enron assignment may 8, 2010

8/2/2019 ENRON Assignment May 8, 2010

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ENRON ENRON ENRON ENRON

NAME Denise DouglasCOURSE Certified Forensic Accounting &

Fraud DetectionACADEMIC YEAR 2010DATE DUE May 8, 2010ASSIGNMENT International Accounting Scandals:

ENRON


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Table of Contents

Page

Enron at a glance..............................................................................................3

Enron Corporation...........................................................................................4

Board of Directors............................................................................................5

High paid Executives in the USA....................................................................8

Enron Share Prices..........................................................................................9

Key Contributors to Enrons demise.............................................................10

Lessons from Enron.........................................................................................29

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ENRON AT A GLANCE

TypeDefunct / Asset-less Shell

FoundedOmaha, Nebraska, 1985

HeadquartersHouston, Texas, United States

Key people Kenneth Lay Founder, former Chairman

and CEO

Jeffrey Skilling former President, CEOand COO

Andrew Fastow former CFO Richard Causey former CAO Rebecca Mark-Jusbasche former Vice

Chairman, Chairman and CEO of EnronInternational

Stephen F. Cooper Interim CEO andCRO

John J. Ray, III Chairman Ben Glisan Treasurer Michael Kopper MD of LJM2 Timothy Belden VP and MD of Enron

West Power Trading Division

Kenneth Rice CEO of Enron BroadbandServices

Arthur Andersen External Auditors andConsultants

Vinson & Elkins External LegalAdvisors

John Baxter Chief Strategy Officer andVice Chairman of Enron North America

Sharon Watkins VP of CorporateDivision

IndustryFormerly Energy

Revenue$101 billion (in 2000)

Employees

Approximately 22,000 in 2000Approximately 4 in 2008

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ENRON CORPORATION

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ENRON Corporation was conceived and birthed

through a merger between Houston Natural Gas and

InterNorth from Omaha, Nebraska in the United

States of America in 1985. The CEO of Houstons

Natural Gas, Kenneth Lay, spare-headed the merger

between the two companies. Kenneth Lay went on to

attain the much coveted position as CEO of Enron.

The headquarters, which was initially based in

Omaha, was relocated to Houston, Texas in 1986.

Originally, Enrons primary business was the

distribution and transmission of electricity and

natural gas in the United States. This was facilitated

through the operations of interstate gas pipelines.

However, the deregulation of the energy sector in the 1980s removed exclusive rights to its pipelines,

which impacted on its profits and cash flow. The cash flow situation was worsened by the huge debt

incurred to finalise the merger. Therefore Enron began to move away from the pipeline sector into new

fields. In 1999, the company launched its broadband services unit and Enron Online, the company's

website for trading commodities. Growth for Enron was rapid and this soon became the largest business

site in the world; more than 90 per cent of Enrons income arose from trades ove

EnronParkingGarage,withtheskybridgethatconnectsthegaragewithEnronCentreNorth.

r Enron Online.

CEO, Kenneth Lay, hired Accountant, Jeffrey Skilling, to work for Enron in 1990. He later became the

Chief Operating Officer. Within a few years Enron become the largest merchant of energy in the United

States and the United Kingdom. By 1994 Enron become the largest seller of electricity in the United States

as well.

In 2000, the company's annual revenue reached $100 billion US, more than 20,000 employees worldwide,

ranking it the seventh-largest company on the Fortune 500 and the sixth-largest energy company in the

world. The company's stock price peaked at $90 US.
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Enron gained the admiration of all and ironically won prizes such as most admired company, best

board, and even the years best CFO. Enron was so confident of the continued increases in the value of

its shares that they installed televisions in the elevators so that employees could watch the stock go up.

Documents filed with the U.S. Securities and Exchange Commission (SEC) revealed that Enron had 692

subsidiaries in the Cayman Islands, 119 in the Turks & Caicos, 8 in Bermuda, 6 in Barbados, 4 in Puerto

Rico and 1 each in Aruba and the British Virgin Islands. In addition, there were 43 in Mauritius, 2 in Hong

Kong, 2 in Panama and 1 each in Singapore, Guam and Guernsey.

On December 2, 2001, Enron, the seventh largest publically traded corporation in the United States filed for

bankruptcy. Millions of investment dollars were lost by shareholders, more than $60 billion in market

value, thousands of employees lost their jobs, 5,600 jobs and a significant portion of their retirement,

almost $2.1 billion, vanished overnight and thousands of creditors only received pennies on the dollars

owed to them. This was one of the worse financial disasters in history to hit the United States.


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THE BOARD OF DIRECTORS

At the time of Enrons collapse in 2001, the Board of Directors consisted of fifteen (15) members all

having impressive credentials and were extremely intelligent. They were well educated, affluent, highly

successful businessmen and women and many of them experts in areas of finance, accounting, derivatives,

and structured finance.

