANTS OUTSIDE THE ORGANIZATION HELP TO HIDE IT?
-Yes, Arthur Andersen accounting firm which was formerly one of the ‘Big Five’ accounting firms was involved in the scandal.
-Andersen did not fulfill its professional responsibilities in connection with its audits of Enron's financial statements, or its obligation to bring to the attention of Enron's Board of Directors concerns about Enron's internal contracts.
-Two leading officials of Arthur Andersen were responsible for giving orders of destroying the relevant documents and financial statements. WHO INSIDE THE ORGANIZATION HELPED TO HIDE THE SCANDAL?
-Kenneth Lay – former CEO of Enron and chairman
-Jeffery Skilling – former president, CEO, COO
-Andrew Fastow – former CFO
-Rebecca Mark – former vice chairman
-Stephen F. Cooper – Interim CEO and CRO
-John, J. Ray III – Co-chairperson HOW WAS THE SCANDAL WAS FINALLY DETECTED?
-Sherron Watkins, an Enron VP of Corporate Development, wrote an anonymous letter to Ken Lay that suggested Skilling had left because of accounting improprieties and other illegal actions. She questioned Enron's accounting methods and found out that the debts were hidden under SPEs(Special Purpose Entities).
-Sherron Watkins then met with Ken Lay in person, adding more details to her charges. She noted that the SPEs had been controlled by Enron's CFO, Fastow, and that he and other Enron employees had made their money and left only Enron at risk. During 2001, Enron's stock fell from $86 to 30 cents. On October 22, 2001 the SEC (US Securities and Exchanges Commission) began an investigation into Enron's accounting procedures