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    The Enron Case Presntation (Group 1) (1) 12

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    Diksha Lath
    The document summarizes the rise and fall of Enron Corporation. It provides details about: 1) Enron's history as an energy company that grew rapidly through acquisitions and international expansion into deregulated markets. 2) How Enron used complex accounting schemes and off-balance sheet entities to hide losses and inflate profits, which ultimately led to its financial collapse when these activities were uncovered. 3) Key events in Enron's demise in 2001 including the resignation of top executives, revelations of conflicts of interest and unfair compensation practices, and multi-billion dollar losses from failed hedging transactions.

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    The Enron Case Presntation (Group 1) (1) 12

    Uploaded by

    Diksha Lath
    49 views18 pages
    The document summarizes the rise and fall of Enron Corporation. It provides details about: 1) Enron's history as an energy company that grew rapidly through acquisitions and international expansion into deregulated markets. 2) How Enron used complex accounting schemes and off-balance sheet entities to hide losses and inflate profits, which ultimately led to its financial collapse when these activities were uncovered. 3) Key events in Enron's demise in 2001 including the resignation of top executives, revelations of conflicts of interest and unfair compensation practices, and multi-billion dollar losses from failed hedging transactions.

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    The Enron Case Presntation (Group 1) (1)12

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    The document summarizes the rise and fall of Enron Corporation. It provides details about: 1) Enron's history as an energy company that grew rapidly through acquisitions and international expansion into deregulated markets. 2) How Enron used complex accounting schemes and off-balance sheet entities to hide losses and inflate profits, which ultimately led to its financial collapse when these activities were uncovered. 3) Key events in Enron's demise in 2001 including the resignation of top executives, revelations of conflicts of interest and unfair compensation practices, and multi-billion dollar losses from failed hedging transactions.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    49 views18 pages

    The Enron Case Presntation (Group 1) (1) 12

    Uploaded by

    Diksha Lath
    The document summarizes the rise and fall of Enron Corporation. It provides details about: 1) Enron's history as an energy company that grew rapidly through acquisitions and international expansion into deregulated markets. 2) How Enron used complex accounting schemes and off-balance sheet entities to hide losses and inflate profits, which ultimately led to its financial collapse when these activities were uncovered. 3) Key events in Enron's demise in 2001 including the resignation of top executives, revelations of conflicts of interest and unfair compensation practices, and multi-billion dollar losses from failed hedging transactions.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 18

    Aarju Kumari

    Abhinav Chaudhary
    Abinash Das
    Ahana Das
    Akarsh Deep
    Akash Bhadra
    Amal Jain
    Amit

    The Fall of Enron


    • Enron Corporation was an American energy
    company based in Houston, Texas.
    • Enron employed around 21,000 people and was
    one of the world's leading electricity, natural gas,

    Enron pulp and paper, and communications company,


    with claimed revenues of $111 billion in 2000.

    Company • Fortune named Enron "America's Most Innovative


    Company" for 6 consecutive years.

    Profile • It was formed in 1985 when Houston Natural Gas


    merged with InterNorth.
    • After several years of international and domestic
    expansion involving complicated deals and
    contracts, Enron went into billions of dollars into
    debt.
    • Started from gas transport
    • Ventured into long term fixed pricing

    History &
    contracts.
    • Expanded to Broadband Services

    Expansion • Capital and Risk management services


    • Ventured into foreign countries
    starting from the UK
    • Started projects in several countries.
    Enron’s Business

    Energy trading model Trading model


    • Largest interstate pipeline firm • Focused on markets that were
    • Entered into long-term fixed- highly inefficient
    price contract with its customers • Electric power in 1997
    • 1993 largest seller of natural gas • Enron Broadband Services (EBS)
    in North America in 2000
    Enron’s Business

    International business Promoting Deregulation


    • International energy-asset • It entered market which were
    construction business recently deregulated
    • $1.4 billion Treeside power plant • Personal connection with high
    in United Kingdom ranking government officials
    • $2.9 billion Dabhol Power • Contributed heavily in
    Project in Mumbai. presidential campaigns of
    George Bush.
    Major focus on the deregulated market who are highly
    inefficient market, complex distribution channels, low
    supply and services quality, etc.

    Recruited scientists and engineers, lured with attractive


    signing bonuses, free movement in the Organization.

    Managing
    Talent Biannual feedback system based on 360-degree review
    system, PRC.

    This process was used to drive employee compensation


    and $750m annually paid to employees as cash bonus.

    Superior originators had average salary of $150,000 to


    $200,000.
    Analysed significant Evaluated the aggregate
    financial and risks and rewards of the
    nonfinancial risks for all company’s investments
    its business, projects and using a variety of
    transactions. information tools.

    Risk Measured sudden


    RisktRAC separated all
    Management economic shocks
    through Monte Carlo
    trades and contracts into
    1217 trading portfolios.
    Practices simulations.

