The Enron Scandal

INTRODUCTION:

Enron Corporation was an American energy, commodities, and Services Compan y based in Houston, Texas. Texas. Enron was formed in 19! by "ennet# $ay after merging Houston %atura& 'as and (nter%ort#. )efore its ban*ruptcy on +ecember , --1, Enron emp&oyed approximate&y -,--- staff and was one of t#e wor&ds &eading &eading e&ectricity, natura& gas, communications, and  pu&p and paper companies, wit# c&aimed revenues of near&y /1-1 bi&&ion in ---. ACHIEVEMENTS: • •

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0ortune named Enron Americas 2ost (nnovative Company Co mpany for six consecutive years. (t was a&so an extensive futures trader, inc&uding sugar, coffee, grains, #og, and ot#er meat futures. At t#e time of its ban*ruptcy fi&ing in +ecember --1, Enron structured into seven distinct business units.

SCANDAL: •

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At t#e end of --1, it was revea&ed t#at its reported financia& condition was sustained substantia&&y by institutiona&i3ed, systematic, and creative&y p&anned accounting fraud, *nown as t#e Enron scanda&. Enron #as since become a popu&ar symbo& of wi&&fu& corporate fraud and corruption.

ENRON’S FALL •

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T#e Enron scanda&, revea&ed in 4ctober --1, eventua&&y &ed to t#e ban*ruptcy of t#e Enron Corporation, an American energy company compan y based in Houston, Texas, Texas, and t#e disso&ution of Art#ur Andersen, Andersen, w#ic# was one o ne of t#e five &argest audit and accountancy  partners#ips in t#e wor&d. (n addition to being t#e &argest ban*ruptcy reorgani3ation reorgani3ation in American #istory at t#at time, Enron undoubted&y is t#e biggest audit fai&ure. Severa& years &ater, w#en 5effrey S*i&&ing was #ired, #e deve&oped a staff of executives t#at, t#roug# t#e use of accounting &oop#o&es, specia& purpose entities, and poor financia& reporting, were ab&e to #ide bi&&ions in debt from fai&ed dea&s and pro6ects. C#ief 0inancia& 4fficer Andrew Andrew 0astow and ot#er executives were ab&e to mis&ead Enron7s  board of directors and audit committee of #ig#8ris* accounting issues as we&& as pressure pressure Andersen to ignore t#e issues. T#e Enron scanda& was a financia& scanda& invo&ving Enron Corporation and its accounting firm Art#ur Andersen Andersen t#at was revea&ed reve a&ed in &ate --1.  --1. After a series of reve&ations invo&ving irregu&ar accounting procedures conducted t#roug#out t#e 199-s, Enron was on t#e verge of ban*ruptcy by %ovember of --1.

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A w#ite *nig#t rescue attempt by a simi&ar, sma&&er energy company, +ynegy, was not viab&e. Enron fi&ed for ban*ruptcy on +ecember , --1 ENRON BUSINESS

Business Model •

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+eregu&ation genera&&y &ed to &ower prices and increased supp&y, it a&so introduced increased vo&ati&ity in gas prices Standard contract o&d:888 a&&owed supp&iers to interrupt gas supp&y wit#out &ega&  pena&ties. Creating a natura& gas ;ban*. ?. !.

=roducts 'as 4i& )roadband E&ec E&ectr tric icit ity y pu&p pu&p and paper per wa water

REMAR!ABLE COMPAN" COMPAN" • • •

T#e wor&ds &argest energy trader. T#e tota& revenue was /1-1 bi&&ion in ---, @t# of Top !-- companies in t#e S. (t was a )&ue c#ip company wit# /- per s#are, 1 t#ousands emp&oyees, g&oba&i3ation enterprise.

BAN!RUPTC" •

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(n --1, a investment agency agenc y boss pub&ic&y doubts t#e profitabi&ity mode& of Enron, t#e stoc* price decrease from /- to ?/ in Aug --1. 1B, 4ct. Enron announces t#e tota& &oss for >t# uarter was /B1 mi&&ion. , 4ct. SEC begin to investigate Enron forma&&y. , %ov. Enron was forced to admit do fa&se account, profit tota& fa&se near&y /B-- mi&&ion since 199@. >-, %ov --1, stoc* price fa&&s to /-.B per s#are.

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, +ec. forma&&y app&y for ban*ruptcy ban*ruptc y protection &ose near&y /11 bi&&ion w#en it  p&ummeted to &ess t#an /1 by t#e end of %ovember --1. T#e .S. Securities and Exc#ange Commission SEC: began an investigation, and +ynegy offered to purc#ase t#e company compan y at a fire sa&e price. D#en t#e dea& fe&& t#roug#, Enron fi&ed for ban*ruptcy on +ecember +ece mber , --1 under C#apter 11 of t#e nited States )an*ruptcy Code, and wit# assets of /B>.? bi&&ion, it was t#e &argest corporate  ban*ruptcy in .S. #istory unti& Dor&dCom7s Dor&dCom7s -- ban*ruptcy. ban*ruptcy. 2any executives at Enron were indicted for a variety of c#arges and were &ater sentenced to prison. Enron7s auditor, Art#ur Art#ur Andersen, was found gui&ty in a nited States +istrict Court, but b ut  by t#e time t#e ru&ing was overturned at t#e .S. Supreme Court, t#e firm #ad &ost t#e ma6ority of its customers and #ad s#ut down . Emp&oyees and s#are#o&ders received &imited returns in &awsuits, despite &osing bi&&ions in pensions and stoc* prices. As a conseuence of t#e scanda&, new regu&ations and &egis&ation were enacted to expand t#e t# e re&iabi&ity of financia& reporting for pub&ic companies. 4ne piece of &egis&ation, t#e Sarbanes84x&ey Act, expanded repercussions for destroying, a&tering, or fabricating records in federa& investigations or for attempting to defraud s#are#o&ders. T#e act a&so increased t#e accountabi&ity accoun tabi&ity of auditing firms to remain ob6ective and independent of t#eir c&ients.

