Enron Bank Scandal

Summary:
Jef Skilling, the president of Enrons trading operations, convinced federal
regulator to permit Enron to use an accounting method known as mark to market!
"t is a method where price or value of a security is recorded on a daily #asis to
calculate pro$ts and losses! %sing this method allowed Enron to count pro&ected
earnings from long'term energy contracts as current income! (his was money that
might not #e collected for many years! "t is thought that this techni)ue was used to
in*ate revenue num#ers #y manipulating pro&ections for future revenue!
Enron had #een #uying any new venture that looked promising as a new pro$t
center! (heir ac)uisitions were growing e+ponentially! Enron had also #een forming
of #alance sheet entities to move de#t of of the #alance sheet and transfer risk for
their other #usiness ventures! (hese S,Es were also esta#lished to keep Enron-s
credit rating high, which was very important in their $elds of #usiness!
.hen the telecom industry sufered its $rst downturn, Enron sufered as well!
Business analysts #egan trying to unravel the source of Enron-s money! (he /aptors
would collapse if Enron stock fell #elow a certain point, #ecause they were
ultimately #acked only #y Enron stock! 0ccounting rules re)uired an independent
investor in order for a hedge to work, #ut Enron used one of their S,Es!
/eason #ehind this scandal:
0 su#stantial fraction of Enrons reported pro$ts over a 1 year period 23445'
67778 had #een the result of accounting manipulations!
%na#le to spot #ad accounting practices and companys overstatement of
pro$ts!
(he multiple con*icting roles of auditor!
0utomatic renewal of auditing contracts!
0lthough a professor of accounting and a dean for monitoring the company,
#ut they all fail in their profession!
9isastrous loss in employees retirement fund, #ut the e+':E; has cashed his
own stock much earlier!
<anagers tend to #uild up their own empires and scarify the pro$ts of the
organi=ation!
Enrons #oard of directors fails to control and oversee the management!
(he #oard had #een #ene$ted in various relationships with the company!