Presentation on Enron Corporation Scandal. The Presentation consists of Introduction, Rise, Fall, Impact, Methods of Accounting, Auditing Errors, Conviction, Changes after the Enron Scandal.

2. Know ENRON
Enron Corporation was an American energy, commodities,
and services company based in Houston, Texas.
Enron was formed in 1985 following a merger between
Houston Natural Gas Company and InterNorth Inc.
Kenneth Lay, who had been the chief executive officer (CEO)
of Houston Natural Gas, became Enron's CEO and chairman.
Enron employed approximately 29,000 staff and was a
major electricity, natural gas, communications and pulp and
paper company.
Fortune named Enron "America's Most Innovative Company"
for six consecutive years from 1996 - 2001.

4. ENRON Financial Corp.
The new subsidiary Enron Financial Corporation was
founded in 1989 & enters the natural gas commodities
trading market.
Jeffrey Skilling ,an energy consultant, is hired from
McKinsey to run the Enron Finance Corp.
He was also seen as a key architect of the company’s gas-
trading strategy.

5. Facts & Figures
60Billion US Dollars
Market Capitalisation
The value of a company that is traded
on the stock market, calculated by
multiplying the total number of shares
by the present share price.
Times
70
Price to Earning Ratio
The price-to-earnings ratio (P/E ratio)
is the ratio for valuing a company
that measures its current share price
relative to its per-share earnings
6Times
Price to Book Value
Companies use the price-to-book
ratio to compare a firm's market
capitalization to its book value by
dividing the company's stock price
by its book value.

6. 1996 1997 1998 1999 2000 2001 2002
100
75
50
25
0
Stocks of ENRON Corp. has raised
significantly over the year the years
reaching the all time high of $90
USD / share in 2001 followed by the
downfall of ENRON empire in 2002.
Stock Value

7. The Fall
Following the exit of CEO analysts began to downgrade their
rating for Enron's stock, and the stock descended to a 52-week
low of $39.95.
By October, the company reported its first quarterly loss of
about $618 million and closed its "Raptor" SPV. This action
caught the attention of the SEC.
A few days later, Enron changed pension plan administrators,
essentially forbidding employees from selling their shares for
at least 30 days. Shortly after, the SEC announced it was
investigating Enron and the SPVs created by Fastow.

8. Bankruptcy
Enron had losses of $591 million and had $690 million in
debt by the end of 2000. By Dec. 2, 2001, Enron had filed
for bankruptcy.
Enron's Plan of Reorganization was approved by the U.S.
Bankruptcy Court, the new board of directors changed
Enron's name to Enron Creditors Recovery Corporation
(ECRC).
The company's new sole mission was "to reorganize and
liquidate certain of the operations and assets of the 'pre-
bankruptcy' Enron for the benefit of creditors."

10. $30 Million of self dealings by the Chief Financial
Officer Andrew Fastow.
$700 Million of Net earnings disappeared.
$1.2 Billion of Equity Shareholders disappeared.
Over $4 billion hidden liabilities.
During 2001, after a series of revelations involving
irregular accounting procedures bordering on fraud
perpetrated throughout the 1990s involving Enron and
its accounting company Arthur Andersen, Enron
suffered the largest Chapter 11 bankruptcy in history
THE SCANDAL

11. 74Billion $
LOSS TO SHAREHOLDERS
67Billion $
OWED TO CREDITORS, EMPLOYEES
&
LIMITED SHAREHOLDERS

12. PARTNERS IN CRIME
Kenneth Lay Jeffrey Skilling
David DuncanAndrew Fastow

13. INTRODUCTION
Arthur Andersen LLP was an American
holding company based in Chicago, the
company had
provided auditing, tax and consulting services
to large corporations.
BIG FIVE
Formerly the leader of the "Big Five"
accounting firms along with PWC,
Delloite, Ernest & Young, and KPMG. By
2001, it had become one of the world's
largest multinational businesses.
World's Biggest Accounting Firm in '00

14. HOW ?
Revenue Recognition
Trading companies use conventional "agent model" for reporting
revenue (where only the trading or brokerage fee would be
reported as revenue), Enron instead selected to report the entire
value of each of its trades as revenue.
Between 1996 and 2000, Enron's revenues increased by more
than 750%, rising from $13.3 billion in 1996 to $100.8 billion in
2000. This extensive expansion of 65% per year was
unprecedented in any industry, including the energy industry
which typically considered growth of 2–3% per year to be
respectable.

