enron it's over

8/8/2019 Enron It's Over

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³What we are looking at here is an example of superbly

complex financial reports. They didn¶t have to lie. All

they had to do was to obfuscate it with sheer complexity ² although they probably lied too.´

Senator John Dingell



` Enron Corporation was an American energy company based

in Houston, Texas. Before its bankruptcy in late 2001, Enron

employed approximately 22,000 and was one of the world's

leading electricity, natural gas, pulp, paper, and

communications companies, with claimed revenues of nearly

$101 billion in 2000. Fortune named Enron "America's Most

Innovative Company" for six consecutive years.



` Enron was originally involved in transmitting anddistributing electricity and natural gas throughout the

United States.

` The company developed, built, and operated power plants and pipelines while dealing with rules of law and

other infrastructures worldwide.

` In just 15 years, Enron grew into one of America'slargest companies, but its success was based onartificially inflated profits, dubious accounting practices,and ± some say ± fraud.



` Enron Wholesale Services

` Enron Energy Services

` Enron's Global Assets



³ E nron knew they were crooks. But they were profitable crooks.´



` What happened?

` Why did it happen?

` What were the results?



` Personalities behind the Enron scandal

` Prelude to scandal



Ken Lay, Chairman and CEO Big picture; optimistic; tended to avoid controversy³K en gravitates toward good news´

Jeffrey Skilling, President Proponent of big ideas; less interested in details³Skilling is a designer of ditches, not a digger of ditches.´

Andrew Fastow, CFO Ambitious; unwilling to let the rules get in the way³I don¶t know that he ever had a moral compass´



Kenneth Lee Lay ` Born April 15, 1942

Died July 5, 2006 (age 64)

` Charge(s): Fraud, false statement ;

` Penalty: Could have faced 40 years in prison

plus monetary fines, but died before sentencing

11



Jeffrey Skilling

` Born November 25, 1953 (1953-11-25)

` Charge(s): conspiracy, securities fraud, falsestatement, insider trading

` Penalty: originallysentenced to 24 years

and 4 months and fined $45 million USD, pending resentencing

` Status: Incarcerated

12



Andrew Stuart Fastow

` Born: December 22, 1961

` Charge(s): conspiracy, securities fraud, false statement, insider trading

` Penalty: 6 years, followed by 2 years of probation

` Status: Incarcerated

13



Arthur Andersen was one of the world¶s five leading accounting firms(Big Five)Was paid $52m in 2000, the majority for non-audit related consulting services.Type: Limited Liability PartnershipFounded: 1913 Industry: Accounting, Professional

Services,Tax, Consulting;

Licenses of Certified Public Accountants surrendered in 2002



Enron Corp(Houston, TX)

.Enron Oil(Valhalla, NY)

Enron Oil chiefs involved in irregularities

± Lay imposed weak sanctions; allowed execs to continue

Enron Oil faced devastating exposure

± Division head, CFO had siphoned off money; both fired ± Lay surprised both by losses and impropriety



` PracticeSubjective assessment of future gains

Little incentive for follow-through

Pressure to accelerate deal flow

` Key Issues:

a) How do we know future costs? (Hint: not very well)

b) What if profits don¶t pan out? (Contracts should be written down, but«)

c) How will Wall Street react if deals don¶t keep getting bigger?



Because Enron believed it was leading a revolution,

it pushed the rules. Employees attempted to crush

not just outsiders but each other. Competition wasfierce among Enron traders, to the extent that they

were afraid to go to the bathroom and leave their

computer screen unattended and available for

perusal by other traders.



` Enron morphed from a sleepy gas pipeline into a rogue trading company

` ± Enron officers used their political clout affect policy, e.g.,

electricity deregulation;

` -pressure on Indian officials to push development of expensive

power plant

` ± Enron traders caused California¶s energy crisis

` ± Enron¶s profits were the product of accounting fraud

` ± Enron used SPEs to hide billions of dollars of debt



` ± Skilling left before the collapse because he ³knew something´

` ± Top management, auditors, and banks were all part of the conspiracy

` ± The Board and regulators were asleep at the wheel

` ± Lay sold his shares while touting the company to employees and investors

` ± Executives were dumping their shares while employees, not allowed to sell from their 401(k)s, saw their retirements wiped out

` ± The Enron collapse was the (inevitable?) result of management greed



` Individual and collective greed²company, its employees, analysts,

auditors, bankers, rating agencies and investors²didn¶t want to

believe the company looked too good to be true

` Atmosphere of market euphoria and corporate arrogance

` High risk deals that went sour

` Deceptive reporting practices²lack of transparency in reporting

financial affairs

` Unduly aggressive earnings targets and management bonuses

based on meeting targets

` Excessive interest in maintaining stock prices



` Was paid $52 million in 2000, the majority for non-audit related consulting services.

` Failed to spot many of Enron¶s losses

` Should have assessed Enron management¶s internal controls on derivatives trading²expressed approval of internal controls during 1998 through 2000

` Kept a whole floor of auditors assigned at Enron year around

` Enron was Andersen¶s second largest client

` P

rovided both external and internal audits

` CFOs and controllers were former Andersen executives

` Accused of document destruction²was criminally indicted

` Went out of business



` Enron paid several hundred million in fees, including fees for derivatives transactions

` None of these firms alerted investors about derivatives problems at Enron.

