INTRODUCTION: INTRODUCTION:
Enron Corporation was an American energy, commodities, and Services Compan
Enron Corporation was an American energy, commodities, and Services Company based iny based in Houston, Te
Houston, Texas. Enron was formed in 19! xas. Enron was formed in 19! by "ennet# $ay after merging Houston %atura& 'asby "ennet# $ay after merging Houston %atura& 'as and (nter%ort#. )efore its ban*ruptcy on +ecember , --1, Enron emp&oyed approximate&y and (nter%ort#. )efore its ban*ruptcy on +ecember , --1, Enron emp&oyed approximate&y -,--- staff and was
-,--- staff and was one of t#e one of t#e wor&ds &wor&ds &eading e&ectricity, natura& gas, communications, andeading e&ectricity, natura& gas, communications, and pu&p and paper companies, wit# c&aimed revenues of near&y /1-1 bi&&ion in ---.
pu&p and paper companies, wit# c&aimed revenues of near&y /1-1 bi&&ion in ---. ACHIEVEMENTS:
ACHIEVEMENTS:
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• 0ortune named Enron Americas 2ost (nnovative Co0ortune named Enron Americas 2ost (nnovative Company for six consecutive years.mpany for six consecutive years. •
• (t was a&so an extensive futures trader, inc&uding sugar, coffee, grains, #og, and ot#er(t was a&so an extensive futures trader, inc&uding sugar, coffee, grains, #og, and ot#er
meat futures. meat futures.
•
• At t#e time of its ban*ruptcy fi&ing in +ecember At t#e time of its ban*ruptcy fi&ing in +ecember --1, Enron structured into seven--1, Enron structured into seven
distinct business units. distinct business units. SCANDAL:
SCANDAL:
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• At t#e end of --1, it was revea&ed t#at its reported financia& condition was sustainedAt t#e end of --1, it was revea&ed t#at its reported financia& condition was sustained
substantia&&y by institutiona&i3ed, systematic, and creative&y p&anned accounting fraud, substantia&&y by institutiona&i3ed, systematic, and creative&y p&anned accounting fraud, *nown as t#e Enron scanda&.
*nown as t#e Enron scanda&.
•
• Enron #as since become a popu&ar symbo& of wi&&fu& corporate fraud and corruption.Enron #as since become a popu&ar symbo& of wi&&fu& corporate fraud and corruption.
ENRON’S FALL ENRON’S FALL
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• T#e Enron scanda&, revea&ed in 4ctober --1, eventua&&y &ed to t#e ban*ruptcy of t#eT#e Enron scanda&, revea&ed in 4ctober --1, eventua&&y &ed to t#e ban*ruptcy of t#e
Enron Corporation, an American energy compan
Enron Corporation, an American energy company based in y based in Houston, TeHouston, Texas, and xas, and t#et#e disso&ution of Art#ur A
disso&ution of Art#ur Andersen, w#ic# was ondersen, w#ic# was one of t#e ne of t#e five &argest audit and five &argest audit and accountancyaccountancy partners#ips in t#e wor&d. (n addition to being t#e &argest ban*ruptcy reor
partners#ips in t#e wor&d. (n addition to being t#e &argest ban*ruptcy reorgani3ation ingani3ation in American #istory at t#at time, Enron undoubted&y is t#e biggest audit fai&ure.
American #istory at t#at time, Enron undoubted&y is t#e biggest audit fai&ure.
•
• Severa& years &ater, w#en 5effrey S*i&&ing was #ired, #e deve&oped a staff of executivesSevera& years &ater, w#en 5effrey S*i&&ing was #ired, #e deve&oped a staff of executives
t#at, t#roug# t#e use of accounting &oop#o&es, specia& purpose entities, and poor financia& t#at, t#roug# t#e use of accounting &oop#o&es, specia& purpose entities, and poor financia& reporting, were ab&e to #ide bi&&ions in debt from fai&ed dea&s and pro6ects. C#ief
reporting, were ab&e to #ide bi&&ions in debt from fai&ed dea&s and pro6ects. C#ief 0inancia& 4fficer A
0inancia& 4fficer Andrew 0astow and ot#er executives were ndrew 0astow and ot#er executives were ab&e to mis&ead Enron7sab&e to mis&ead Enron7s board of directors and audit committee of #ig#8ris* accounting issues as we&& as pr
board of directors and audit committee of #ig#8ris* accounting issues as we&& as pressureessure Andersen to ignore t#e issues.