The Board was also diversified and included several international members, several of them had more than

twenty (20) years experience on the Board of Enron or its predecessors and even served as directors on the

Boards of other companies as well. They possessed a wealth of sophisticated business and investment

experience. In Enron, these Directors belonged to several of the five Committees listed below:

The Executive Committee

This Committee was established to manage urgent business matters arising between schedule Board

meetings. Its members in 2001 were Mr. Duncan, the Chairman; Mr. Lay, Mr. Skilling, Mr. Belfer, Dr.

LeMaistre and Mr. Winokur.

The Finance Committee

This Committee was responsible for approving major transactions, gave oversight to the risk management

policies and provided guidance on the Companys financial decisions and policies. Its members in 2001

were Mr. Winokur, the Chairman; Mr. Belfer, Mr. Blake, Mr. Chan, Mr. Pereira and Mr. Savage.

The Audit and Compliance Committee

This Committee was the primary liaison between the Audit Firm, Arthur Anderson LLP and Enron. They

were responsible for the review of their accounting and compliance programs and the approval of the

financial statement. Its members in 2001 were Dr. Jaedicke, the Chairman; Mr. Chan, Dr.Gramm, Dr.

Mendelsohn, Mr. Pereira, and Lord Wakeham.

The Compensation Committee

This Committee was established to monitor the Companys compensation policies and plans for directors,

officers and employees. Its members in 2001 were Dr. LeMaistre, the Chairman; Mr. Blake, Mr. Duncan,

Dr. Jaedicke, and Mr. Savage.

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The Nominating Committee

This Committees sole purpose was to nominate individuals to serve as Directors. Its members in 2001

were Lord Wakeham, the Chairman; Dr. Gramm, Dr. Mendelsohn and Mr. Meyer.


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HIGH PAID EXECUTIVES IN THE USA

A Sunday May 27, 2001 article in the Houston Chronicle entitled "Houston's Highest-Paid

Executives" listed the top 100 paid executives in the Houston area. The following is based on total

compensation in 2000.

Rank in Termsof Pay

Name CompanyTotalCompensation

2 Kenneth D. Rice Enron Corp. $47,375,588

4 Mark A. Frevert Enron Corp. $37,341,139

5 Jeffrey K. Skilling Enron Corp. $36,381,688

6 Kenneth L. Lay Enron Corp $35,665,037

11 Charles L. Watson Dynegy $26,364,445

14 Stephen W. Bergstrom Dynegy $16,835,542

18 William A. Wise El Paso Corp. $13,974,828

37 Ralph Eads El Paso Corp. $6,348,012

47 Stanley C. Horton Enron Corp. $5,397,047

50 R. Steve Ledbetter Reliant Energy $5,165,355

63 H. Brent Austin El Paso Corp. $4,022,385

64 John W. Somerhalder II El Paso Corp. $4,019,769

72 Britton White, Jr. El Paso Corp. $3,721,78197 Kenneth E. Randolph Dynegy $2,727,534

TOTAL: $245,340,150

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ENRON SHARE PRICES

At the heart of Enron's demise was the creation of partnerships with shell companies, managed by Enron

executives who profited richly from them by allowing Enron to keep hundreds of millions of dollars in debt

off its books. But once stock analysts and financial journalists heard about these arrangements, investors

began to lose confidence in the company's finances. The results: a run on the stock, lowered credit ratings

and insolvency.

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KEY CONTRIBUTORS TO ENRONS DEMISE

Kenneth Lay

Kenneth Lay earned a masters degree in economics from the University of

Missouri in 1968 and a doctorate degree in economics from University of Houston

in 1970. He was the former CEO of Houston Natural Gas and headed the merger

between that Houston Natural Gas and Internorth to form the great Enron

Corporation, in 1985. He subsequently became the CEO of Enron and later the

Chairman of the Board of Directors in 1986 until he resigned is 2002.KennethLay

Illegal And Unethical Acts

Lay lived an extravagant lifestyle and was overly generous in his contributions to charity and other causes.

He gave as much as $6.1 million in 2001. During 1996 to 2001 Enron and Kenneth Lay donated nearly

$600,000 to various charities in the US.

It was reported that Lay was a close friend of former US President, George W. Bush and the largest singlefinancier of George W. Bushs campaign for President. He was accused of Lay used his and the companys

money to gain political power by donating heavily to candidates, particularly Republicans.

Kenneth Lays total compensation in 2000 exceeded $140 million, including $123 million from exercising

a portion of his Enron stock options. This amount surpassed the average CEO compensation of U.S.

publicly traded corporations by a factor of ten. This made him the highest paid CEO in the country. The

Compensation Committees lavish compensation philosophy facilitated the decision to allow Lay to repay

personal company loans with company stock. He alone accumulated more than 6.5 million options on

Enron stock.

The Committee also agreed to provide Lay with a $4 million line of credit which, in August 2001, was

increased to $7.5 million. He used what one former Board Member called an ATM approach, where he

repeatedly drew down the entire amount available, then repaid it with Enron stock. During the period

October 2000 to October 2001, Lay used the credit line to acquire more than $77 million in cash from

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Enron and repaid the loans exclusively with Enron stock. Several Directors confirmed that Lay still owed

the company about $7 million.

