THE RISE AND FALL OF ENRON

Prepared by:-

#SATYAM BHALLA
#ANKUSH
#AMIT KUMAR
# MANAS SHRIVASTAVA
#ATUL
 ORIGIN OF COMPANY

• In 1985,Enron was born from

the merger of Houston natural
gas and Internorth, a Nebraska
pipeline company

•In the process of the merger,

Enron incurred massive debt.
 GROWTH AND EXPANSION
• Kinneth lay,CEO, hired Mckinsey & Co. to assist in developing
Enron’s business strategy. It assigned a consultant named
Jeffrey skilling for work.
• He suggested to create a “gas bank “ in which Enron would
buy gas from network of suppliers and sell it to network of
consumers.
• Lay created a new division in 1990 called Enron Finance Corp.
and hired Skilling to run it.
 CHANGING OF CORPORATE CULTURE FOR
GROWTH

• Skilling hired the best and brightest traders, recruiting

associates from the top MBA schools.

• In 1990, he hired Andrew fastow, a Kellogg MBA, who was

working with a Bank.

• Skilling instituted performance review committee, which

became known as harshest employee ranking system in the
country.
 STEPS IN GROWTH

• In 1996, skilling became Enron’s CEO. He

convinced Lay the gas bank model could be
applied to market of electrical energy.
• In 1997, Enron acquired electric utility
company Portland general Electric corp.
• Revenues grew to $7 billion from $2billion and
number of employee grew from 200 to 2000.
• In October 1999 ,they created Enron online(EOL), an
electronic commodities trading website.
• In January 2000 Enron plan to build a high speed
broadband telecommunication network and to trade
network capacity.
• In August 2000 Enron’s stock hit an all time high of $ 90.56
• Company was touted by fortune and other publications as
one of the most admired and innovative companies of the
world.
 ACCOUNTING SCANDAL
• Companies have outstanding energy related or other
contracts on their balance sheet at the end of quarter-they
were booking unrealized gains or losses to income statements

• MANIPULATING LEVERAGE RATIOS- Enron’s return on

assets(ROA) and reduce its debt to total assets ratio, hence
making companies more attractive to credit rating investors.

• Special purpose entities(SPEs) borrows large sums of money

from a financial institution to purchase assets and showing
up on the company’s financial statements.
• Enron took the use of SPEs to new heights of complexity, not
restricted to financial instruments but also its own stock, right
to acquire its stock and related liabilities.

• To compensate partnership investors ,Enron began to incur

larger and larger issuance of its stock .

• Fastow himself paid $30million in management fees ,far more

than his Enron salary.

• Enron increased notes receivable and shareholders equity to

reflect this transaction, which violate generally accepted
accounting principles.
• Aggressive earning targets and management bonus
compensation based on those targets.

• Excessive interest by management in maintaining stock price or

earnings trend through aggressive accounting practices.

• Management setting aggressive financial targets and

expectations for operating personnel.

• Inability to generate sufficient cash flow from operations while

reporting earnings and earnings growth.

• Assets, liabilities, revenues or expenses based on significant

estimates that involves unusually subjective judgments such as
reliability of financial instruments.
• Lay, skilling and fastow still have much to explain and specially
the audit committee have to undergo the justice dept. which
has opened a criminal investigation.

• This scandal resulted in formation of new policies by SEC as

policies like full disclosure of all the information.
 AFTER EFFECTS
• Douglas carmaichael ,professor of accounting at baruch
college shown the uncertainty and doubts in disclosure on the
financial statements.
• Feb 2001 Lay announced his retirement and skilling became
CEO of Enron-Mar 2001 the stock price has fallen to mid 60s
from $80.
• August 2001 skilling took the retirement and stock slipped
below $40 that week and further swindled to $30 a share.
• Oct 2001 Enron announced its 1st quarterly loss in more than
4 years after taking charges of $1bn on poorly performing
businesses.
• Oct17 company announced, as locking the employees
investments for a period of 30 days and preventing them to sell
their Enron stock.
• Nov 2001 another restatement resulted in another $591mn
losses over the four years as well as additional $628mn in
liabilities as of the end of 2000.
• Thus share price slashed to $10 and thus shockingly Nov 30 the
stock closed to 26cents a share and was bankrupt on
Dec 02.
• The scandal thus threatens to undermine confidence in financial
market s in the US and abroad.
 SARBANES OXLEY ACT 2002
The Sarbanes-Oxley Act of 2002 includes provisions addressing
audits, financial reporting and disclosure, conflicts of interest, and
corporate governance at public companies. The Act also establishes
new supervisory mechanisms, including the new Public Company
Accounting Oversight Board, for accountants and accounting firms
that conduct external audits of public companies. 
In general, the Sarbanes-Oxley Act applies to public companies, that
is, companies (including banks and bank holding companies) that
have a class of securities registered under section 12 of the Securities
Exchange Act of 1934 (the 1934 Act), or are otherwise required to file
periodic reports (e.g., 10-Ks and 10-Qs) under section 15(d) of the
1934 Act. Some of the Act's provisions are currently effective, while
others will become effective on a specified future date or upon the
issuance of implementing rules by the SEC. 
 Sarbanes-Oxley contains 11 titles that describe specific mandates and
requirements for financial reporting. Each title consists of several
sections, summarized below.