Andersen to ignore t#e issues.
•
• T#e Enron scanda& was a financia& scanda& invo&ving Enron Corporation and itsT#e Enron scanda& was a financia& scanda& invo&ving Enron Corporation and its
accounting firm Art#ur A
accounting firm Art#ur Andersen t#at was revendersen t#at was revea&ed in &ate a&ed in &ate --1.--1.
•
• After a series of reve&ations invo&ving irregu&ar accounting procedures conductedAfter a series of reve&ations invo&ving irregu&ar accounting procedures conducted
t#roug#out t#e 199-s, Enron was on t#e verge of ban*ruptcy by %ovember of --1. t#roug#out t#e 199-s, Enron was on t#e verge of ban*ruptcy by %ovember of --1.
•
• A w#ite *nig#t rescue attempt by A w#ite *nig#t rescue attempt by a simi&ar, sma&&er energy company, +ynegy, was nota simi&ar, sma&&er energy company, +ynegy, was not
viab&e. Enron fi&ed for ban*ruptcy on +ecember , --1 viab&e. Enron fi&ed for ban*ruptcy on +ecember , --1
ENRON BUSINESS ENRON BUSINESS Business Model
Business Model
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• +eregu&ation genera&&y &ed to &ower prices and increased supp&y, it a&so introduced+eregu&ation genera&&y &ed to &ower prices and increased supp&y, it a&so introduced
increased vo&ati&ity in gas prices increased vo&ati&ity in gas prices
•
• Standard contract o&d:888 a&&owed supp&iers to interrupt gas supp&y wit#out &ega&Standard contract o&d:888 a&&owed supp&iers to interrupt gas supp&y wit#out &ega&
pena&ties. Creating a natura& gas ;ban*<Enron:8888Enron began offering uti&
pena&ties. Creating a natura& gas ;ban*<Enron:8888Enron began offering uti&ities &ong8ities &ong8 term fixed price contracts for natura& gas, typica&&y at prices t#at
term fixed price contracts for natura& gas, typica&&y at prices t#at assumed &ong8termassumed &ong8term dec&ines in spot prices
dec&ines in spot prices
•
• 4ff8ba&ance s#eet financing ve#ic&es888Specia& =urpose Entities S=E: , to finance many4ff8ba&ance s#eet financing ve#ic&es888Specia& =urpose Entities S=E: , to finance many
of t#ese transactions. of t#ese transactions.
•
• Enron 4n&ine888T#e creation of t#e on8&ine trading mode&.Enron 4n&ine888T#e creation of t#e on8&ine trading mode&. •
• T#e gas trading mode& was a #uge success.T#e gas trading mode& was a #uge success. •
• )y 199, Enron was t#e )y 199, Enron was t#e &argest merc#ant of natura& gas in %ort# America.&argest merc#ant of natura& gas in %ort# America.
Producs Producs 1 1.. ==rroodduuccttss .. ''aas s 44ii&& >
>.. ))rrooaaddbbaanndd ?.
?. E&E&ecectrtricicitity y pu&pu&p p andand !.
!. ppaapeper wr waatterer REMAR!ABLE
REMAR!ABLE COMPACOMPAN"N"
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• T#e wor&ds &argest energy T#e wor&ds &argest energy trader.trader. •
• T#e tota& revenue was /1-1 bi&&ion in ---, @t# of Top !-- companies in t#e S.T#e tota& revenue was /1-1 bi&&ion in ---, @t# of Top !-- companies in t#e S. •
• (t was a )&ue c#ip company wit# /- per s#are, 1 t#ousands emp&oyees, g&oba&i3ation(t was a )&ue c#ip company wit# /- per s#are, 1 t#ousands emp&oyees, g&oba&i3ation
enterprise. enterprise. BAN!RUPTC" BAN!RUPTC"
•
• (n --1, a investment agenc(n --1, a investment agency boss pub&ic&y doubts t#e profitabi&ity mode& of Enron, t#ey boss pub&ic&y doubts t#e profitabi&ity mode& of Enron, t#e
stoc* price decrease from /- to
stoc* price decrease from /- to ?/ in Aug --1.?/ in Aug --1.
