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Enron

The storyline of the Enron Scandal.
by

Maryellen Engelke

on 18 March 2013

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Transcript of Enron

Enron Case Study
Auditing LP 3
Joseph Kelly, Maryellen Engelke, Naomi Schultz, Brian Laufenberg Introduction The purpose of this presentation is to:
Provide an overview of the Enron corporation.
Identify key players in the Enron scandal.
Provide an outline of details in the Enron scandal.
Outline how Enron executives hid the fraud. Key Players Kenneth Lay Enron Created in 1985 when Houston Natural Gas merged with InterNorth Top Executive of Enron.
Found guilty to having lied to investors, employees, and regulators to disguise Enron's financial weakness.
Convicted on six counts of fraud and conspiracy and four counts of bank fraud.
Insisted Enron's collapse was due to a conspiracy waged by short sellers, a handful of rogue executives whose activities he was unaware of.
Two months after being charged he passed away while on vacation. Jeffrey Skilliing Initially was hired as a consultant to assist in developing Enron's business strategy, resulting in the energy derivative.
Was hired in 1990 to run Enron Finance Corp.
Established the performance review committee that created fierce internal competition to "do deals" and post earnings.
In 1996 became Enron's Chief Operating Officer.
Resigned in 2001 as stock price fell.
Convicted of 18 counts of fraud and conspiracy and one count of insider trading.
Sentenced to24 years and 4 months in prison and fined $45 million. Sherron Watkins Vice President of Enron.
Labeled a whistleblower in the Enron scandal.
Warned top executives about the company's accounting problems months before its collapse.
Stayed employed with Enron through the scandal.
Never accused of a crime. Andy Fastow CFO of Enron.
Found guilt of having lied to investors, employees, and regulators to disquise Enron's financial weakness.
Pled guilty to conspiracy and agreed to serve ten years in prison.
All other charges were dropped as a result of his cooperation. Timeline of Enron 1985 - Enron is created as the result of a the merger of Houston Natural Gas and Inter North 1989 - Enron begins trading natural gas commodities. 1990
-Created Enron Finance Corp.
-Jeffrey Skilling is hired to focus on commodities trading.
-Jeffrey Skilling hires Andrew Fastow. 1997 - Fastow creates Chewco, a partnership, to purchase the University of California pension fund's stake in a joint venture dubbed JEDI. Chewco doesn't meet requirements to be kept off Enron's balance sheet. This is the first step toward similar deceptive financial moves to hide debt and inflate profits. 1999
-Enron's board waives its conflict of interest provision which allows Fastow to run private partnerships that will do business with Enron.
- Enron creates Enron Online (EOL), an electronic commodities trading Web site. 2000 - Enron's shares reach high of $90.00 2001 August - Sherron Watkins meets with Lay to discuss concerns of murky finance and accounting. 2001 October 16 - Enron announces $638 million in third quarter losses and a $1.2 billion reduction in shareholder equity. This was the result of write-offs related to failed broadband and water trading ventures, and fragile entities backed by falling Enron stock created to hedge inflated asset values and keep hundreds of millions of dollars in debt off Enron's books. 2001 October 19 - Securities and Exchange Commission (SEC) launches investigation into Enron's finances. 2001 October 22 - Enron agrees to cooperate with the SEC. 2001 November - Enron files documents with SEC revising financial statements for the last five years to account for $586 million in losses. 2001 November - Enron states a $690 million debt is due Nov. 27. 2001 November 28 - Enron stock falls below $1.00 and is considered junk bond status. 2001 December 2 - Enron goes bankrupt and lays off more than 4,000 employees at Enron's headquarters in Houston. 2002 January
- A criminal investigation of Enron begins.
- The company's auditor, Arthur Andersen, states it has destroyed tons of Enron documents consisting of over 30,000 files and emails.
- Sherron Watkin's letter to Lay warning Enron could "implode in a wave of accounting scandals" surfaced
- Kenneth Lay resigns as chairman and CEO of Enron. 2002 March - Auditor Arthur Andersen indicted for destroying Enron documents 2002 October - Andersen sentenced to probation and fined $500,000. The firm was banned from auditing public companies. How the Fraud Was Hid Enron paid millions of dollars and consulting fees to Andersen; possibly impairing independence.
Enron established around 500 Special Purpose Entities (SPEs). 1997 - Skilling developed Enron Capital and Trade Resources, the biggest wholesale buyer and seller of natural gas and electricity; resulting in a growth in revenue of $5 billion. 2000 January - Enron announces plan to build a high speed broadband telecommunications network and to trade network capacity or bandwidth. 2000 July - Enron and Blockbuster announce a deal to offer video on demand to customers throughout the world. SPEs Allows a company to increase leverage and return on assets without having to report debt on its balance sheet.
The company contributes hard assets and related debt to a SPE in exchange for an interest.
The SPE borrows large sums of money to purchase assets or conduct business without the debt or assets showing up on the company's financial statements.
Only 3% of the SPE can be owned by an outside investor to avoid classification as a subsidiary. Enron capitalized SPEs not only with hard assets and liabilities, but also complex derivative financial instruments, Enron's restricted stock, rights to acquire its stock and related liabilities, and to park troubled assets that were falling in value.
Transferring troubled assets allowed Enron keep their losses off Enron's books.
In order not to dilute earnings per share, and add capital, Enron used SPEs to borrow funds directly from outside lenders, often supplying its own credit and stock guarantees.
As the number of SPEs Enron created increased, Enron began to use its own stock as collateral . This in turn increased Enron's stock income which allowed Enron to increase income by utilizing the equity method of accounting. How Enron Utilized SPEs Enron The Aftermath As Congressman John Dingell stated, "Enron went from the number seven company on the Fortune 400 to a penny stock in a stunning three weeks because it apparently lied for years in its financial statements."
Enron's collapse drew attention to deficiencies in several accounting and auditing areas including:
Treatment of off-balance sheet and related-party transactions
Auditor independence
Retention of audit records
Clarification of disclosure rules
Scandals such as Enron, Tyco, and WorldCom prompted Congress to pass the Sarbanes-Oxley Act (SOX) of 2002.
Toughened penalties for corporate fraud.
Restricted the types of consulting CPAs may perform for public company audit clients.
Created the Public Company Accounting Oversight Board (PCAOB). As a result of the merger, Enron incurred a massive debt and no longer had exclusive rights to its pipelines due to the deregulation. In order to survive, Enron had to come up with new and innovative strategies to generate profits and cash flow. 1998 - Anthony Fastow is named CFO of Enron 2000 - Enron has industry leading revenue of $101 billion. 2002 - Anthony Fastow is arrested for fraud, money laundering, and conspiracy charges. 2004 - Jefferey Skilling and Kenneth Lay are indicted Ben Gilsan, Jr. Treasurer of Enron until he was fired in October 2001.
Benefited personally from one of Enron's complex SPE investments.
Former accountant of Andersen.
Played a key role in accounting-related deceptions.
Plead guilty to one count of conspiracy related to financial reporting deception. David Duncan Partner in the Houston office of Andersen.
Headed the Enron audit.
Orchestrated a document shredding campaign.
Terminated from Arthur Andersen shortly after events became publicly known. Michael Kopper Andrew Fastow's Assistant.
Actively and aggressively involved in creating and managing SPEs, and the accounting deception.
Plead guilty to a lesser charge and cooperated with the government to investigate and prosecute others. Supporting Players An energy commodities and service company with industry leading revenue of $101 billion in 2000 and employing 21,000 people.
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