Lay was able to circumvent certain quarterly reporting requirements to the SEC and delayed reporting the

transactions, such as the line of credit he received, to the SEC and investing public until the end of the

fiscal year in which the transaction occurred.

Catastrophic End

Kenneth Lay resigned his position as CEO of Enron in February 2001 in favour of Jeffrey Skilling.

However he resumed the position after Jeffrey Skilling resigned in August 2001. Kenneth Lay

subsequently resigned as Chairman and CEO of Enron Corporation on January 23, 2002. On July 8, 2004

Lay surrendered to Federal Bureau of Investigations.

He was accused of participating in a conspiracy to manipulate Enron's quarterly financial results, making

false and misleading public statements about the company's financial performance and omitting facts

reflective of the truth and fairness of the financial statements.

On May 25, 2006 Lay is convicted of all six counts against him, including conspiracy to commit securities

and wire fraud and four counts of personal banking fraud and making false statements to banks, in a

separate personal banking trial. He was convicted of fraud in one of the biggest catastrophic disasters inAmerican corporate history and conspiracy for lying to employees and investors about Enrons financial

health.

Lay surrendered his passport and posted a $5 million bond secured with family-owned properties at a

hearing following the verdict. The Enron founder was also ordered to stay in the Southern District of Texas

or Colorado, avoid contact with any victim of the fraud and report regularly to court authorities. He

disallowed from purchasing or a gun or use alcohol excessively or drugs.

At the age of 64, Kenneth Lay faced the prospect of the rest of his life in prison after his conviction. Lay

was scheduled to be sentenced on October 23, 2006. It was reported that Lay died on July 25, 2006 while

vacationing in Aspen, Colorado. Coroner, Dr. Robert Kurtzman of Mesa County, reported in his autopsy

that Lay died in of heart disease.


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Jeffrey Skilling

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Jeffrey Keith Skilling, earned a Bachelor Degree in Applied Science at the Southern

Methodist University, and his Masters Degree at Harvard Business School. Prior to

Skilling being hired by Kenneth Lay in 1990, he was a consultant at McKinsey &

Company.

In 1991, Skilling was promoted to Chairman and CEO of Enron Finance Corporation and

became the chairman of Enron Gas Services Company. In that capacity, Skilling pushed an

aggressive investment strategy, helping make Enron the biggest wholesaler of gas and electricity, with $27 billion

traded in a quarter. He became the Chief Operating Officer of Enron Corporation in 1996; a position generally

considered the 2nd highest position behind Kenneth Lay. When Lay resigned as CEO in February 2001,

Skilling was selected to replace him.

JeffreySkilling

With Lays direction he brought Enron into the futures market. He, along with the companys Auditors,

Arthur Andersen, went on to apply to the SEC for permission to allow Enron to use mark-to-market

accounting. Under Skilling's plan, Enron became heavily focused on contracts for delivery of energy, aswell as selling pieces of those contracts as derivatives, matching big suppliers with smaller customers.

Skilling was clearly Enron's chief visionary and internal navigator. He was the embodiment of a risk taking

and deal-making culture which epitomised Enron. Thinking outside the box was richly rewarded; however,

Enrons internal controls and corporate governance were very loose.


The use of mark-to-market permitted Enron to account for profits from long-term contracts in the first year

of the contract. Skilling cited that it would reflect the true economic value of the contract. Thus, Enron

could record anticipated profits as actual gains that could likely turn into losses overnight, as the company's

fiscal health became secondary to manipulating its stock price on Wall Street. These actions were highly

unscrupulous and were often gambles to deceive investors and inflate stock price. This would reasonably

guarantee a continued infusion of investor capital into debt-ridden Enron.
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In 2000, California was plunged into an unprecedented energy crisis. Severe power failures shut down

several parts of the state affecting both residences and businesses. The price of energy soared

continuously. It turned out that Enron was at the center of the crisis. Lawyers in Washington proved that

Kenneth Lay and Jeffrey Skilling asked power companies to take plants offline at the height of the

California energy crisis. If there is a decrease in supply, when demand remains constant or was increased,

the price of this commodity would rise, thus increasing revenues.

Catastrophic End

In August 2001, in the midst of the California energy crisis, Skilling unexpectedly resigned as CEO citing personal

considerations. Prior to his resignation it was reported that his behaviour was quite eccentric and he

subsequently suffered a nervous breakdown upon his departure. He was replaced by his predecessor, the

former Enron CEO, Kenneth Lay until the company declared bankruptcy in December 2001. UponSkillings departure he sold almost $60 million of his shares in blocks of 10,000 to 500,000.