` In October, 2001, 16 of 17 security analysts covering Enron still rated it a ³strong buy´ or ³buy.´

` Example: One investment advisor purchased 7,583,900 shares of Enron for a state retirement fund, much of it in September and October, 2001



` Enron¶s outside law firm was paid substantial fees and had previously employed Enron¶s general counsel

` Failed to correct or disclose problems related to derivatives and special purpose entities

` Helped draft the legal documentation for the SPEs



` Enron·s creation of over 3000 (!) p artnershi p s

started about 1993 when it teamed with Calpers(Calif. Public Retirement System) to create JEDI (Joint Energy Development Investments) fund.

`

Why partnershi ps? As long as Enron could findanother partner to take at least a 3% stake, Enronwas not required to report the partnership¶sfinancial condition in its own financial statements.

` Enron used partnerships to hide bad bets itmade on speculative assets by selling these assetsto the partnerships in return for IOUs backed byEnron stock as collateral! (over $1 billion by 2002)



` On July 13, 2001, Skilling resigned as CEO. He claimed it was for

personal reasons. The real reason was that Enron was heading for trouble, and he didn¶t want to face the music. There were at least five reasons that could foreseeably lead to disaster:

` (i) The firm¶s stock was down about 40% for the year. If it kept

falling, several of Fastow¶s SPEs ± those primarily financed with Enron stock ± would be under water.

` (ii) India had stopped making payments for electricity generated by the Dabhol plant. Enron had shuttered the plant in May and, despite

the Bush administration pressuring India on Enron¶s behalf, was facing the prospect of writing off its entire $900 million investment.



` (iii) The company had recently spent $326 million to buy back shares of the failed Azurix water company.

` (iv) Severe shortages of electricity in California had led to rolling blackouts and accusations that Enron had manipulated prices.

` (v) The venture in bandwidth trading failed lamentably, and ventures in metals and pulp trading wereracking up losses.

` The company was in a cash crunch and was trying to sell assets to raise cash. Skilling could see the writing on the wall, but so could most of Enron¶s senior management. Many had been liquidating their holdings in Enron stock for months.



` Many people suffered from Enron¶s failure, but employees

were hit especially hard. Thousands were laid off with just$4,500 in severance pay.

` Enron had encouraged employees to invest their pension

assets in the company¶s stock. Employees who had foolishlydone so lost pension savings as well as their jobs.

` In June 2002, Arthur Andersen was convicted of obstructionof justice for its destruction of Enron documents. Andersen,

which was once the largest accounting firm in the U.S., wasbarred from auditing clients.



`

The government nearly had a scandal on its hands, as manypoliticians had Enron as a major contributor to their campaigns.

` The energy industry went through a crisis, since other companiesin the industry were Enron copycats and had very similar deals

and trading positions in place when Enron went down. Andinvestors took a big hit.

` Finally, even with its downfall, some good has come ± regulators are seeking to improve standards and practices in accounting,

corporate governance, risk control, and pension fund administration, to ensure that another Enron does not emerge.



` Progressive-adaptive- A culture which stresses openness to new ideas, adapts quickly to shifting market conditions. Company is future-oriented and

wants to catch waves of change` Purpose-driven- Leadership effectively directs the

company on a clear course. A common purpose is defined that is shared by all employees who are

committed to the same set of core values



Transparency committee-Investors want adequate information to reliably assess

how a company is being run and what its risks are. The goal should be to help investors and other members of the board of directors understand the firm¶s value

proposition, strategy, key success factors and risks Auditing Business Model Reform-

Auditors are to help investors identify stocks that are good investments and those that are not. Auditor

independence can be achieved when auditors see audit committees as their real clients, not top management.



Accrual Accounting-

x Companies need to use accrual accounting to provide a more accurate description of a company¶s value.

SEC Review-

x A semi-annual review by the SEC would almost guarantee a more accurate representation of a company¶s statements. It could also prevent executives from participating in transactions with a conflict of interest.



` Accounting and Finance. We need better disclosure to public, board members and employees. First, we want to go back to accrual

accounting and stop the aggressive accounting immediately.

` Control Systems. As far as control issues are concerned we feel that enforcement was

extremely deficient.



` Culture. Enron¶s culture is one where there is no clear direction with a dual role of both an owner and trader of commodities. They stress a highly

competitive, arrogant, distrustful culture that made objecting to unethical behavior very difficult. We want to change the current culture to a more purpose-driven culture



2010-09-22 36

` With the fall of Enron due to the accounting fraud, manybegan to question the accounting practices corporationsthroughout the United States.

` The fall of Enron lead to the dissolution of the accountingfirm Arthur Anderson. Which at the time was one of the´Big Fiveµ accounting firms.

` Following the collapse of Enron the Sarbanes-Oxley Act waspassed on July 2002. The act established the Public CompanyAccounting Oversight Board to oversee the auditors of public companies and to protect the interest of investors.

` In November 2004 Enron emerged from its bankruptcy and

on September 2006 they sold Prisma Energy InternationalInc. their last business.` As of 2007 Enron changed it name to Enron Creditors

Recovery Corporation.



³Every fraud

could have been prevented

if honest people

had asked the right

questionsat the right time´

37



` International Institute for Management Development. The Collapse of Enron. March 5, 2003.

` Wong, Paul T.P., ³Lessons from the Enron Debacle: Corporate Culture Matters´. Psychjourney.com. 2004

` Preston, Robert, Koller, Mike. ³Enron Feels the Power´. InternetWeek. 10/30/2000, Issue 835.

` Hill, Andrew, Fidler, Stephen. ³Enron ties itself up in knots, then falls over´. Ft.com.

` Byrne, John A., France, Mike, Zellner, Wendy. ³At Enron, µThe environment was Ripe for Abuse¶´. Business Week Online. 2/15/2002.

` ³A chronology of Enron Corp.´. CNNMoney.com. January 21, 2002.

enron it's over

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