ENRON:

QUESTIONABLE ACCOUNTING LEADS

TO COLLAPSE
ENRON CORPORATION
• The company was created out of the merger of
two major gas pipeline companies in 1985.

• The company provided products and services

related to natural gas, electricity and
communications for its wholesale and retail
customers.

• It generated, transmitted, and distributed

electricity to the north-western United States,
and marketed natural gas, electricity, and other
ENRON CORPORATION
• Andrew Fastow transformed Enron from an old-
style electricity and gas company into $150
billion energy company and Wall Street
favorite.
• Enron’s revenue grew from $31 billion to more
than $100 Billion, making it the SEVENTH-
LARGEST company of Fortune 500.
• Skilling created a system in which Enron’s
employees were ranked every six months, with
those ranked in the bottom 20 percent forced out
(RANK AND YANK SYSTEM)
 People behind enron
• Jeffrey Skilling- Chief Executive Officer (CEO)

• Andrew Fastow- Chief Financial Officer.

• Chair Ken Lay- former Chief Executive Officer

(and was replaced by Jeffrey Skilling)

• Sherron Watkins- Enron’s Vice President

• Lea Fastow- former assistant treasurer

 But….
Why did ENRON collapse?
 ENRON’S UNETHICAL PRACTICES

• Fraud

• Money laundering

• Conspiracy

• Obstruction of justice
• Enron’s corporate culture also was about a
focus on how much money could be made
by executives, not of their stakeholders

• The “rank and yank” system helped

create a fierce environment in which
employees competed against rivals not
only outside the company but also at the
next desk.
• The company used special-purpose
entities (SPEs), to conceal losses. The
SPEs move assets and debt off its
balance sheet and to increase cash flow.

• Andrew Fastow manages to inflate

Enron’s profit to look good in future
investors.
 Management’s Fault
• The management allowed the off-balance-
sheet partnership to be created.
• Lay believed that the transaction were legal
because attorneys and accountants approved
them.
• Executives sold their own stock knowing that
the company is near to bankruptcy. (INSIDER
TRADING)
 ENRON’S PARTNERS
• Vinson and Elkins
– Enron’s legal department who had have dismissed
Sherron Watkin’s allegation of accounting fraud
– Helped structure some of Enron’s special-purpose-
entities.
• Merril lynch
– Helped Enron falsify their financial reports
– Have a role in the sale of Nigeria barges.
 ENRON’S PARTNERS
 Arthur Andersen LLP
 Responsible for ensuring the accuracy of Enron’s
financial statements and internal bookkeeping.
 But Andersen’s independence was questionable
because of the large consulting fees Enron paid
Andersen unduly influenced the company’s decision.
 THE FALLOUT
• Federal prosecutors argue that Enron’s
case is not about exotic accounting
practices but FRAUD and THEF.
• Sarbanes-Oxley Act
• Ushered in an era of accounting scandals
that precipitated a global loss of
confidence in corporate integrity.
• Enron Creditors Recovery Corporation
 QUESTIONS
ENRON: QUESTIONABLE
ACCOUNTING LEADS TO COLLAPSE
 How did the corporate
culture of Enron's contribute
\
to its bankruptcy?
 ANSWER
 The corporate culture of Enron itself is very
aggressive profit wise. Enron's culture focuses on
how much money could be made for the executives.

 Enron ensures the stability and profit making of

operations for the sake of their executives rather
than the shareholders.

 Enron was very strict with their employees. They

established the rank and yank system. Enron's
corporate culture encourage flouting, possible even
breaking the rules.
 Did Enron’s bankers, auditors, and
attorneys can contribute to Enron's
\
demise? If so, what was their
contributions.
 ANSWER
• Banker:
– Merrill lynch is engaged in money laundering
since it sold barges but the sale was
improperly recorded to Enron.

– It was also engaged in conspiracy since it

aided in fraudulent manipulation of Enron
income statement.
 ANSWER
Auditors:
Arthur Andersen LLP
 was engaged in conspiracy due to the fact
that it Anderson's audit was biased since
Enron gave large consulting fees to
Andersen.

Attorney:
did not investigate the allegations of
accounting fraud by Watkins and helped
established the SPEs
 What role did the chief financial
officer play in creating the problems
\
that led to Enron’s financial
problem?
 ANSWER
• Fastow used SPEs to hide Enron's Debt
and He directly ran these partnerships to
purchase the underperforming assets
• Enron’s CFO manipulated balance sheets
to hide losses, inflate revenues.
• He also banned the employees stocks to
be sold and it triggers the collapsed of the
company.
• He also uses SPEs to get bribes and to
enrich his self.