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IA

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cheung cheuk ki

on 26 June 2013

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Transcript of IA

NAME
Enron
Chau Ching Man Yuki 12000213
Lam Man Lay Rachel 12001724
Cheung Cheuk Ki Jacky 12005924
Kwok Hoi Pan Ben 12000027
Enron
Lam Wing Sum Sam 12000159
Enteron
Greek Word

- American Company Based in Houston, Texas

- A Leading Company Providing Natural Gas, Electricity

- 20000 Staff and Earned 101 Billion US Dollars in 2010

- America's Most Innovative Company
- 2011 Bankruptcy

- Enron Scandal

- Stock Price - 90 US Dollars to Only 50 Cents

- Dissolution of Arthur Anderson (Big5)
Abnormal Accounting Practices
Consequences
Stock Price Influence

- Executives Kept Losses in Secret

- Offloading of Shares Began from Executives, but the Public Kept Buying

- Public Still Expected Shares would be over US$ 130


Post-bankruptcy

- Enron's Shareholders Lost $74 billion in 4 Years before Company's Bankruptcy

- To Pay its Creditors, Employees & Investors, Enron Held Auctions to Sell Assets

- Around 22,000 Employees Lost their Jobs


Guilty Parties
Guilty Parties
Guilty Parties
Kenneth Lee Lay (CEO & Chairman)

Making False and Misleading Public Statements about Enron's Financial Performance

Charges: Fraud, False Statement

Penalty: Faced 40 Years in Prison and Monetary Fines, but Died before Sentencing

Jeffrey Skilling (CEO)

After Quitting Enron, Skilling Sold almost $60 Million of his Stake in the Company

Insisted to Adopt "Mark-to-Market" Accounting

Charges: Conspiracy, Securities Fraud, False Statement, Insider Trading

Penalty: Originally Sentenced to 24 Years and 4 Months and Fined US$45 Million
Andrew Stuart Fastow (CFO)

Allowed Enron's Audited Balance Sheet to Appear to be Debt-free (Reality: Owed More than US$30 Billion)

Charges: Conspiracy, Securities Fraud, False Statement, Insider Trading

Penalty: 6 Years, Followed by 2 Years of Probation
Guilty Parties - Arthur Andersen
One of the “Big Five” Accounting Firms
Reasons of Arthur Andersen ‘s Downfall

- Conflict of Interest : Enron was Andersen’s Second Largest Client

Consequences

- Charges : Obstruction of Justice & Pay $72.5m to Enron Investors

- Damage its Reputation even Reversal of Conviction

- Dissolution of Arthur Andersen

- 85,000 People Lost their Job
Reforms: Sarbanes Oxley Act

Aims: Deter Behaviors Like Enron and Arthur Andersen

Major Content:

- Increased Responsibility of Executives on Financial Reports

- Enhanced Financial Disclosures

- Independence of Auditors : Rotation (Every 5 Years)

Lessons Learned from Enron Scandal

- Awareness of Business Ethics and
Corporate Social Responsibility

- Independence and Not to be Tempted to Make Accounting Fraud
Causes of Downfall
1. Inappropriate Revenue Recognition

- Generally Used Agent Model in Energy Industry
~Revenue Recognition: Trading and Brokerage Fee

- Enron Selected Merchant Model
~Revenue Recognition: The Whole Value of Each Trade

- Other Energy Trading Companies Adopt Enron’s Method

2. Mark-to-Market Accounting

- Revenue Recognition: Estimated Present Value of Net Future Cash Flows

- Enron Applied it into Long-Term Contracts: Still Recognize Revenue even it is Not Viable and no Money Received

3. Special Purposes Entities (SPE)

- Extensive Borrowing of Capital for Expansion
~Increase Liability

- Creation of Hundreds of SPE
~Hide Debts and Limit Disclosures

- Capitalize SPE that were Unknown to Public
~Debts Become Assets of Enron
~Increase Enron’s Equity

Lack of Corporate Governance

- Board of Directors
~ Conflict of Interest
~ Conceal True Performance through Accounting Maneuvers

- Audit Committee
~ Without Technical Knowledge
Lack of Integrity of Management

- To Investors:
Illusion of Progress in Different Business Segments -> Increase Stock Price

- To Employees:
Encouraged by CFO to Buy Company Stock

Undue Influence on Auditor (Arthur Andersen)

- Bring in Competing Accounting Firms -> Gave an Illusion of Looking for New Auditor

- Auditor was Pressured to Co-operate with Enron

Dysfunctional Corporate Culture

- Focus on Increasing Short-Term Revenue and Stock Price

~ Received Large Cash Bonus and Enron Stock Option

T
H
E
E
N
D
Intestine
- Lack of Independence: Acted as Both External and Internal Auditors of Enron
- Weak Internal Control
Ignored Accounting Advice from National Office
SEC Investigation: Cover up Negligence by Destroying Related Documents
Full transcript