Skilling was indicted on 35 counts of fraud, insider trading, and other crimes related to the collapse of

Enron. He pleaded not guilty to all charges. Skilling was brought before the congressional committees and

stated that he had no knowledge of the complicated chain of scandal that eventually resulted in Enron's

bankruptcy. He was placed on a $5 million bond, which restricts him to the continental United States.

Skilling spent over $40 million, for the preparation for the trial which began in January 2006. Prosecutorssaid that Skilling received more than $150 million in compensation from the sale of Enron shares from

1999 through 2001 and milked Enron for hundreds of millions of dollars to maintain his luxurious lifestyle,

while driving the company into bankruptcy.

Ben Glisan, Enrons former Treasurer, testified that Skilling knew Enron was in deep financial trouble and

concealed it from investors. Andrew Fastow, Enrons former Chief Financial Officer, testified that Skilling

was deeply involved in the conspiracy to cover-up of Enrons troubled finances.

In 2006, Skilling was convicted of multiple federal felony charges, 19 out of 28, including insider trading, securities

fraud, conspiracy to hide the failing health of the company by selling a boosterish optimism to Wall Street

and the public and making false statements to auditors. He was acquitted of the remaining nine. The charges

carry a maximum 185 years. He is currently serving a 24-year, 4-month prison sentence at the Federal Correctional

Institution in Waseca, Minnesota and was also fined $45 million.


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Andrew Fastow

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Andrew Stuart Fastow graduated from Tufts University in 1983 with a Bachelor of

Arts in Economics and Chinese. He earned his MBA at Northwestern University,

Chicago.

He was employed at Continental Illinois National Bank and Trust Company in

Chicago, where he helped pioneer a system of raising capital by selling notes backed

by risky loans. That system moved assets off the bank's balance sheet while creating revenue. Based on his

work at Continental, Fastow was hired by Enrons Chief Operating Officer, Jeffrey Skilling, in 1990. He

was the Chief Financial Officer at the time of Enrons collapse.

AndrewStuartFastow

In October 1999, Ted A. Izatt, senior vice president at Lehman Brothers Inc. in New York said: Thanks to

Andy Fastow, Enron has been able to develop all these different businesses, which require huge amounts of

capital, without diluting the stock price or deteriorating its credit quality-- both of which actually have gone

up. He has invented a groundbreaking strategy." Fastow's expert balancing act, in fact, earned him the

CFO Excellence Award for Capital Structure Management, in 1999.

In order to develop capital structuring and structured finance deals, Enron secured the necessary capital

without sacrificing its credit rating. Instead this was done through the issuing of equity. Fastow reduced

the balance-sheet debt, maintained the credit rating, and reduced the cost of capital while simultaneously

growing the balance sheet.


Fastow ingeniously created separate business entities, Special Purpose Entities, which were not reflected in

the main company's financial statements; this was not disclosed to investors by auditors, Arthur Andersen.

The result was that an extremely successful-looking company was, in reality, haemorrhaging losses because

millions in debt were hidden in Enron's partnership companies
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Despite clear conflicts of interest, the Board of Directors waived the companys code of conduct and

approved an unprecedented arrangement allowing Fastow to establish and manage the LJM private equity

funds, LJM1, LJM2 and LJM3. This arrangement allowed inappropriate conflict of interest transactions as

well as accounting and related party disclosure problems, due to the dual role of Fastow as a senior officer

at Enron and an equity holder and general manager of the new entities.

LJM partnerships were designed to transact business primarily with Enron, realising hundreds of millions

of dollars in profits at Enrons expense. Occasionally, they also purchased assets from Enron and

subsequently re-sold it to Enron at a higher price. Fastow admitted to receiving LJM compensation

totalling $45 million, $23 million from LJM1 and $22 million from LJM2 in just two years. There were 23

investments with Enron and a 69 percent rate of return in its first year of operation. Some of the

transactions, such as one called Raptors, had produced returns as high as 2,500 percent. Some transactions

received immediate returns of $1 million on individual investments of $5,800.

The Directors were surprised at the exorbitant compensation and the decision made on October 24, 2001 to

place Fastow on immediate leave.

Catastrophic End

The U.S. Securities and Exchange commission launched an investigation into the investment partnerships

led by Fastow. Investigations revealed that there was a complex web of partnerships designed to hideEnron's debt. By late November 2001, the company's stock was down to less than $1 US due to to this

revelation. As a result billions of dollars were lost by investors.

On October 31, 2002, Fastow was indicted on 78 counts including fraud, money laundering, and

conspiracy. Two years later, he pleaded guilty to two counts of wire and securities fraud and agreed to

cooperate with federal prosecutors to become an informant of other former Enron executives and surrender

nearly $24 million in cash and property in exchange for a reduced sentence of 10-year sentence and an

agreed to Fastow is currently serving a six year prison sentence at the Federal Detention Center in Oakdale,Louisiana, followed by two years of probation.

