The Enron scandal was a financial scandal involving Enron Corporation (former

NYSE ticker symbol: ENE) and its accounting firm Arthur Andersen, that was revealed in
late 2001. After a series of revelations involving irregular accounting procedures
conducted throughout the 1990s, Enron was on the verge of bankruptcy by November
2001. A white knight rescue attempt by a similar, smaller energy company, Dynegy, was
not viable. Enron filed for bankruptcy on December 2, 2001.
As the scandal was revealed, Enron shares dropped from over US$90.00 to less than
50. Enron's plunge occurred after revelations that much of its profits and revenue were
the result of deals with special purpose entities (limited partnerships which it controlled).
The result was that many of Enron's debts and the losses that it suffered were not
reported in its financial statements.
In addition, the scandal caused the dissolution of Arthur Andersen, which at the time was
one of the five largest accounting firms in the world.
Background of Enron
In the early 1990s the Congress of the United States of America passed legislation
deregulating the sale of electricity. It had done the same for natural gas some years
earlier. The resulting energy markets made it possible for companies like Enron to thrive,
while the resultant price volatility was often bemoaned by producers and local
governments.[2] Strong lobbying on the part of Enron and others, however, kept the
system in place.[3][4]
Enron had created offshore entities, units which may be used for planning and
avoidance of taxes, raising the profitability of a business. The names of these SPEs, or
special purpose entities, were Bob West Treasure, Jedi and Hawaii [2]. This provided
ownership and management with full freedom of currency movement, and full anonymity,
that would keep losses the company was taking off of the balance sheets. These entities
made Enron look more profitable than it actually was, and created a dangerous spiral in
which each quarter, corporate officers would have to perform more and more contorted
financial deception to create the illusion of billions in profits while the company was
actually losing money. This practice drove up their stock price to new levels, at which
point the executives began to work on insider information and trade millions of dollars
worth of Enron stock. The executives and insiders at Enron knew about the offshore
accounts that were hiding losses for the company; however, the investors knew nothing
of this. Chief Financial Officer Andrew Fastow led the team which created the off-books
companies, and manipulated the deals to provide himself, his family, and his friends with
hundreds of millions of dollars in guaranteed revenue, at the expense of the corporation
he worked for and its stockholders.
In 1999, Enron launched EnronOnline, an Internet-based trading operation, which was
used by virtually every energy company in the United States. President and chief
operating officer Jeffrey Skilling began advocating a novel idea: the company did not
really need any "assets." By pushing the company's aggressive investment strategy, he
helped make Enron the biggest wholesaler of gas and electricity, with $27 billion traded
in a quarter. The firm's figures, however, had to be accepted at face value. Under
Skilling, Enron adopted mark to market accounting, in which anticipated future profits
from any deal were tabulated as if real today. Thus, Enron could record gains from what

over time might turn out losses, as the company's fiscal health became secondary to
manipulating its stock price on Wall Street during the Tech boom. But when a company's
success is measured by agreeable financial statements emerging from a black box, a
term Skilling himself admitted, actual balance sheets prove inconvenient. Indeed,
Enron's unscrupulous actions were often gambles to keep the deception going and so
push up the stock price, which was posted daily in the company elevator. An advancing
number meant a continued infusion of investor capital on which debt-ridden Enron in
large part subsisted. Its fall would collapse the house of cards. Under pressure to
maintain the illusion, Skilling verbally attacked Wall Street Analyst Richard Grubman[5],
who questioned Enron's unusual accounting practice during a recorded conference call.
When Grubman complained that Enron was the only company that could not release a
balance sheet along with its earnings statements, Skilling replied "Well, thank you very
much, we appreciate that . . . asshole." Though the comment was met with dismay and
astonishment by press and public, it became an inside joke among many Enron
employees, mocking Grubman for his perceived meddling rather than Skilling's lack of
tact.[6]
By the late 1990s Enron's stock was trading for $80-90 per share, and few seemed to
concern themselves with the opacity of the company's financial disclosures. In mid July
2001, Enron reported earnings of $50.1 billion, almost triple year-to-date, beating
analysts' estimates by 3 cents a share.[7] Despite this, Enron's profit margin had stayed
at a modest average of about 2.1%, and its share price had dropped by over 30% since
the same quarter of 2000.[8]
However, concerns were mounting. Enron had recently faced several serious operational
challenges, namely logistical difficulties in running a new broadband communications
trading unit, constructing the Dabhol Power project, a large power plant in India, and
criticism of the company for the role it allegedly had played in the power crisis of
California in 2000-2001.
Early history

Enron Complex in Downtown Houston

Enron traces its roots to the Northern Natural Gas Company, which was formed in
1932 in Omaha, Nebraska. It was reorganized in 1979 as the leading subsidiary of a
holding company, InterNorth. In 1985, it bought the smaller Houston Natural Gas and
changed its name to Enron in the process.[3]
The merged company initially named itself "HNG/InterNorth Inc.", even though
InterNorth was the nominal survivor. It built a large headquarters complex in Omaha.