• Public Company Accounting Oversight Board (PCAOB)

• Auditor Independence
• Corporate Responsibility
• Enhanced Financial Disclosures
• Analyst Conflicts of Interest
• Commission Resources and Authority
• Studies and Reports
• Corporate and Criminal Fraud Accountability
• White Collar Crime Penalty Enhancement
• Corporate Tax Returns
• Corporate Fraud Accountability
 FORMATION OF AUDIT COMMITTEE
Accountants, standards-setters, investors and politicians alike have turned
their attention to the Enron controversy, subsequently analyzing the audit
procedure. Thus, the audit committee's role and the appropriate actions to
take when fraudulent financial reporting is spotted.
Today, audit committees are universal and the national stock exchange(s)
have listing requirements for them. Such requirements are modeled after the
Blue Ribbon Committee (BRC) on Improving the Effectiveness of Corporate
Audit Committees recommendations. In December 1999, the SEC, the
national stock exchange(s), and the Auditing Standards Board issued new
rules largely based on the recommendations by the BRC. Thus, best practices
dealing with matters such as independence, qualifications, charters, outside
auditor involvement, and reports became law.
The audit committee should be informed about the financial and operational
aspects of the company and, therefore, should receive sufficient and timely
information. If the audit committee meeting is scheduled to coincide with the
regular full board meetings, then the committee must receive written
information well in advance of the meetings.
 INDEPENDENT DIRECTORS
The conflict between a person's professional role and his or her
responsibilities as a actor is an alibi, not a necessary reality. Most of Enron's
in-house and outside counsel apparently signed off on numerous self-dealing
transactions, staged perfunctory internal investigations, and facilitated a
company policy of nondisclosure of highly significant information. Much of
this arguably fell within the letter of legality, but apparently Enron's lawyers
never realized that it is sometimes necessary to say "no" to a client. But a
lawyer must also say no to arguably legal actions that seem to the lawyer, as
an independent moral actor, to be wrong, even if that means losing the
clientThe failure of Enron's independent directors to monitor the out-of-
control behavior of its managers is not likely to produce any legal liability, but
it leaves them with a heavy burden of moral responsibility.Will something like
Enron happen again? Every culture gets the scandal it deserves. Our culture
breeds the attitudes and values (or no values) displayed in Enron, and our
supposed watchdogs are as much infected as anyone else. As long as
professionals and directors inhabit only a legal, and not a moral universe, it is
sure to happen again.
To be an effective independent overseer, the audit committee must be positioned between senior
management and the external auditors. The committee's charter defines its mission, duties, and
responsibilities; plans its annual agenda; and documents its findings and conclusions.
Failure on the part of the audit committee to review and evaluate the financial statements and
related accounting policies in accordance with generally accepted accounting principles is clearly
malfeasance.
One of the conclusions from the Report of the Special Investigation Committee of the Board of
Directors of Enron Corporation (Powers Report" was:"The Board, and in particular the Audit and
Compliance Committee, has the duty of ultimate oversight over the Company's financial reporting.
While the primary responsibility for financial reporting abuses discussed in the Report lies with
management, the participating members of the Committee believe those abuses could and should
have been prevented or detected at an earlier time had the Board been more aggressive and
vigilant."
While a review of Enron's annual proxy statement as of March 27, 2001 reveals compliance with the
final disclosures rules on audit committees, a closer examination of the factors indicative of financial
reporting risk by Enron's audit committee would have minimized the potential for class-action suits by
recognizing the warning signals that lead to fraudulent reporting.
CLAUSE 49 OF LISTING AGREEMENT OF S E B
I
Mumbai, April 8 SEBI on Wednesday made some modifications to the
Clause 49 of the Listing Agreement. SEBI has stated that at least half
of the board of directors of a listed company should consist of
independent directors if the non-executive chairman of the company
is related to the promoters or persons occupying management
position. Independent directors
As per the existing provision of the Clause 49 of the Listing
Agreement, at least one-third of the board members are required to
be independent directors.
In a circular issued today, amending this mandatory provision, SEBI
said: “if the non-executive Chairman is a promoter or is related to
promoters or persons occupying management positions at the board
level or at one level below the board, at least one-half of the board of
the company should consist of independent directors.” SEBI has also
made the minimum age for independent directors as 21 years.
“The gap between resignation or removal of an independent
director and appointment of another independent director in
his place shall nor exceed 180 days,” according to another
modification introduced by SEBI.
Requisite qualifications
Further, the regulator said that disclosures of relationships
between directors should be made in specified document to
the stock exchanges.
The regulator also directed the companies to ensure requisite
qualifications and experience for the independent director to
enable him to contribute effectively to the company in his
capacity as independent director, though it was non-
mandatory.