In January 2004, Andrew Fastows wife and former Enron assistant treasurer, Lea Fastow, pleaded guilty to

a felony tax crime, admitting to disguising shady income as gifts and hiding the ill-gotten income from the

couple's accountant and the government. Lea Fastow was sentenced to one year in federal prison and one

year of supervised release in a halfway house


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Richard Causey

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Richard Causey graduated with a Bachelors Degree in Accounting and a Masters

Degree from the University of Texas at Austin. He is a Certified Public Accountant

in the state ofTexas.

Causey was a Senior Manager at Arthur Andersen, specialising in the natural gas

industry. He had primary responsibility for the Enron engagement as well as othernatural gas pipeline and marketing clients. This allowed him to work alongside employees from Enron and

he became quite familiar with their accounting procedures. He subsequently left Arthur Andersen and

joined the Enron Capital and Trade Division. He eventually was promoted to Executive Vice President and

Chief Accounting Officer, where he was responsible for the Special Purpose Entities. Causey was also a

member of Enron's Management Committee.

RichardCausey

Illegal and Unethical Acts

The only control initially specified in the LJM private equity funds, LJM1, LJM2 and LJM3, established

and managed by Andrew Fastow, was the approval of all transactions between Enron and LJM by Richard

Causey. In 2000, additional controls were added however, they were inherently flawed because of poor

design. Causey indicated that he reviewed the LJM transactions and signed the relevant documents, but

considered only narrow procedural or risk issues; the transactions were not reviewed for their overall

fairness to Enron.

Causey is sold about 209,000 of his Enron shares for $13.3 million. He also received bonus payments of

more than $1.5 million from 1997-2000; these bonuses were based on inflating profits and hiding debt

based largely on the partnerships he was supposed to police.

Causey also admitted that he and other unnamed Enron executives removed a hedge from a partnership that

Enron partly owned and which held Enron stock. The value of the related investment would go down if the
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hedge was still in place. Once the hedge was removed, Enron reported the stock price increase as recurring

profits in the first quarter of 2000.

Enron's retail electricity business, Enron Energy Services was an important promotional vehicle for Enron.

Causey admitted that in the first quarter of 2001, there were hundreds of millions of dollars of unexpected

trading losses, which far exceeded its projected income for the year. In order to maintain the entitys

attractiveness as a promotional tool, Causey contends that Enron shifted the entity's trading losses into a

more profitable entity and thus, avoided direct reporting of the losses that might have caused a reduction in

investment and a fall in the share prices.

Catastrophic End

Causey was fired from Enron on February 14, 2002, as part of an investigation by the SEC after the releaseof an in-house report noting his failure to review the deals between Enron and the Special Purpose Entities.

On January 22, 2004, Causey was indicted on 36 counts ofwire fraud, conspiracy, insider trading, lying to

auditors and money laundering charges in connection with his activities at Enron between 1998 and 2002.

They believed that he also knew about the details to swindle millions of dollars from the numerous

suspicious deals. Causey originally pled not guilty, but on December 28, 2005, he entered a guilty plea and

agreed to testify against Kenneth Lay and Jeffrey Skilling in exchange for a 5 to 7-year prison term and a

fine of US$1.25 million.

The SEC alleged that Causey and others fraudulently manipulated Enron's asset portfolio, made improper

off-balance-sheet Special Purpose Entities, concealed Enrons losses of Enron Energy Services and Enron

Broadband Services by manipulating the Business Segment Reporting, manipulated expenses to conceal

losses at Enron's broadband unit and manipulated reserves in Enron's wholesale energy trading business to

conceal earnings volatility and losses. The Commission also alleged that Causey and others made false and

misleading statements regarding Enron's financial position and the performance and that these

misrepresentations were reflected in Enron's public filings with the Commission.

Causey agreed to be enjoined permanently from violating the antifraud, periodic reporting, books and

records, and internal control provisions of the federal securities laws, and to be barred permanently from

acting as an Officer or Director of a public company. As part of his criminal plea, Causey agreed to forfeit

a total of $1.5 million and to cooperate with the ongoing investigations being conducted by the

Commission and the Justice Department's Enron Task Force.
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In settlement of this action, Causey also consented to the entry of an Administrative Order, pursuant to

Rule 102(e) of the Commission's Rules of Practice, barring him from appearing or practicing before the

Commission as an Accountant.

Causey began his sentence on January 2, 2007 at Federal Correctional Institution in Bastrop, Texas. He is

scheduled to be released in October 2011.
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Ben Glisan

BenGlisan

Ben Glisan, 37, was the former Treasurer of Enron Corporation. One month prior to

Enrons filing for bankruptcy, November 2001, Glisan was fired when an internal

probe revealed his investment of $5,800 in one of the several complex schemes yielded

a gain of $1 million.

Glisan pleaded guilty in January 2006 to a federal conspiracy charge; twenty-three other counts against himwere dismissed. He was the first Enron executive to be sentenced to prison as a result of Enrons failure.

He was sentence to five years in prison and was taken into custody immediately.