However, the departure of ex-InterNorth CEO Samuel Segnar six months after the
merger allowed former HNG CEO Kenneth Lay to become CEO of the newly merged
company. Lay soon moved Enron's headquarters to Houston and began to thoroughly
re-brand the business. Lay originally favored the name "Enteron" (possibly spelled in
camelcase as "EnterOn"); but when it was pointed out that the term approximated a
Greek word referring to the intestine, it was quickly shortened to "Enron." The final name
was decided upon only after business cards, stationery, and other items had been
printed reading Enteron, reflecting the confused state of affairs in the company at the
time. Enron's "crooked E" logo was designed in the mid-1990s by the late American
graphic designer Paul Rand.
Enron was originally involved in transmitting and distributing electricity and gas
throughout the United States. The company developed, built, and operated power plants
and pipelines while dealing with rules of law and other infrastructures worldwide. Enron
owned a large network of natural gas pipelines which stretched ocean to ocean and
border to border including Northern Natural Gas, Florida Gas Transmission,
Transwestern Pipeline company and a partnership in Northern Border Pipeline from
Canada. These were the cash cows that made all of the other Enron companies,
ventures and investments possible. They were the only part of Enron that made
significant profits. In 1998, Enron moved into the water sector, creating the Azurix
Corporation, which it part-floated on the New York Stock Exchange in June 1999. Azurix
failed to break into the water utility market, and one of its major concessions, in Buenos
Aires, was a large-scale money-loser.
Enron grew wealthy, it claimed, via its pioneering, due largely to marketing and
promoting power. Enron was named "America's Most Innovative Company" by Fortune
magazine for six consecutive years, from 1996 to 2001. It was on the Fortune's "100
Best Companies to Work for in America" list in 2000, and had offices that were, in
hindsight, stunning in their opulence. Enron was hailed by many, including labor and the
workforce, as an overall great company, praised for its large long-term pensions,
benefits for its workers and extremely effective management until its exposure in
corporate fraud. The first analyst to publicly disclose Enron's financial flaws was Daniel
Scotto who in August 2001 issued a report entitled "All Stressed up and no place to go"
which encouraged investors to sell Enron stocks and bonds at any and all costs.
As was later discovered, many of Enron's recorded assets and profits were inflated, or
even wholly fraudulent and nonexistent. Debts and losses were put into entities formed
"offshore" that were not included in the firm's financial statements, and other
sophisticated and arcane financial transactions between Enron and related companies
were used to take unprofitable entities off the company's books.
Its most valuable asset and the largest source of honest income, the 1930s-era Northern
Natural Gas, was eventually purchased back by a group of Omaha investors, who
moved its headquarters back to Omaha, and is now a unit of Warren Buffett's MidAmerican Energy Holdings Corp. NNG was put up as collateral for a $2.5 billion capital
infusion by Dynegy Corporation when Dynegy was planning to buy Enron. When Dynegy
looked closely at Enron's books, they backed out of the deal and fired their CEO, Chuck
Watson. The new chairman and interim CEO, the late Daniel Dienstbier, had been
president of NNG and an Enron executive at one time and an acquaintance of Warren
Buffett. NNG continues to be profitable today.