    64-page code of Ethics


    which laid out accepted
    behaviours.
    From
    1993-2001
    Enron used complex & dubious accounting schemes:
    • to reduce Enron’s tax payments;
    • to inflate Enron’s income and profits;
    • to inflate Enron’s stock price and credit rating;
    • to hide losses in off-balance-sheet subsidiaries;
    • to engineer off-balance-sheet schemes to funnel
    money to themselves, friends, and family;
    • to fraudulently misrepresent Enron’s financial
    condition in public reports.
    The Disaster
    Stock
    • Enron had a very complex business model,
    which stretched the limits of the accounting. Financial Reporting
    • The issue that was most challenging for the
    company was, Enron’s non transparent financial Challenges
    statements that did not clearly depict its operations
    and finances with shareholders.
    • The company followed Mark-to-market accounting,
    in which the income was estimated as the PV of
    future cash flow, but costs were hard to be recorded.
    • Another important area of concern was over the
    financial reporting for Special Purpose Entities
    (SPEs).
    • SPEs were legal entities created to fulfill narrow,
    special or temporary objectives.
    Financial
    • These shell firms were created by a sponsor, but
    managed by independent equity investor and debt
    Reporting
    financing.
    • Enron used these to manage risks associated with
    Challenges
    specific assets and disclosed their minimal details in
    financial reporting.
    • By 2001, Enron had used hundreds of SPEs to hide
    its debt. As a result of one violation, Enron’s balance
    sheet understated its liabilities, overstated its equity
    and profits.
    • Chairman – Ken Lay
    • Review & oversight of the SPEs created to hedge
    investment gains
    • Andrew Fastow, CFO was granted the permission
    Further to create LJM1 followed by 2&3 for hedging the
    gains on Rhythms stock and so as to increase the

    Actions
    proportion of his own compensation under these
    transactions, reason being that his SPEs were
    making earnings in millions.
    • Finance Committee analysed the risk for Raptors
    from decline of Enron’s stock price and report said
    that if stock price fell to $40, the company will
    have to produce 35 million shares (approx.) to
    meet the Raptor commitments.
    • Compensation & Management Development
    Committee chaired by Charles LeMaistre
    reviewed Fastow’s remuneration as well as
    outside income sources for all senior officers.
    • Lay and Skilling were the highest compensation

    Further
    earners including bonuses and stock options.
    • Lay got an added advantage and received line of
    credit of $7.5 million and used that to obtain more
    Actions than $77 million in cash which he repaid using
    company’s stock. This was reported to SEC and
    the committee claimed that they were unaware of
    the transactions occurring.
    • Compensation policies also focussed on earnings
    growth and stock prices more which led to conflict
    of interests.
    An Audit & Compliance Arthur Andersen, the There was a lack of
    Committee came to picture external auditor indicated independent oversight of
    because of all such issues, risks associated with management by the Board
    consisting of a professor of Enron’s accounting and which contributed to
    accounting and former mentioned that nine Enron’s collapse.
    CAUSES &
    dean of Stanford Business accounting practices used
    CONSEQUEN-CES
    School. Some of the by the company were
    reviews made were on: classified risky and
    declared them company’s
    “leading edge”.
    Enron’s compliance with GAAP
    Adequacy of reserves and
    related party transactions
    Disclosures relating to litigation
    risks and credit risks
    Overview of key business
    trends and changes in Internal
    Control System
    EXTERNAL  The external auditors had to make sure whether a firm’s
    AUDITOR financial statement is in accordance with GAAP
    standards.
     The audit industry became competitive in 1970’s which
    imposed challenges on the audit firms to apply consisting
    accounting and auditing standards to develop low cost
    audit procedures.
     Enron outsourced its internal audit functions to Arthur
    Anderson who was Enron’s external auditor since 1985.
     Mr. Anderson classified Enron in its maximum risk
    category.
     Enron’s employees entered into numerous complex
    transactions and sometimes structured those
    transactions in a way to achieve financial reporting
    objectives.
     Over the years, 86 Anderson employees joined Enron
    including its CAO, CEO and many Enron employees
    were on the payroll of Anderson.
    • In 2001, Enron’s CEO Jeffrey Skilling resigned
    and Kenneth Lay took over again as CEO.
    During 1999-2001 many other top executives
    resigned.

    Enron’s • Sherron Watkins, VP of corporate development


    suggested that Enron should infuse money to

    Rapid satisfy capitalization requirements.


    • Enron terminated hedges by Raptor and LJM

    Demise SPE’s which costed them $544 million.


    • In 2001, the shareholders equity was reduced
    by $1.2 billion and Mr. Andrew Fastow was
    fired for unfairly earning $45 million from LJM
    transactions.
    • Enron’s earning from 1997-2000 were reduced
    by $586 million and owners’ equity were
    reduced by $929 million during same period.
    Enron’s • Dynegy, Enron’s competitor agreed to acquire
    it for $9 billion but later pulled out of the
    Rapid proposed merger because credit agencies
    downgraded Enron’s debt to junk-bond status,

    Demise forcing the firm to retire $4 billion of its $13


    billion debt.
    • On December 2, 2001 Enron filed for
    bankruptcy and sued Dynegy for breach of
    contract.
    THANK YOU

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