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cheung cheuk ki

on 26 June 2013

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Transcript of IA

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


- 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


- 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

- 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