Accounting scandal of 2001

After a series of revelations involving irregular accounting procedures bordering on fraud
perpetrated throughout the 1990s involving Enron and its accounting firm Arthur
Andersen, Enron stood on the verge of undergoing the largest bankruptcy in history by
mid-November 2001 (the largest Chapter 11 Bankruptcy until that of Lehman Brothers
on September 15 2008). A white knight rescue attempt by a similar, smaller energy
company, Dynegy, was not viable.
As the scandal was revealed, Enron shares dropped from over US$90.00 to just
pennies. Enron had been considered a blue chip stock, so this was an unprecedented
and disastrous event in the financial world. Enron's plunge occurred after it was revealed
that much of its profits and revenue were the result of deals with special purpose entities
(limited partnerships which it controlled). The result was that many of Enron's debts and
the losses that it suffered were not reported in its financial statements.
Enron filed for bankruptcy on December 2, 2001. In addition, the scandal caused the
dissolution of Arthur Andersen, which at the time was one of the world's top accounting
firms. The firm was found guilty of obstruction of justice in 2002 for destroying
documents related to the Enron audit and was forced to stop auditing public companies.
Although the conviction was thrown out in 2005 by the Supreme Court, the damage to
the Andersen name has prevented it from returning as a viable business.
Enron also withdrew a naming rights deal with the Houston Astros Major League
Baseball club to have its name associated with their new stadium, which was formerly
known as Enron Field (it is now Minute Maid Park.)
Accounting practices
Enron had created offshore entities, units which may be used for planning and
avoidance of taxes, raising the profitability of a business. This provided ownership and
management with full freedom of currency movement and the anonymity that allowed
the company to hide losses. These entities made Enron look more profitable than it
actually was, and created a dangerous spiral in which each quarter, corporate officers
would have to perform more and more contorted financial deception to create the illusion
of billions in profits while the company was actually losing money. This practice drove up
their stock price to new levels, at which point the executives began to work on insider
information and trade millions of dollars worth of Enron stock. The executives and
insiders at Enron knew about the offshore accounts that were hiding of losses for the
company; however the investors knew nothing of this. Chief Financial Officer Andrew
Fastow led the team which created the off-books companies, and manipulated the deals
to provide himself, his family, and his friends with hundreds of millions of dollars in
guaranteed revenue, at the expense of the corporation for which he worked and its
stockholders.
In 1999, Enron launched EnronOnline, an Internet-based trading operation, which was
used by virtually every energy company in the U.S. President and chief operating officer
Jeffrey Skilling began advocating a novel idea: the company didn't really need any
"assets." By pushing the company's aggressive investment strategy, he helped make
Enron the biggest wholesaler of gas and electricity, with $27 billion traded in a quarter.

The firm's figures, however, had to be accepted at face value. Under Skilling, Enron
adopted mark to market accounting, in which anticipated future profits from any deal
were tabulated as if real today. Thus, Enron could record gains from what over time
might turn out losses, as the company's fiscal health became secondary to manipulating
its stock price on Wall Street during the Tech boom. But when a company's success is
measured by agreeable financial statements emerging from a black box, a term Skilling
himself admitted, actual balance sheets prove inconvenient. Indeed, Enron's
unscrupulous actions were often gambles to keep the deception going and so push up
the stock price, which was posted daily in the company elevator. An advancing number
meant a continued infusion of investor capital on which debt-ridden Enron in large part
subsisted. Its fall would collapse the house of cards. Under pressure to maintain the
illusion, Skilling verbally attacked Wall Street Analyst Richard Grubman[4], who
questioned Enron's unusual accounting practice during a recorded conference call.
When Grubman complained that Enron was the only company that could not release a
balance sheet along with its earnings statements, Skilling replied "Well, thank you very
much, we appreciate that . . . asshole." Though the comment was met with dismay and
astonishment by press and public, it became an inside joke among many Enron
employees, mocking Grubman for his perceived meddling rather than Skilling's lack of
tact. When asked during his trial, Skilling wholeheartedly admitted that industrial
dominance and abuse was a global problem: "Oh yes, yes sure, it is."[5]
Peak and decline of stock price
In August 2000, Enron's stock price hit its highest value of $90.[6] At this point Enron
executives, who possessed the inside information on the hidden losses, began to sell
their stock. At the same time, the general public and Enron's investors were told to buy
the stock. Executives told the investors that the stock would continue to climb until it
reached possibly the $130 to $140 range, while secretly unloading their shares.
As executives sold their shares, the price began to drop. Investors were told to continue
buying stock or hold steady if they already owned Enron because the stock price would
rebound in the near future. Kenneth Lay's strategy for responding to Enron's continuing
problems was in his demeanor. As he did many times, Lay would issue a statement or
make an appearance to calm investors and assure them that Enron was headed in the
right direction.
By August 15, 2001, Enron's stock price had fallen to $42. Many of the investors still
trusted Lay and believed that Enron would rule the market. They continued to buy or
hold their stock and lost more money every day. As October closed, the stock had fallen
to $15. Many saw this as a great opportunity to buy Enron stock because of what Lay
had been telling them in the media. Their trust and optimism proved to be greatly
misplaced.
Lay has been accused of selling over $70 million worth of stock at this time, which he
used to repay cash advances on lines of credit. He sold another $20 million worth of
stock in the open market. Also, Lay's wife, Linda, has been accused of selling 500,000
shares of Enron stock totaling $1.2 million on November 28, 2001. The money earned
from this sale did not go to the family but rather to charitable organizations, which had
already received pledges of contributions from the foundation. Records show that Mrs.
Lay placed the sale order sometime between 10:00 and 10:20 AM. News of Enron's