More than $900,000 held in banks and brokerage accounts in the name of Glisan and his wife, Barbara,

were frozen by Prosecutors. He also agreed to forfeit nearly $1 million in profits from a partnership

investment related to Enron and agreed not to seek the refund of $412,000 which he paid in income taxes.

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Michael Kopper

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Michael Kopper, resigned as Director of the Global Finance Unit at Enron in July 2001

to become Managing Director of LJM2 Capital Management, one of Enrons Special

Purpose Entities to run one of those partnerships. is the first Enron executive to admit

guilt and pledge cooperation with federal prosecutors.

Kopper was considered the right-hand man to Enrons former CFO, Andrew Fastow.

Kopper admitted in a court paper that he assisted Fastow orchestrate unethical partnerships that filled their

coffers with millions at the expense of Enron. An internal investigation by Enron found that Kopper was

indeed closely involved in the partnerships, which stated artificially inflated profits, and made considerable

personal gains.

MichaelKopper

He pled guilty to charges of money laundering and wire fraud on August 2002, and has promised to

surrender $12 million of the ill-gotten gains. He was fined $50,000 that will be sent to a fund established

for victims of Enron's collapse and upon completion of his prison sentence; he will be on probation for two

years. He faced a maximum jail sentence of 15 years, but received a reduced sentencing of three years and

one month for cooperating with Prosecutors.
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Timothy Norris Belden

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Timothy Norris Belden joined Enron Corporation in 1997 as Director of Enron Energy

Services and later became the Vice President and Managing Director of Enrons West

Power Trading Division.

Belden was considered the mastermind behind Enron's scheme to drive up California's

energy prices. He confessed to the US District Court, that between 1998 and 2001 he and others Enron

officials agreed to formulate and implement a series of fraudulent schemes to obtain increased revenue for

Enron from wholesale electricity customers and other market participants in the State of California.

TimothyBelden

They submitted false information to the California Power Exchange (PX) and the California Independent

System Operator (ISO). They artificially increase congestion on California transmission lines and was paid

to relieve congestion which they didnt. They exported and then imported amounts of electricity generated

within California in order to receive higher, out-of-state prices from the ISO when it purchased out-of-

market. Energy was scheduled where there was none and as a result of these false schedules, they were

able to manipulate prices in certain markets, arbitrage price differences between the markets, obtain

congestion management payments in excess of what they would have received with accurate schedules.

Prices for electricity above price caps set by the ISO and the Federal Energy Regulatory Commission were

received unknowingly and thus excessive revenue. ISO made these payments to Enron by interstate wire

transmission throughthe Bank of America in San Francisco, California. He admitted that he received a $5

million bonus from Enron as a reward for the profits he extracted from California.

Belden pleaded guilty to one count of conspiracy to commit wire fraud as part of a plea bargain, including

his cooperation with State Prosecutors to assist in the conviction of other top Enron executives. On

February 14, 2007, Belden was sentenced to two years of court-supervised release. He also agreed to

forfeit $2.1 million to the State.
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Kenneth Rice

Kenneth rose from being a farm boy from Nebraska to become the CEO of Enron

Broadband Services. He confessed that he was pressured by Jeffrey Skilling to mislead

investors to believe that Enron Broadband Services was a more valuable enterprise

than it actually was even as it was hemorrhaging tens of millions of dollars each

quarter. He admitted that by the end of 2000 the broadband unit was struggling, with

few customers and ex

KennethRicecessive costs.

As business worsened they decided to sell future revenues of their content services business, so that they

could recognise profits in the current period. They had $600 million worth of investments in 2001 which

didnt include the loss making investments. Instead they hid it by transferring them to off-the-books

entities, LJM and Raptor. Even in the midst of making losses they were able to sell more than 1 million

shares for a total of $72.7 million in between 2000 and 2001, prior to his resignation in August 2001.

Rices total compensation, including stock sales, in 2000 came to $47.3 million, significantly more than his

superiors, Kenneth Lay and Jeffrey Skilling, earned. Rice became a wealthy man at the expense of Enron

and its stakeholders and rose rapidly in the frenzy of ill-gotten money. He spent most of his earnings on

sports cars, motorcycles and a Colorado vacation home.

Rice was charged in 2003 with selling 1.2 million shares of Enron stock for more than $76 million while he

knew Enron Broadband Services was failing. He was ordered to forfeit more than $13 million in ill-gotten

cash and property. He was indicted on more than 40 counts against him including fraud, conspiracy and

other charges for participating in a scheme to tout Enron's broadband network as having capabilities it

didn't possess to impress analysts and inflate the company's stock. He agreed to cooperate with State

Prosecutors against Kenneth Lay and Jeffrey Skilling in exchange for a reduced sentencing. He eventually

pleaded guilty to one count of securities fraud in 2004 and assisted prosecutors in other Enron cases. He

received a prison sentence of 27 months in prison and ordered to pay a fine of $50,000.

