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Parties Involved

annie-is-a-lebian.tumblr.com

John Clifford Baxter

Andrew Fastow

Jeffery Skillings

Kenneth lay

In class References to Accounting Improperties

  • Chief financial officer of Enron

  • Fastow plead guilty and got a lighter sentence than the others with 6 years in prison

Revenue Recognition Principle - states that revenue is to be recorded in the accounts at the time of the transactions.

  • He was the chief strategy officer at Enron

  • He committed suicide on Jan 25 2002, a year after he resigned from Enron.

  • Before his death he said to skillings "They are calling us child molesters, that will never wash off."
  • Skillings was the CEO a few month before the scandal

  • Skillings was convicted of 19 accounts of federal felonies related to the financial problems at Enron

  • He faced 24 years in prison
  • Kenneth Lay was the founder, CEO and chairmen of Enron from 1985 to 2002

  • Lay was convicted of 6 accounts of fraud .He faced 45 years in jail maximum.

  • Lay passed away July 5th 2002, of an heart attack. There are many conspiracies about his death, many believe that he is still alive

Business entity concept - a long-standing accounting principle that keeps accounting for a business separate from the accounting for the owner or for any other business.

Revenue recognition

Matching period - each expense item related to revenue earned must be recorded in the same fiscal period as the revenue it helped to earn.

Special Purpose Entities

  • To make Enron look like they had a LOT of money accountants falsified mark to market accounting for long term projects.

Avoiding Future Accounting Improperties

  • Enron used deception to manipulate its balance sheets to pose as a growing profitable and well financed company.
  • Special purpose entities are company's that have one job and it is to hold assets which would not be shown in Enron's balance sheet.

So What is Mark to Market Accounting?

$50 Million

  • Enron sold their assets to special purpose entities, these assets were not shown in there balance sheet , covering up their debt.
  • So lets pretend... Enron signed a contract that lasts twenty five years

AN EXAMPLE OF HOW IT WORKS

$40 Million

Kaitlyn buys a special pencil for $200,000

  • They need to estimate how much money they will make out of this contract

$30 Million

Kaitlyn now has this useless object under her assets in her balance sheet, portraying her as a really stupid person and Kaitlyn does not want to be seen as stupid.

  • The Enron corporation was responsible for the Sarbanes-Oxley act in 2002 that prohibited the acts of which Enron portrayed leading to their downfall to protect shareholders.

$20 Million

  • Enron owned other businesses but did not run them, just profited. (partnerships)

Kaitlyn gives $200,000 to Alex

  • So they calculate the highest amount of revenue they can possibly make, and minimize the expenses amount it will cost them to do

Kaitlyn has an acceptable balance sheet

$10 Million

Portray Kaitlyn as Enron and Alex as a partnership.

Kaitlyn has now gotten rid of the special pencil from being listed as an asset in her balance sheet by making Alex "buy" it from her.

25th year

20th year

10th year

15th year

5th year

In order for Kaitlyn to get rid of the special pencil off her balance sheet, she gives Alex the money to "buy" it from her.

  • Enron calculates the total profit of 25 years to be $50 million
  • By not claiming some their assets they were able to create a better balance sheet making their stock prices higher.

Alex now "buys" the special pencil from Kaitlyn

  • Every year Enron should have gone back to the contract and adjust the amount to what they really made

Alex basically give Kaitlyn her money back in exchange for the special pencil.

  • A corporate assessment would rule out any value, decision making, risk and vulnerabilities that could cost the company.
  • Enron didn't deduct the losses making them look a lot more profitable

Summary of scandal

Enron was able to hide, manipulate and deceive official accounts and auditors for years. A reporter named Bethany McLean published an article called "Is Enron Overpriced?" bringing attention to Enron; exposing them. She was able to show how the company claimed to be a multi-billion dollar company when they were actually in mass amounts of debt. They were able to pull off this scandal by cheating and lying, the three of the methods that they used were, over revenue recognition, special purpose entities and false auditing.

  • Keep the auditors and consultants separate, Enron used Arthur Andersen as both resulting in a conflict of interest between the parties.
  • To provide a code of conduct to provide guidance in making ethical decisions.