problems, including the millions of dollars in losses they had been hiding went public
about 10:30 that morning, and the stock price soon fell to below one dollar. Former
Enron executive Paula Rieker has been charged with criminal insider trading. Rieker
obtained 18,380 Enron shares for $15.51 a share. She sold that stock for $49.77 a share
in July 2001, a week before the public was told what she already knew about the $102
million loss.
Post-bankruptcy
Enron initially planned to retain its three domestic pipeline companies as well as most of
its overseas assets. However, before emerging from bankruptcy, Enron spun off its
domestic pipeline companies as CrossCountry Energy.
Enron sold its last business, Prisma Energy, in 2006, leaving it as an asset-less shell. In
early 2007, it changed its name to Enron Creditors Recovery Corporation. Its goal is to
pay off the old Enron's remaining creditors and wind up Enron's affairs.
Shortly after emerging from bankruptcy in November 2004, Enron's new board of
directors sued 11 financial institutions for helping Lay, Fastow, Skilling and others hide
Enron's true financial condition. The proceedings were dubbed the "megaclaims
litigation." Among the defendants were Royal Bank of Scotland, Deutsche Bank and
Citigroup. As of 2008, Enron has settled with all of the institutions, ending with Citigroup.
Enron was able to obtain nearly $20 million dollars to distribute to its creditors as a result
of the megaclaims litigation.
Comparing - Enron Vs Satyam Scandal
Submitted by Vijaianand on Thu, 02/05/2009 - 14:29
The Satyam story is getting stale. With the way investigation is going with the slow
Indian Judicial system, it will be long short until we see some justice done bringing all the
culprits involved. Meanwhile, I took a wild shot at comparing Enron Scandal and Satyam
Mammoth Scam to see whether its worth calling India's Enron.
ENRON Case
Nov. 9: The company discloses that it overstated its earnings by $567 million since 1997.
Two company officials are fired.
Dec. 2: Enron, once one of the world's largest electricity and natural gas traders, files for
Chapter 11 bankruptcy protection.
Sloppy board oversight, imaginative accounting, off-balance sheet financing, and a
criminal CFO are some of the reasons which was by the media. But it is more of come to
mind. But those are superficial, not decisive, at root more consequences than causes
according to an analyst.
Enron did not fail because of creative bookkeeping, for instance, but was creative in
bookkeeping because it was failing. Enron collapsed chiefly because its managers were
paid to aim at the wrong financial measures, and consequently, its internal system of
financial controls was a shambles.

SATYAM Saga
On January 7, Ramalinga Raju tendered his resignation and confessed to a close to Rs
7,800-crore accounting fraud. The episode has international ramifications. Satyam
serves as the back office for some of the largest banks, manufacturers, and healthcare
and media companies in the world, handling everything from computer systems to
customer service.
Shareholders have lost Rs 13,600 crore in Satyam shares in less than a month. The
market capitalization fell to Rs 1,607.04 crore on January 9, 2008, from Rs 15,262 crore
at the end of trade on December 16, 2008, the day when Satyam had announced the
Rs-8,000 crore acquisition deal of two firms promoted by the kin of the IT firms former
chairman Ramalinga Raju.
According to the recent New York Times report, Investigators looking into the fraud have
found a maze of about 300 companies related to Raju that were used to siphon as much
as $1 billion in cash from Satyam. From the very latest investigation news from Andhra
Pradesh police who has Raju(Satyam CEO) in custody revealed a more interesting tactic
used to loot the money. Out of 53,000 employees, 10,000 employees were fake and
money was laundered thru the fake 10,000 paychecks every month. Also they found
some involvement by external accounting company which helped to route this looted
money to the proper place.
It is the corruption and scamming mentality drove satyam scandal except the technique
is different. It is the same old book keeping practice which allows lot of loops holes and
tricks to be tried. Obviously we end up with a big question, how come Regulatory
authorities, IT department, Banks didn't smell anything fishy and more importantly what
happened to the Auditing process which is suppose to catch all the malpractices.
In conclusion, it is same spoiled pie but in different flavor. When these big money
laundering outbreaks, it never fails to shock us with the magnitude of money and job
losses. These days Corporate Scams have become part of technology revolution. Let's
better get used to it, it is just the start.