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Arthur AndersenArthur Andersen LLP, one of the Big 5 Audit Firms in the world was

appointed Auditors of Enron in 1986. Arthur Andersen LLP, in conjunction

with Jeffrey Skilling, lobbied the Securities and Exchange Commission to

permit their trading business to adopt mark-to-market accounting, that is, the

accounting act of recording the price or value of a security, portfolio or

account to reflect its current market value rather than its book value. Enron

recognised estimated income at the present value of net future cash flows, once

a long-term contract was signed, though in many cases the viability of the

contracts and its associated costs were brought into question. Enron was thus

the first nonfinancial company to be permitted to use the mark-to-market method.

ArthurAndersenHoustonOffice

Arthur Andersen LLP not only provided external audit services, but internal audit and consultancy services

for approximately sixteen years with a complement of staff that was more than a hundred. The majority of

the Arthur Andersons field-work took place at Enrons head office in Houston, Texas; so much so that

they, established their own office at Enrons Houston office.


A major concern was the dual role of Arthur Andersen as Enrons auditor and consultant, as they

performed extensive internal auditing and consulting services, which they termed an integrated audit.

This was however viewed as a serious conflict of interest and dilution of the independence and

effectiveness of the external audit function. The Audit Committee or no other Board member expressed the

concern that Arthur Andersen might be auditing its own work. The Audit Committee did very little to

evaluate the independence relationship between Arthur Andersen and Enron.

Perhaps Arthur Andersen was unwilling to upset Enrons management or endanger its fees since Enron was

one of Arthur Andersens largest clients. During 2000, the total fee income was approximately $52

million, of which the audit fees and non-audit fees were approximately $25 and $27 million respectively.

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They were also paid millions of dollars in consultancy fees for helping to design the LJM Cayman, LP,

which was a company created in 1998 by Enrons CFO Andrew Fastow to purchase Enrons poorly

performing stocks, thereby strengthening Enrons financial position. Arthur Andersen was also accused of

turning a blind eye to huge sums of money not recorded in Enron's Financial Statements since they

represented a potential fee income of $100 million a year.

Partner, David B. Duncan, the Engagement Leader on the audit, wrote letters fraudulently stating that the

U.S. Financial Accounting Standards Board approved of the accounting practices of Enron that hid debts

and overstated earnings.

In 2001, the employees of Arthur Andersen were instructed by David Duncan and Nancy Temple, Lawyer

in Andersens Legal Department to destroy documents pertaining to Enron, while on notice of a federal

investigation. Andersen claimed that the documents were destroyed as part of its housekeeping duties and

not as a scam to keep documents from the regulators.

Catastrophic End

In January 2002 David Duncan was fired from Arthur Andersen shortly after he acknowledged his

wrongdoing in the shredding of documents pertaining to Enron. Andersen was subsequently convicted of

obstruction of justice. On May 31, 2005 the Supreme Court of the U.S. unanimously reversed Andersen's

conviction because there were fundamental flaws in the instructions to the jury.

The 89 year old firm, one of the largest audit firms in the world and a part of the Big 5 audit firms

tragically collapsed. Anderson still exists as a company with less than 200 employees for the purposes of

completing all the litigations against them and presiding over the orderly dissolution of the company.

Andersen lost their client confidence because they knowingly and willingly participated in questionable

acts and committed criminal offenses. At least 650 corporate clients, out of 2,311 immediately left and

approximately 7,000 of its 26,000 employees in the U.S. were laid off. Partners formed new companiesand many of its practices in the United States were sold.

The Texas state accounting board has filed a motion to revoke Andersen's license in that state because of its

role in Enron's collapse. The board also sought $1 million in fines. Arthur Andersen also agreed to

surrender its CPA license to SEC cease practicing by August 31, 2006.


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Vinson & Elkins

Vinson & Elkins is an international law firm with its headquarters in the First City

Tower in Downtown Houston, Texas. The firm is the largest office in Houston,

Texas and has offices in 14 major energy, financial, and political centers

worldwide, including Abu Dhabi, Austin, Beijing, Dallas, Dubai, Hong Kong,

Houston, London, Moscow, New York City, Palo Alto, Shanghai, Tokyo, and

Washington, D.C.

hy the Board never requested or reviewed the material.

Vinson & Elkins was the legal advisors for Enron Corporation since its inception but

they received negative attention when the energy-giant went into bankruptcy. The

Board members indicated that Enron management and Vinson & Elkins also withheld the information that

the August 2001 Sherron Watkins letter, had described the Raptor transactions as a possible accounting

scandal and enumerated their problems. The Board of Directors testified Vinson & Elkins never told the

Board anything was amiss, which is w

Vinson&ElkinsHoustonOffice

Senior Partner, Harry Reasoner, of Vinson & Elkins, stated that lawyers are not obligated to blow the

whistle on client-wrongdoing. In fact, they have an obligation to maintain client secrecy. However Vinson

& Elkins was the subject of a number of claims during the years following Enron's collapse. They endured

much scrutiny by media, the U.S. Congress and federal agencies.

