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ENRON

Smartest Guys in the Room


Daphne Quiquin
Widmaeir Gallimor
Michael Milana
Alfred Zeiler
The collapse of Enron has been described as
offering the same sort of opportunity for
reflection for the business community as
the Challenger disaster did for the
engineering profession.
Companys Profile
By early 2001, Enron was the 7th largest U.S. company,
and the largest U.S. buyer/seller of natural gas and
electricity
Employed approximately 22,000 employees
One of the world's leading electricity, natural gas, pulp,
paper, and communications companies, with claimed
revenues of nearly $101 billion in 2000
Named "America's Most Innovative Company" for six
consecutive years
Houston-based natural gas pipeline company formed
by merger in 1985 of Houston Natural Gas Company
and InterNorth, Inc
Areas of Business
Enron
Wholesale
Services
Energy
Services
Transportation
Services
Enron Online
Broadband
Services
Wholesale Services
Global wholesale businesses that market, transport
and provide energy commodities

Two business lines:
1. Commodity Sales and Services

2. Assets and Investments
Retail arm of Enron that sells or manages the
delivery of natural gas, electricity, liquids and other
commodities.

Energy Services
Transportation Services
Oversees Enron's natural gas pipelines
Broadband Services
Provides broadband intermediation capabilities
including network services, such as:
dark fiber
circuits
Internet Protocol service
data storage
Enron Online
Web-based system
Gave access to more than 1,200 products
o Petrochemical, Plastics, Power, Pulp &
Paper, Steel, Weather Risk Management
Transacting directly with Enron
Set prices
Enron
We have metamorphosed from an asset-based
pipeline and power generating company to a
marketing and logistics company whose biggest
assets are its well-established business approach
and its innovative people.

Kenneth Lay, Chairman
Enron What Happened
On October 16, 2001 - the first major public
sign of trouble - Enron announces a huge
third-quarter loss of $618 million
On October 22, 2001 - the SEC begins an
inquiry into Enrons accounting practices
On December 2, 2001 - Enron files for
Post Enron Era
22 Enron executives & partners plead guilty or were
convicted of criminal charges
Arthur Andersen was found guilty of fraud; the
conviction was later overturned on appeal
Several Andersen partners were also personally
convicted of crimes
Post Enron Era Contd.
20,000 employees of Enron lost most of their savings
and pension plans
In 2004 Enron's name was changed to Enron
Creditors Recovery Corporation with the mission to
liquidate any remaining assets and operations of
Enron
Upon completion of its mission and final distribution
to creditors, the company would no longer exist
Conditions Allowing Fraud to Occur
Deregulation of gas and electric utilities
Change in Management Culture
Change in Accounting Practices
o Special Purpose Entities
Deregulation
Regulated &
Inefficient
Monopolies
Create Competition
Increase Efficiency
Cheaper Energy
Happy Consumers
Change in Management Culture
Richard Kinder - Enrons president from 1986
to 1996
Enron operated with a highly effective
management control system
Change in Management Culture
Formal code of ethics
Elaborate performance review and bonus
structure
Risk Assessment and Control group
Big-5 auditor
Conventional powers of boards and related
committees
Change in Management Culture
Jeff Skilling - Enrons president from 1997 to
2001
Exercised control over almost all facets of the
organization, particularly its accounting
procedures
Change in Management Culture
Change in Accounting Practices
Change in Accounting Practices
On trading activities, Enron used the merchant
model

Other firms used the agent model
Change in Accounting Practices
During the last four years before Enron filed for
bankruptcy it reported an annual growth of
16.9 % on average for net income and 164.6%
annual growth for revenue. This decreased
Enrons net profit margins to a very low
percentage.

Change in Accounting Practices

In 1991-2001 Enron reported negative free cash
flows, high operating cash flows with
decreasing and low profit margins.
Change in Accounting Practices
Discovery of the Financial Fraud
On August 2001, Sherron Watkins, VP wrote an
anonymous letter to Ken Lay stating that Skilling
had left because of accounting improprieties and
other illegal actions. She questioned Enron's
accounting methods and mentioned the Raptor
(SPEs) transactions.
She also mentioned CFO, Fastow and other Enron
employees had made their money, leaving Enron
in danger for the support of the Raptors.
Sherron Watkins The Whistleblower
Discovery of the Financial Fraud
Weeks later, Chung Wu, a UBS PaineWebber
broker in Houston, sent an e-mail to 73
investment clients saying Enron was in trouble
and advising them to consider selling their shares.
Enron would compensate SPE investors shares of
Enrons common stock for the losses.
Discovery of the Financial Fraud
The accounting firm Arthur Andersen was paid
one million dollars a week for signing off the
annual reports of Enron and being their
consultant.
A lawyer firm, Vinson and Elkins examined the
business partnerships of Enron and was paid
$900,000 a week to make the investments of
Enron look legitimate.
Discovery of the Financial Fraud
On October 16 2001, Enron declared a third
quarter loss of $618 million. During 2001, Enron's
stock fell from $86 to 30 cents.
On October 22, the SEC began an investigation
Enron's accounting methods and partnerships.
In November, Enron representatives admitted to
overstating company earnings by $57 million
since 1997.
Discovery of the Financial Fraud
Descriptions of the Fraud
Valuation estimates overstated earnings
Unrealized trading gains accounted for slightly
more than half of the companys $1.41 billion
reported pretax profit for 2000
Used special purpose entities (SPE) to access
capital or hedge risk
Descriptions of the Fraud
Sold leveraged assets to the SPE, then booked
profit
Only 3% of the SPE needed to be owned by an
outside investor
Extremely complex derivative financial
instruments
Descriptions of the Fraud
Transferring troubled assets to SPEs
From 1999 through July 2001, these entities paid
Fastow more than $30 million in management fees
Descriptions of the Fraud
Enron failed to consolidate SPEs into their
financial statements
Very confusing footnotes
Bragging that the stock should be trading higher

Descriptions of the Fraud
On August 14, six
months after being
named CEO, Skilling
resigned for personal
reasons
Legal Ramifications of the Fraud
Andrew Fastow
Faced 98 counts
Plead guilty to one charge of conspiracy to commit
wire fraud
Plead guilty to one charge of conspiracy to commit
securities fraud
Agreed to serve 6 years in prison
Legal Ramifications of the Fraud
Named in 35-count indictment
Pleads not guilty to wire fraud
Pleads not guilty to securities fraud
Pleads not guilty to conspiracy
Pleads not guilty to insider trading
Pleads not guilty to making false statements on
financial reports

Jeffrey Skilling

Jeffrey Skilling was
sentenced to 24 years in
prison.


His sentence was reduced to
14 years.

He has been in jail since
2006.



Ken Lay, was convicted of 10 counts of fraud and
conspiracy in two cases
He died of a he died a heart attack before
sentencing was scheduled
In all 16 people pleaded guilty


Legal Ramifications of the Fraud
Was charged and found guilty for obstruction of
justice
The sec is not allowed to accept audits from
convicted felons
The company surrendered it s CPA license
The conviction was later over turned
Ramifications for Accountants
Passed by congress in 2002
The PCAOB was created to develop standards for
preparing audit reports
This was to protect the interest of investors
All rules and standards must be approved by the
sec
Sarbanes Oxley act
The Process
Conclusion and Group Reaction
Ethics
Increased regulation
Fraud
Reputation
Independence