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How did it #appen 1. Acco Accoun unti ting ng met# met#od od . 2ana 2anage geme ment nt grou group p >. S monit onitor or syst system em ACCOUNTIN' METHOD

 Enrons nontransparent financia& statements did not c&ear&y depict its operations and finances wit# s#are#o&ders. Accru(l (ccounin):

Actua& costs and actua& revenues were received rec eived and recorded w#en se&&ing it. M(r*+o+,(r*e (ccounin):

(ncome was estimated as t#e =F of future cas# f&ow, but costs were #ard to be recorded. Accounting met#od Examp&eG •

(n 5u&y ---, Enron and )&oc*buster Fideo Fideo signed a -8 year agreement to introduce a new on8&ine video game to various cities.

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After severa& pi&ot pro6ects, Enron estimated profits of more t#an /11- mi&&ion form t#e dea&, even t#oug# ana&ysts uestioned t#e tec#nica& viabi&ity and mar*et demand of t#e service. D#en t#e networ* fai&ed to wor*, )&oc*buster pu&&ed out of t#e contract, Enron continued to recogni3e future profits, even t#oug# t#e dea& resu&ted in a &oss.

Accounting met#od S=E Specia& purpose entities: •

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(t is a &ega& entity created to fu&fi&& narrow, specia& or temporary ob6ectives. T#ey are used to #ide debt, owners#ip most&y in rea& mar*et. T#ese s#e&& firms were created by a sponsor, but managed by b y independent euity investor and debt financing. Enron used S=E to manage ris*s associated wit# specific assets and disc&ose minima& detai&s of its S=E. )y --1, Enron #ad used #undreds of S=Es to #ide its debt. deb t. As a resu&t of one vio&ation, Enrons ba&ance s#eet understated its &iabi&ities, overstated its euity and profits. MANA'EMENT 'ROUP

 Cor-or(e )o.ern(nce

 Enron #ad a mode& mode & board of directors comprising predominant&y outsiders wit# significant owners#ip sta*es and a ta&ented audit committee. Even wit# its comp&ex corporate governance, Enron was sti&& ab&e to concea& its true performance. E/ecui.e co,-ens(ion

T#e setup of t#e system contributed to a dysfunctiona& corporate cu&ture t#at became obsessed wit# a focus on&y on s#ort8term earnings to maximi3e bonuses. Fin(nci(l (udi

Enrons auditor firm, Art#ur Art#ur Andersen, was accused of app&ying rec*&ess standards in its audits  because of a conf&ict of interest over t#e significant consu&ting fees/@ fees/@ mi&&ion:. Andersons Andersons auditors were pressured by Enron to defer recogni3ing t#e c#arges from t#e S=E as its credit ris*s. US ,onior s%se,: •

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T#e state accounting committee was an independent body estab&is#ed in accordance wit# t#e state Accountant Acts. At At t#e nationa& &eve&, t#e niform Certified =ub&ic Accountants Act was 6ust a temp&ate met#od, does not n ot #ave binding enforce. American institute of C=A and State Certified 'enera& Accountants Association were traditiona& civi& society organi3ations, not specifica&&y au t#ori3ed by &aw.

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T#e independence of t#e C=A.

Business E$ic G

 How about t#e CE4 and directors dea& wit# fraud T#e top management operated t#e prob&em in very we&&, but a&& of t#e intentiona&&y &ess of attention about t#e fraud. (nc&uding t#e CE4 S*i&&ing, many of t#e directors were continuing advocated to rise stoc* price, but se&&ing t#e stoc* at t#e same time.  )ot# of t#ey #ave no business et#ics and no &ongterm deve&opment.19!8--1 Enron: D#ere t#ere is a business et#ic, t#ere is a &ong8term b&oom. Conclusion ARTHUR ANDERSEN

(n 5u&y --, t#e one8time )ig ! accounting firm was found gui&ty of obstruction of 6ustice for s#redding documents in t#e Enron case. T#eir Enron connections essentia&&y put t#e entire firm out of business, affecting ,--- wor*ers, most of w#om #ad no connection to Enron. S(r0(nes+ O/le% Ac G

)etween +ecember --1 and Apri& --, t#e Senate Committee on )an*ing, Housing, and rban Affairs Affairs and t#e House Committee on 0inancia& Services #e&d mu&tip&e #earings about t#e co&&apse of Enron and re&ated accounting ac counting and investor protection issues.I T#ese #earings and t#e corporate scanda&s t#at fo&&owed Enron &ed to t#e passage of t#e Sarbanes8 4x&ey Act on 5u&y >-, --. T#e Act is near&y a mirror image of EnronG T#e companys perceived corporate governance fai&ings are matc#ed virtua&&y point for point in t#e principa& provisions of t#e Act.