•
• 1B, 4ct. Enron announces t#e tota& &oss for >t# uarter was /B1 mi&&ion.1B, 4ct. Enron announces t#e tota& &oss for >t# uarter was /B1 mi&&ion. •
• , 4ct. SEC begin to investigate Enron forma&&y., 4ct. SEC begin to investigate Enron forma&&y. •
• , %ov. Enron was forced to admit do fa&se account, profit tota& fa&se near&y , %ov. Enron was forced to admit do fa&se account, profit tota& fa&se near&y /B-- mi&&ion/B-- mi&&ion
since 199@. since 199@.
•
•
• , +ec. forma&&y app&y for ban*ruptc, +ec. forma&&y app&y for ban*ruptcy protection &ose near&y /11 bi&&ion w#en ity protection &ose near&y /11 bi&&ion w#en it
p&ummeted to &ess t#an /1 by t#e end of %ovember --1. p&ummeted to &ess t#an /1 by t#e end of %ovember --1.
•
• T#e .S. Securities and Exc#ange Commission SEC: began an investigation, andT#e .S. Securities and Exc#ange Commission SEC: began an investigation, and
+ynegy offered to purc#ase t#e compan
+ynegy offered to purc#ase t#e company at a fire sa&e price. D#en t#e dea& y at a fire sa&e price. D#en t#e dea& fe&& t#roug#,fe&& t#roug#, Enron fi&ed for ban*ruptcy on +ece
Enron fi&ed for ban*ruptcy on +ecember , --1 under mber , --1 under C#apter 11 of t#e nited StatesC#apter 11 of t#e nited States )an*ruptcy Code, and
)an*ruptcy Code, and wit# assets of /B>.? bi&&ion, it was t#e &argest corporatewit# assets of /B>.? bi&&ion, it was t#e &argest corporate ban*ruptcy in .S. #istory unti& D
ban*ruptcy in .S. #istory unti& Dor&dCom7s -- ban*ruptcyor&dCom7s -- ban*ruptcy..
•
• 2any executives at Enron were 2any executives at Enron were indicted for a variety of c#arges and were indicted for a variety of c#arges and were &ater sentenced&ater sentenced
to prison. to prison.
•
• Enron7s auditor, Art#ur Andersen, was found gui&ty in Enron7s auditor, Art#ur Andersen, was found gui&ty in a nited States +istrict Court, ba nited States +istrict Court, butut
by t#e time t#e ru&ing was overturned at t#e .S. Supreme Court, t#e firm #ad &ost t#e by t#e time t#e ru&ing was overturned at t#e .S. Supreme Court, t#e firm #ad &ost t#e
ma6ority of its customers and #ad s#ut down . ma6ority of its customers and #ad s#ut down .
•
• Emp&oyees and s#are#o&ders received &imited returns in &awsuits, despite &osing bi&&ionsEmp&oyees and s#are#o&ders received &imited returns in &awsuits, despite &osing bi&&ions
in pensions and stoc* prices. As a conseuence of t#e
in pensions and stoc* prices. As a conseuence of t#e scanda&, new regu&ations andscanda&, new regu&ations and &egis&ation were enacted to expand t#
&egis&ation were enacted to expand t#e re&iabi&ity of financia& reporting for pub&ice re&iabi&ity of financia& reporting for pub&ic
companies. 4ne piece of &egis&ation, t#e Sarbanes84x&ey Act, expanded repercussions for companies. 4ne piece of &egis&ation, t#e Sarbanes84x&ey Act, expanded repercussions for destroying, a&tering, or fabricating records in federa& investigations or for attempting to destroying, a&tering, or fabricating records in federa& investigations or for attempting to defraud s#are#o&ders. T#e act a&so increased t#e accoun
defraud s#are#o&ders. T#e act a&so increased t#e accountabi&ity of auditing firms totabi&ity of auditing firms to remain ob6ective and independent
remain ob6ective and independent of t#eir c&ients.of t#eir c&ients. #$%&
#$%&
How did it #appen How did it #appen
1.
1. AcAccocoununtiting ng memet#t#odod .
. 2a2ananagegemement nt grgrououpp >.
