The Enron Scandal

Presentation by Group 5

 Houston Natural Gas and InterNorth merged in 1985

Energy, commodities and services organisation

Enron

Headquartered in Houston, Texas

Founders Kenneth Lay and Jeffrey Skilling
Current status: bankrupt

 Enron began trading in natural gas since its formation

As they grew, they looked for more businesses to
venture into

Why did it
go
bankrupt?

In 1994, de-regulation of energy utilities led Enron to

jump into this sector
Acquired Portland General Electric to
customers in California this business failed

service

Expanded into several foreign countries incurred

high operating expenses
And then

The Scandal

Revenue recognition errors

Setting up of Special Purpose Entities

Revenue
recognition
errors

Mark to Market Accounting

Adopted for energy contracts
Record future expected benefits as current income

Merchant model
Ideally, brokerage fee is to be recorded as revenue
Enron recorded the entire value of transaction

Example

Transaction

Value

Portland Electric Company

Revenue

$ 200 million

Agent expenses

$ 198 million

Profit

$ 2 million

Revenues of Portland Electric Company were recorded in

Enrons books
Their expenses were then deducted
Net profit still remained the same
But, they now claimed themselves to be a $ 200 million
dollar company

 Limited liability entities set up by Enron

Modus operandi:

Special
Purpose
Entities
(SPE)

Acquire loans from banks with Enrons stocks as

security
Transfer money to Enron
Enron in turn guarantees the SPE with Enrons stocks,
in turn pushing its liabilities to the SPE

Consequence:
If Enron makes profit, SPE has no issues, and bank has
no issues
If Enron makes loss, SPE suffers a loss due to dip in
Enrons stocks, the bank loses money, but Enron does
not suffer from this transaction

They
They started
started hiding
hiding
debts
debts
Recorded
Recorded entire
entire value
value as
as income
income
instead
instead of
of recording
recording brokerage
brokerage

In
Summary

How Enron
overstated
Revenue?

FINISH

Recorded
Recorded future
future expected
expected
benefits
benefits as
as current
current income
income
Violated
Violated basic
basic rules
rules
of
of accounting
accounting

Stock Price

Stock Price
Chart

Stock Price

Effects on
investors
and
employees

Enrons stock value depreciated by 99.5% in just one

year
Due to fall in stock prices, many of Enrons employees
lost their lifetime savings
Alliance Capital, Enrons largest shareholder, lost 43
million shares
Total value of money lost is estimated at $2.4 billion

 Auditing firm Arthur Andersen and Enron were both

charged for fraud and faced federal prosecution
Executives of Enron faced terms in prison; CEO Jeffery
Skilling is still serving his term

After effects

$ 42 million paid to victims of Enron

The Sarbanes-Oxley Act was signed by the President
of US
Aims to restore investors confidence in financial
reports
Is monitored by the SEC
Is applicable to all firms that are listed in the US

This is like the driver of a

security van saying he's a
millionaire because he drives
a million pounds in banknotes
from one vault to another.
The Enron Scandal.

Quote taken from The Guardian; source has been mentioned in the last slide.

Thank you.

 The Guardian
https://www.theguardian.com/business/2002/jan/30/cor
poratefraud.enron
https://www.theguardian.com/business/2006/jan/30/cor
poratefraud.enron

Sources

Wikipedia
https://en.wikipedia.org/wiki/Enron#Online_marketplace
_services
https://en.wikipedia.org/wiki/Enron_scandal

New York Times

http://www.nytimes.com/2002/01/26/opinion/enron-for
-dummies.html?_r=0
http://www.nytimes.com/2001/12/04/business/enron-s-col
lapse-investors-plenty-pain-go-around-for-small-invest
ors-funds.html?_r=0

Investopedia
http://www.investopedia.com/updates/enron-scandal-s