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Biliran

Phil. TSM
by

Cathlyn Llavore

on 6 September 2013

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Transcript of Biliran

BACKGROUND OF THE CASE
David Duncan
Shredded all files

Inflated profit and Assets

Deleted 30,000 emails

WHAT GONE WRONG?
In 1992, Jeff Skilling, the president of the Enron’s trading operations, convinced federal regulators to permit Enron to use an accounting method known as “mark-to-market”.

Skilling demanded that the business use mark-to-market accounting, citing that it would represent true economic value.
Accounting method that requires that once a long-term contract was signed, income is estimated as the present value of net future cash flow.
Using this method allowed Enron to count projected earnings from long-term energy contracts as current income.
Due to the large discrepancies of attempting to match profits and cash, investors were typically given false or misleading reports.
It is thought that this technique was used to inflate revenue numbers by manipulating projections for future revenue.
Market-to-Market
Enron had been buying any new venture that looked promising as a new profit center. Their acquisitions were growing exponentially.
Enron used special purpose entities.
Enron had also been forming off balance sheet entities to move debt off of the balance sheet and transfer risk for their other business ventures.
In total, by 2001, Enron had used hundreds of special purpose entities to hide its debt.
The Raptors were established to cover their losses if the stocks in their start-up businesses fell.
When the telecom industry suffered its first downturn, Enron suffered as well. Business analysts began trying to unravel the source of Enron's money. The Raptors would collapse if Enron stock fell below a certain point, because they were ultimately backed only by Enron stock.
When Enron's stock began to decline, the Raptors began to decline as well.
On August 14, 2001, Enron's CEO, Jeff Skilling, resigned due to "family issues.“
Enron chairman Ken Lay stepped in as CEO.
Enron made a habit of booking costs of cancelled projects as assets, with the rationale that no official letter had stated that the project was cancelled. This method was known as "the snowball“.
Sherron Watkins
Financial Economic Impact
Many employees lost their jobs and all their retirement savings.
28000employees Andersen lost their job
Around 1,750 Andersen partners lost their entire life savings.
Andersen had lost around 150 U.S. Public Client
The financial losses due to loss of business with the departure of clients
It affect the retirement savings of thousands of ordinary Americans
Many individual investors who invested in index-funds lost money.
Millions of dollars lost in Enron stock Investments by Individual and Institutional investors.
Many of Enron’s trading partners such Citigroup and J.P. Morgan also suffered steep losses.
Subsequent Effect on Ethics, Governance, Risk Regulations of Ccountries or Global Markets Concerned
The government deregulated the oil and gas industry prior to the bankruptcy of Enron.
California experienced a series of rolling blackouts of electricity and significant spikes in the price of electricity.
Employees of Enron lost basically their entire retirement portfolios.
Investors lost any money they had invested in Enron stock.
They ignored the ethical standards.
Only focused on the achievement of their financial goal.
Began cheating on their works.
Employees were measured on their abilities to cheat.
The people who never cheated were regarded as odd.
Employees tended to be uncooperative and seldom communicated with each other.
Employees were unwilling to ask questions because asking questions was regarded as humiliating
Kenneth Lay
How
It
Was
Discovered?
Sherron Watkins, an Enron VP, 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 specifically cited the Raptor transactions.
Chung Wu, a UBS Paine Webber broker in Houston, sent an e-mail to 73 investment clients saying Enron was in trouble and advising them to consider selling their shares.
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.
On October 16, Enron announced a third quarter loss of $618 million.

During 2001, Enron's stock fell from $86 to 26 cents.

On October 22, the SEC began an investigation into Enron's accounting procedures and partnerships.

In November, Enron officials admitted to overstating company earnings by $57 million since 1997. Enron, or "the crooked E," filed for bankruptcy in December of 2001.
Conclusions
Misleading information was given to the investor due to the accounting system, which eventually lead to decreasing stock price when the information about this started to float up.
The downfall of Enron was caused by several factors.
The mark-to-market method.
Enron officials embezzled money from the firm while reporting fraudulent earnings to investors. Eventually, the company went bankrupt because of fraudulent earnings reports and embezzlement.
Recommmendations
Incentives must be paid after a project is done or at least when the company is really profiting from that certain project.
Operational risk should be minimized and there should be some sort of check up.
Careful selection of accounting approach and financial structures to use.
Minimized payment in stocks.
Full transcript