Download Enron Corporation

SUBJECT:CORPORATE LAW
TOPIC:ENRON SCANDAL
SUBMITTED TO:SHANTI MA’AM
CLASS:BCOMM 3
PRESENTATION BY:
1)NEEMA MATHIAS
2)ARHAM KHAN
3)PRAVESH MISHRA
4)SUJIT
5) ANAMIKA
6) MARIYA ABUSALEH
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.
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.
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.
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.
Enron’s Business
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.
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.
Accounting
& The Fraud
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.
Bankruptcy
• 2001, an 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.
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.
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.
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.
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.
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.
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.
Lessons to Learn from this Case
 Ethics cannot be fragmented… or fragmentation goes
against ethics
 Company governance must integrate the active participation
of all stakeholders who affect the organization's activities or
who are affected by these activities
 And in all four domains : profitability, equity, dignity and
viability
 WE also encourage this fragmentation (Shadow)
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.
Conclusions…
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.
THANK YOU!!!!!