1. Enron

2. Group Members and
Work Breakdown
Introduction Chen, Yan
Enron’s Business Chen, Yao
Accounting and The Fraud Chen, Yipeng
Conclusion Li Ye

3. Introduction

4. Introduction
• Enron Corporation was an
American energy, commodities,
and services company based in
Houston, Texas.
• Before its bankruptcy on
December 2, 2001, Enron
employed approximately 20,000
staff and was one of the world's
leading electricity, natural gas,
communications, and pulp and
paper companies, with claimed
revenues of nearly $101 billion in
2000.

5. Achievements
• Fortune named Enron "America's Most Innovative
Company" for six consecutive years.
• It was also an extensive futures trader, including
sugar, coffee, grains, hog, and other meat
futures.
• At the time of its bankruptcy filing in December
2001, Enron structured into seven distinct business
units.

6. Scandal
• At the end of 2001, it was revealed that its reported
financial condition was sustained substantially by
institutionalized, systematic, and creatively planned
accounting fraud, known as the "Enron scandal".
• Enron has since become a popular symbol of willful
corporate fraud and corruption.

7. Enron’s
Fall
• The Enron scandal was a financial scandal involving
Enron Corporation 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 of 2001. A white knight rescue attempt
by a similar, smaller energy company, Dynegy, was
not viable. Enron filed for bankruptcy on December
2, 2001.

8. Enron’s Business

9. Business
Model
• Deregulation generally led to lower prices and
increased supply, it also introduced increased
volatility in gas prices
• Standard contract(old)--- allowed suppliers to
interrupt gas supply without legal penalties.
• Creating a natural gas “bank”(Enron)----Enron
began offering utilities long-term fixed price
contracts for natural gas, typically at prices that
assumed long-term declines in spot prices.

10. Business
Model
• Off-balance sheet financing vehicles---Special
Purpose Entities(SPE) , to finance many of these
transactions.
• Enron Online---The creation of the on-line trading
model
• The gas trading model was a huge success. By 1992,
Enron was the largest merchant of natural gas in
North America.

12. Products
Gas
Oil
Broadband

13. Products
Electricity
pulp and paper
water

15. Accounting and The
Fraud

16. Remarkable
Company
• The world’s largest energy trader.
• the total revenue was $100 billion in 2000, 7th of Top
500 in US.
• Blue chip, $80 per share, 21 thousands employees,
globalization enterprise.

17. Bankruptcy
• 2001, a investment agency boss publicly doubts the profitability
model of Enron, the stock price decrease from $80 to 42$ in Aug.
• 16, Oct. Enron announces the total loss for 3th quarter was $618
million.
• 22, Oct. SEC begin to investigate Enron formally.
• 8, Nov. Enron was forced to admit do false account, profit total
false nearly $600 million since 1997.
• 30, Nov. stock price falls to $0.26 per share.
• 2, Dec. formally apply for bankruptcy protection.

18. Why?
• How did it happen?
• Accounting method
• Management group
• US monitor system

19. Accounting
method
• Enron’s nontransparent financial statements did not
clearly depict its operations and finances with
shareholders.
• Accrual accounting: actual costs and actual
revenues were received and recorded when selling
it.
• Mark-to-market accounting: income was estimated
as the PV of future cash flow, but costs were hard to
be recorded.

20. Accounting
method
Example:
• In July 2000, Enron and Blockbuster Video signed a 20-
year agreement to introduce a new on-line video game
to various cities.
• After several pilot projects, Enron estimated profits of
more than $110 million form the deal, even though
analysts questioned the technical viability and market
demand of the service.
• When the net work failed to work, Blockbuster pulled out
of the contract, Enron continued to recognized future
profits, even though the deal resulted in a loss.

21. Accounting
method
SPE(Special purpose entities)
• It is a legal entity created to fulfill narrow, special or
temporary objectives . They are used to hide debt,
ownership mostly in real market.
• These shell firms were created by a sponsor, but
managed by independent equity investor and debt
financing.
• Enron used SPE to manage risks associated with specific
assets and disclose minimal details of its SPE.
• By 2001, Enron had used hundreds of SPEs to hide its
debt. As a result of one violation, Enron’s balance sheet
understated its liabilities, overstated its equity and profits.

22. Management
group
• Corporate governance
Enron had a model board of directors comprising
predominantly outsiders with significant ownership stakes and
a talented audit committee. Even with its complex corporate
governance, Enron was still able to conceal its true
performance.
• Executive compensation
The setup of the system contributed to a dysfunctional
corporate culture that became obsessed with a focus only on
short-term earnings to maximize bonuses.
• Financial audit
Enron’s auditor firm, Arthur Andersen, was accused of
applying reckless standards in its audits because of a conflict
of interest over the significant consulting fees($27 million).
Anderson’s auditors were pressured by Enron to defer
recognizing the charges from the SPE as its credit risks.

23. US monitor
system
• The state accounting committee was an
independent body established in accordance with
the state Accountant Acts. At the national level, the
Uniform Certified Public Accountants Act was just a
template method, does not have binding enforce.
• American institute of CPA and State Certified
General Accountants Association were traditional
civil society organizations, not specifically
authorized by law.
• The independence of the CPA.

24. Business
Ethic
• How about the CEO and directors deal with fraud?
Obviously, the top management operated the problem
in very well, but all of they intentionally less of attention
about the fraud. Including the CEO Skilling, many of the
directors were continuing advocated to rise stock price,
but selling the stock at the same time.
• Both of they have no business ethics and no long–term
development.(1985-2001 Enron)
• Where there is a business ethic, there is a long-term
bloom.

25. Conclusion

26. Arthur
Andersen
• In July 2002, the one-time Big 5 accounting firm was
found guilty of obstruction of justice for shredding
documents in the Enron case.
• Their Enron connections essentially put the entire
firm out of business, affecting 22,000 workers, most
of whom had no connection to Enron.

27. Sarbanes-
Oxley Act
• Between December 2001 and April 2002, the
Senate Committee on Banking, Housing, and Urban
Affairs and the House Committee on Financial
Services held multiple hearings about the collapse
of Enron and related accounting and investor
protection issues.
• These hearings and the corporate scandals that
followed Enron led to the passage of the Sarbanes-
Oxley Act on July 30, 2002.The Act is nearly "a mirror
image of Enron: the company's perceived
corporate governance failings are matched
virtually point for point in the principal provisions of
the Act."

28. In conclusion, Enron was a remarkable and
innovative company in the world, Its success cannot
be neglected.
But there is a interest question for Enron’s
bankruptcy: Is there a company can get success
without ethics?
To see from the facts, the answer is “no.”
Whether Enron or Anderson, they finally pay for their
fault on ethics.
We see ethic problem would bring a fatal strike to a
company, no matter how it was successful.

29. Thank You!