>. S S mmononititor or sysyststemem
ACCOUNTIN' METHOD ACCOUNTIN' METHOD
Enrons nontransparent financia& statements did not c&ear&y depict its operations and finances Enrons nontransparent financia& statements did not c&ear&y depict its operations and finances wit# s#are#o&ders.
wit# s#are#o&ders. Accru(l (ccounin): Accru(l (ccounin):
Actua& costs and actua& revenues were rec
Actua& costs and actua& revenues were received and recorded w#en eived and recorded w#en se&&ing it.se&&ing it. M(r*+o+,(r*e (ccounin):
M(r*+o+,(r*e (ccounin):
(ncome was estimated as t#e =F of future cas# f&ow, but costs were #ard to be recorded. (ncome was estimated as t#e =F of future cas# f&ow, but costs were #ard to be recorded. Accounting met#od Examp&eG
Accounting met#od Examp&eG
•
• (n 5u&y ---, Enron and (n 5u&y ---, Enron and )&oc*buster Fi)&oc*buster Fideo signed a -8 year deo signed a -8 year agreement to introduce aagreement to introduce a
new on8&ine video game
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• After severa& pi&ot pro6ects, Enron estimated profits of more t#an /11- mi&&ion form t#eAfter severa& pi&ot pro6ects, Enron estimated profits of more t#an /11- mi&&ion form t#e
dea&, even t#oug# ana&ysts uestioned t#e tec#nica& viabi&ity and mar*et demand of t#e dea&, even t#oug# ana&ysts uestioned t#e tec#nica& viabi&ity and mar*et demand of t#e service.
service.
•
• D#en t#e networ* fai&ed to wor*, )&oc*buster pu&&ed out of t#e contract, EnronD#en t#e networ* fai&ed to wor*, )&oc*buster pu&&ed out of t#e contract, Enron
continued to recogni3e future profits, even
continued to recogni3e future profits, even t#oug# t#e dea& resu&ted in a t#oug# t#e dea& resu&ted in a &oss.&oss. Accounting met#od S=E Specia& purpose entities:
Accounting met#od S=E Specia& purpose entities:
•
• (t is a &ega& entity created to fu&fi&& narrow, specia& or temporary ob6ectives. T#ey are used(t is a &ega& entity created to fu&fi&& narrow, specia& or temporary ob6ectives. T#ey are used
to #ide debt, owners#ip most&y in rea& mar*et. to #ide debt, owners#ip most&y in rea& mar*et.
•
• T#ese s#e&& firms were created by a sponsor, but managed bT#ese s#e&& firms were created by a sponsor, but managed by independent euity investory independent euity investor
and debt financing. and debt financing.
•
• Enron used S=E to manage Enron used S=E to manage ris*s associated wit# specific assets and disc&ose minima&ris*s associated wit# specific assets and disc&ose minima&
detai&s of its S=E. detai&s of its S=E.
•
• )y --1, Enron #ad used #undreds of S=Es to #ide its deb)y --1, Enron #ad used #undreds of S=Es to #ide its debt. As a resu&t of one vio&ation,t. As a resu&t of one vio&ation,
Enrons ba&ance s#eet understated its &iabi&ities, overstated its euity
Enrons ba&ance s#eet understated its &iabi&ities, overstated its euity and profits.and profits. MANA'EMENT 'ROUP
MANA'EMENT 'ROUP Cor-or(e )o.ern(nce
Cor-or(e )o.ern(nce Enron #ad a mode
Enron #ad a mode& board of directors comprising predominant&y outsiders wit# significant& board of directors comprising predominant&y outsiders wit# significant owners#ip sta*es and a ta&ented audit
owners#ip sta*es and a ta&ented audit committee. Even wit# its comp&ex corporate governance,committee. Even wit# its comp&ex corporate governance, Enron was sti&& ab&e to concea& its true performance.
Enron was sti&& ab&e to concea& its true performance. E/ecui.e co,-ens(ion
E/ecui.e co,-ens(ion
T#e setup of t#e system contributed to a
T#e setup of t#e system contributed to a dysfunctiona& corporate cu&ture t#at became obsesseddysfunctiona& corporate cu&ture t#at became obsessed wit# a focus on&y on s#ort8term earnings to maximi3e bonuses.
wit# a focus on&y on s#ort8term earnings to maximi3e bonuses. Fin(nci(l (udi
Fin(nci(l (udi
Enrons auditor firm, A
Enrons auditor firm, Art#ur Andersen, was accused of app&ying rt#ur Andersen, was accused of app&ying rec*&ess standards in its auditsrec*&ess standards in its audits because of a conf&ict of interest over t#e significant consu&ting fees
because of a conf&ict of interest over t#e significant consu&ting fees/@ mi&&ion:. A/@ mi&&ion:. Andersonsndersons auditors were pressured by Enron to defer recogni3ing t#e c#arges from t#e S=E as its credit auditors were pressured by Enron to defer recogni3ing t#e c#arges from t#e S=E as its credit ris*s.
ris*s.