Vinson & Elkins was voluntarily dismissed without payment in January 2007 for the last significant

litigation involving the Enron collapse. The law firm agreed to pay $30 million to the failed energy

company's bankruptcy estate to avoid a lawsuit claiming it aided in the company's downfall, in exchange

the estate agreed to not pursue Vinson & Elkins in civil litigation, "Megaclaims". However, Vinson &

Elkins is still part of a separate shareholders suit seeking billions of dollars from the law firm, financial

institutions and others individuals.

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Page26of29

John Clifford Baxter

John Clifford Baxter was born in Amityville, New York. He graduated from New York

University and later entered the military, where he became a U.S. Air Force captain from

1980 to 1985. He later on attained his Masters Degree at Columbia University.

Baxter joined Enron in 1991 after a varied career in banking and the Air Force. He later

became Chief Strategy Officer and Vice Chairman of Enron North America. It was reported that Baxter had

several clashes with CEO, Jeffrey Skilling over questionable Enron business practices and opposed the

dealings of Enron with LJM citing the inappropriateness of transactions.

JohnCliffordBaxter

He resigned in May 2001 and sold a large quantity of his Enron stock a few months prior to Enron

bankruptcy. He was also subpoenaed by a Congressional committee investigating the Enron affair and was

expected to give evidence. However, on January 25, 2002 he was found dead with a gunshot wound

through the right side of his head. The death was ruled as suicide by the Harris County Medical

Examiner's Office.
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Sherron Watkins

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Sherron Watkins was born on August 28, 1959 in Tomball, Texas. Watkins obtained a

Bachelors Degree in Business Administration and a Masters Degree in Professional

Accounting from the University of Texas. She is also a Certified Public Accountant.

Watkins joined Enron in 1993, having previously worked at Arthur Andersen for eight

years. She later became Vice President of Corporate Development at the Enron

Corporation. She is considered by many to be the whistleblower that helped to uncover the Enron scandal

in 2001.

SharonWatkins

In August 2001, Watkins emailed CEO, Kenneth Lay alerting him of several accounting irregularities and

material misstatements in the financial reports of Enron. She told Lay that she was incredibly nervous

that Enron might implode in a wave of accounting scandals. She cautioned against the very aggressive

accounting policy, most notably the Raptor transactions and the Condor vehicle (names of two Special

Purpose Entities), could unwind into a major disaster.

Watkins, in the same month, she discussed the problems associated with the Raptors with an Andersen

partner outside of the Enron engagement team. In September, an Enron internal memorandum announced

that Andersen had changed their opinion of the proper accounting for the Raptors and no longer supported

the capacity of the Raptor Special Purpose Entities to continue to hedge Enrons investment losses.

As a result, at the end of the third quarter of 2001, Enron terminated the Raptor hedges and recorded a $710

million charge to earnings and a $1.2 billion reduction in shareholder equity. The earnings charge reflected

the investment losses that the Raptors could no longer conceal. This resulted in huge losses shown on

Enrons financial statement; both investors and creditors reacted. Credit rating agency to began to review

the long-term debts for a possible downgrade of Enrons ratings. Investors frantically sold their shares

causing a nose-dive of Enrons stock price. The resulting stock price decline triggered Enrons more

credit rating downgrades and Enrons eventual bankruptcy.
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Page28of29

Watkins memo was subsequently made public five months after it was initially sent. Watkins testimony

was heard before the Congressional Committees of the U.S. House of Representatives and Senate at the

beginning of 2002. Watkins subsequently resigned her position at Enron in November 2002.

Watkins was selected by Time Magazine as one of three persons to receive the People of the Year 2002

award.
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LESSONS FROM ENRON

Why do employees commit white collar crime? Well there are many variables, namely personal values,

organizational values and external variables. All of these top Executives believed that they would never get

caught. At the heart of Enrons collapse is the greed and lust for more in spite of all that the Executives

have attained; pure greed and delusion of grandeur. They impress many with their trappings of power and

wealth. Some even show psychopathic tendencies, as seen in the case of Jeffrey Skilling. And it must be

noted that the existence of creative opportunities and corrupt mind thrust them further into crime because of

the desire to succeed.

Several internal control measures must be instituted. It must first begin with the strengthening of board

governance. There must be legislative and legal controls. An effective design of financial incentives

should be created to move success from the mere numbers on the financial statement and in the stock

market. The effective use of stock-based compensation and comparative performance measures should be

sought, with a limit to compensation received. Of great significance was the creation of the Sarbanes-

Oxley Act, designed to make company executives more accountable

Further, there should be absolutely no related party transaction with employees of the company. Any

investment activity should be done at arms length and with no favourable terms that are exclusive to

employees.

Additionally, there should be rotation of Audit Firms and Audit Partners on an Engagement, so that the

Auditors would not become unprofessionally close to management. All service entities, such as legal

advisors, auditors and consultants should be disallowed from accepting positions at their client company for

a designated period. These can only be properly instituted if there is proper board governance.