Auditors

The job of Auditors is to make sure the company accurately records all the accounts.

Anestasia sucks dick for a gram!!

Enron hired Arthur Anderson to audit their work and also hired them for consulting work.

Kaitlyn Raposo will always be better than Anestasia Raposo. She will always be the favorite child. even if shes adopted.

this message has been aproved by anestasia.

Arthur Anderson ignored all the accounting problems because they did not want to lose the muti million dollar consulting work.

WHO WAS ENRON CORPORATION?

Who did the Enron scandal effect?

  • Enron was established in 1985 by Kenneth Lay and Jeffrey Skilling.

Bibliography

1. http://money.cnn.com/2006/01/13/news/companies/enronoriginal_fortune

2.http://en.wikipedia.org/wiki/Enron

3.http://en.wikipedia.org/wiki/Arthur_Andersen

4.http://www.investopedia.com/financial-edge/1211/the-enron-collapse-a-look-back.aspx

5.http://finance.laws.com/enron-scandal-summary

6. http://content.time.com/time/specials/packages/article/0,28804,2021097_2023262_2023247,00.html

7. http://www.cnn.com/2013/07/02/us/enron-fast-facts/

8. http://www.nytimes.com/2002/01/26/opinion/enron-for-dummies.html

9. http://www.ethics.org/resource/ten-things-you-can-do-avoid-being-next-enron

10.http://en.wikipedia.org/wiki/J._Clifford_Baxter

11. (The Smartest Guys in the Room movie)

12. http://en.wikipedia.org/wiki/Bethany_McLean

  • The Enron company was the 7th largest corporation in America.

Enron's downfall resulted in the ripple effect; spreading its reaction to others such as the shareholders and Arthur Andersen, the banks and investors.

  • They were named "America's most innovative company" 6 years in a row.

EMPLOYEES & ARTHUR ANDERSEN

  • Enron laid of almost 5,000 of their 7,500 employees
  • One of the largest companies to produce electricity, natural gases, and other communication initiatives such as internet bandwidth, risk management, weather derivatives (weather insurance), etc.

The Enron scandal affected not only companies but the financial world as well.

  • employees lost all pension plan funds
  • Enron had no money to pay them back
  • Arthur Andersen was found guilty of shredding documentation and was convicted for the crime.
  • Arthur Andersen lost all respect from the business world.
  • Created markets where people could trade energy, gas futures, etc.
  • The Enron scandal surfaced in the October of 2001, leading to the bankruptcy of the Enron Corporation.
  • Enron's net worth valued at over 70 billion dollars before the bankruptcy.

But how did they manage to get away with it for so long?

INVESTORS & BANKS

  • investors lost almost 60 billion dollars after the downfall.

QUICK!

go to

katy-is-a-poo-eater.com

  • Enron lost the trust of investors and banks
  • Banks and investors wanted their money back but Enron could not comply due to their bankruptcy.
  • the Sarbanes-Oxley Act was introduced the the business world in 2002 thanks to Enron

this act protects shareholders from fraudulent activity and accounting errors and corporate accuracy.

Loopholes

Arthur Anderson

  • Arthur Anderson was the accounting firm responsible for checking Enron's accounts for confirmation of reliability.
  • Enron hired the best accountants around the world including the people who wrote GAAP and other accounting standard setters.
  • Arthur Anderson worked with Enron hiding the amount of debt that they were in for their own benefit (jobs employed at Enron).
  • These accountants were able to find loopholes to assist Enron in creating a larger profit.
  • When the scandal broke out the employees were ordered to shred of all Enron's documents
  • They changed the law of accounting and added the Sarbanes–Oxley Act because of the Enron scandal.

Confusing Annual Reports

  • Annual reports are documentation that show the public how the company preformed for the year.
  • The reports show how much money they have, how they handle it, and how they made it.

anestasia

is

a

butt

face

.com

  • By creating the annual reports in such a way that the public could not understand their areas of profit or business.
  • "the company remains largely impenetrable to outsiders"

The Enron Scandal

By: Kaitlyn & Anestasia

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