15. HOW ?
Mark to Market Accounting
Enron became the first non-financial company to use the method
to account for its complex long-term contracts.
Mark-to- market accounting requires that once a long-term
contract was signed, income is estimated as the present value of
net future cash flow. Often, the viability of these contracts and
their related costs were difficult to estimate.
While using the method, income from projects could be
recorded, although they might not have ever received the
money, and in turn increasing financial earnings on the books.

16. HOW ?
Special Purpose Entities
SPE’s reflect a common financing technique for companies.
Companies can cut their risk by moving assets into separate
partnerships that can be sold to outside investors.
In total, by 2001, Enron had used hundreds of special purpose
entities to hide its debt. Enron's balance sheet understated its
liabilities and overstated its equity, and its earnings were
overstated. In Enron’s case, assets that were losing money were
sold to partnerships. Enron listed the sales of these assets as
earnings.
There were 4000 SPE's of Enron. Notable examples of special
purpose entities that Enron employed were JEDI, Chewco,
Whitewing, and LJM.

18. HOW ?
Auditing & Accounts
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 generated by Enron. During 2000,
Arthur Andersen earned $25 million in audit fees and $27 million in
consulting fees.
The accountants searched for new ways to save the company money,
including capitalizing on loopholes found in Generally Accepted
Accounting Principles (GAAP), the accounting industry's standards.
Enron’s auditor also violated GAAP( general accepted accounting
principles and permit corporation to play “number games”.
As an organization of public accountant, Arthur Andersen violated
the regulations of the public Accountant practices because Andersen
was not only as the internal auditor but also as the external auditor of
Enron.

19. Audit Errors
As per federal securities law, accounting statement of publicly traded
corporations be certified by an independent auditor.
Enron’s auditor, Arthur Andersen, turned a blind eye to improper accounting
practices as well as he was actively involved in devising complex financial
structures and transactions.
Enron’s auditor also violated GAAP( general accepted accounting principles and
permit corporation to play “number games”.
As an organization of public accountant, Arthur Andersen violated the regulations
of the public Accountant practices because Andersen was not only as the internal
auditor but also as the external auditor of Enron.

20. W H I S T L E
B L O W E R
Sherron Watkins
Vice President of Corporate Development
Enron Corporation
Watkins handed CEO Lay a seven page letter and told him that ENRON
would implode in a wave of accounting scandals.
In August 2001, Watkins alerted then-Enron CEO Kenneth Lay of
accounting irregularities in financial reports.
In February 2002, she revealed the various facts regarding ENRON
partnerships and finally resigned in November. But Watkins Revealed all
the facts only after Enron filed for bankruptcy.

22. Conviction
Enron CEO Jeffrey Skilling received
the harshest sentence of anyone involved in the
Enron scandal.
In 2006, Skilling was convicted of conspiracy,
fraud, and insider trading. Skilling originally
received a 17½-year sentence, but in 2013 it
was reduced by 14 years.
Skilling was required to give $42 million to the
victims of the Enron fraud and to cease
challenging his conviction.
Skilling was originally scheduled for release on
Feb. 21, 2028, but he was instead released early
on Feb. 22, 2019.

23. Conviction
Enron's former star CFO Andrew Fastow pled
guilty to two counts of wire fraud and securities
fraud for facilitating Enron's corrupt business
practices.
He ultimately cut a deal for cooperating with
federal authorities and served more than five
years in prison. He was released from prison in
2011.
Enron's founder and former CEO Kenneth Lay
were convicted on six counts of fraud and
conspiracy and four counts of bank fraud. Prior
to sentencing, he died of a heart attack in
Colorado.

24. Conviction
Arthur Andersen was one of the first casualties of
Enron's notorious demise.
In June 2002, the firm was found guilty of
obstructing justice for shredding Enron's
financial documents to conceal them from the
SEC.
The conviction was overturned later, on appeal;
however, the firm was deeply disgraced by the
scandal and dwindled into a holding company.
A group of former partners bought the name in
2014, creating a firm named Andersen Global.