US ,onior s%se,: US ,onior s%se,:
•
• T#e state accounting committee was an independent body estab&is#ed in accordance wit#T#e state accounting committee was an independent body estab&is#ed in accordance wit#
t#e state Accountant Acts. A
t#e state Accountant Acts. At t#e nationa& t t#e nationa& &eve&, t#e niform Certified =ub&ic Accountants&eve&, t#e niform Certified =ub&ic Accountants Act was 6ust a temp&ate met#od, does n
Act was 6ust a temp&ate met#od, does not #ave binding enforce.ot #ave binding enforce.
•
• American institute of C=A American institute of C=A and State and State Certified 'enera& Accountants Association wereCertified 'enera& Accountants Association were
traditiona& civi& society organi3ations, not specifica&&y au
•
• T#e independence of t#e C=A.T#e independence of t#e C=A.
Business E$ic Business E$icGG How about t#e CE4
How about t#e CE4 and directors dea& wit# fraudand directors dea& wit# fraud T#e top management operated
T#e top management operated t#e prob&em in very we&&, but a&& of t#e prob&em in very we&&, but a&& of t#e intentiona&&y &ess oft#e intentiona&&y &ess of attention about t#e fraud. (nc&uding t#e
attention about t#e fraud. (nc&uding t#e CE4 S*i&&ing, many of t#e directors were continuingCE4 S*i&&ing, many of t#e directors were continuing advocated to rise stoc* price, but
advocated to rise stoc* price, but se&&ing t#e stoc* at t#e same time.se&&ing t#e stoc* at t#e same time.
)ot# of t#ey #ave no business et#ics and no &ongterm deve&opment.19!8--1 Enron: D#ere )ot# of t#ey #ave no business et#ics and no &ongterm deve&opment.19!8--1 Enron: D#ere t#ere is a business et#ic, t#ere is a &ong8term b&oom.
t#ere is a business et#ic, t#ere is a &ong8term b&oom. Conclusion
Conclusion
ARTHUR ANDERSEN ARTHUR ANDERSEN
(n 5u&y --, t#e one8time )ig !
(n 5u&y --, t#e one8time )ig ! accounting firm was found gui&ty of obstruction of 6ustice foraccounting firm was found gui&ty of obstruction of 6ustice for s#redding documents in t#e Enron case.
s#redding documents in t#e Enron case.
T#eir Enron connections essentia&&y put t#e entire firm out of
T#eir Enron connections essentia&&y put t#e entire firm out of business, affecting ,--- wor*ers,business, affecting ,--- wor*ers, most of w#om #ad no connection to Enron.
most of w#om #ad no connection to Enron. S(r0(nes+ O/le% Ac
S(r0(nes+ O/le% AcGG
)etween +ecember --1 and Apri& --, t#e Senate
)etween +ecember --1 and Apri& --, t#e Senate Committee on )an*ing, Housing, andCommittee on )an*ing, Housing, and rban Aff
rban Affairs and t#e House Committee on 0inancia& airs and t#e House Committee on 0inancia& Services #e&d mu&tip&e #earings about t#eServices #e&d mu&tip&e #earings about t#e co&&apse of Enron and re&ated ac
co&&apse of Enron and re&ated accounting and investor protection issues.I T#ese #earings and t#ecounting and investor protection issues.I T#ese #earings and t#e corporate scanda&s t#at fo&&owed Enron &ed to
corporate scanda&s t#at fo&&owed Enron &ed to t#e passage of t#e Sarbanes8 4x&ey Act on 5u&y >-,t#e passage of t#e Sarbanes8 4x&ey Act on 5u&y >-, --.
--.
T#e Act is near&y a mirror image of EnronG T#e companys perceived corporate governance T#e Act is near&y a mirror image of EnronG T#e companys perceived corporate governance fai&ings are matc#ed virtua&&y point for point in t#e principa& provisions of t#e Act.