25. Thousands of employee lost their jobs as well as their
retirement savings with the company.
The pension fund (about 60%) for the employees was
obliterated.
After bankruptcy, Enron fired 5000 workers, one quarter
of its 21000 employees. Laid off workers received $4500
severance payment, no matter how many years they had
worked for the company.
Lower-level employees were prevented from selling their
stock due to 401k restriction and many subsequently lost
their life savings.
More than half of employees invested about $1.2billion in
Enron stock.Those shares are now nearly worthless.
Impact on
Employees

26. Enron share holders received limited returns in law suits
despite losing billions in stock prices.
Eligible shareholder whose Enron holding became
worthless when the company crumbled in scandal will
receive $7.2billion in settlements under a distribution
plan approved in federal court.
Undermine the investors trust in the reliability of
mandated corporate filings
At Enron peak ,its shares were worth $90.75 but after the
company declared bankruptcy on december2,2001,they
plummeted to $0.67 by January 2002.
Impact on
Shareholders

27. On November 9, 2001,rival energy trader Dynegy Inc.
decided to purchase the company for $8 billion in stock.
By the end of the month, Dynegy had backed out of the
deal, citing Enron’s downgrade to “junkbond” status and
continuing financial irregularities.
Impact on
Competitors

28. Plans to develop natural gas deposits are being cut back
dramatically. Lose their source of supply.
Lose their source Ultimately it results in power shortages
and higher cost in future years, the burden will fall on the
consumers.
Impact on
Customers

29. Enron’s fraud prompted the U.S congress to pass
Sarabanes-Oxley corporate accountability law, which
forces corporate executives to take personal
responsibility for the accuracy of company accounts.
Suffered economic losses on various grounds.
Impact on
Government

30. Amendment
SARBANES OXLEY ACT
Known as “Public Company accounting Reform and Investor Protection Act”, aimed at Restoring
the public confidence in both public accounting and public traded securities and Assure the
ethical business practices through heightened levels of executive awareness and accountability.
Enactment of Sarbanes Oxley Act In response to the Arthur Anderson, Enron, The Sarbanes Oxley
Act seeks to heightens the consequences for destroying, altering or fabricating financial record,
or for trying to defraud shareholders.
It created Public Company Accounting Oversight Board (PCAOB), which is in charge of
registering and inspecting public accounting firms, and for modifying audit standards.
Sarbanes-Oxley Act of 2002 is probably the best piece of legislation to protect investors in
modern times.

31. FINANCIAL ACCOUNTING STANDARDS BOARD
FASB emerged as the leader of the system of self-regulation and has taken a significant role in the
reform of accounting rules after SEC ( Security Exchange Commission) made a series of enquiry
about the system of self-regulation in the accounting profession without consulting the POB (
Public Oversight Board).
Company's Board of directors became more independent, monitoring the audit companies, and
quickly replacing poor managers. These new measures are important mechanisms to spot and
close loopholes that companies have used to avoid accountability
In January, 2003, the FASB announced new accounting rules designed to force US companies to
move billions of dollars from off-balance sheet entities into companies’ balance sheets ( 3% to
10%).

32. The scandal made the authorities realize the importance of ethics and
importance of INTERNAL CONTROL in business enterprises.
It also helped understand the real meaning of Shareholder’s Wealth
Maximization and the boundaries within which this key objective is to be
achieved.
Enron’s opaque financial statements and records helped conceal the true and
sordid fate of it’s investor’s money. Complicated financial disclosure adds
another page to the scandal, and so companies should disclose their financial
statements closely and in a manner that is it understandable to its
stakeholders.
Conclusion

33. List of
References
Enron Scandal: The Fall of a Wall Street Darling
Investopedia
Enron Fast Facts
CNN Editorial Research
Enron Scandal
Wikipedia
Enron
Slideshare
Enron Reasearch Papers
The George Washington University
Enron Scandal
Brittanica

34. Barath P
rtrbarathracpsgcas@gmail.com