INTRODUCTION:

Enron Corporation was an American energy, commodities, and Services Company based in
Houston, Texas. Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas
and InterNorth. Before its bankruptcy on December 2, 2001, Enron employed approximately
20,000 staff and was one of the worlds leading electricity, natural gas, communications, and
pulp and paper companies, with claimed revenues of nearly $101 billion in 2000.
ACHIEVEMENTS:

Fortune named Enron "Americas 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.

ENRONS FALL

The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the
Enron Corporation, an American energy company based in Houston, Texas, and the
dissolution of Arthur Andersen, which was one of the five largest audit and accountancy
partnerships in the world. In addition to being the largest bankruptcy reorganization in
American history at that time, Enron undoubtedly is the biggest audit failure.
Several years later, when Jeffrey Skilling was hired, he developed a staff of executives
that, through the use of accounting loopholes, special purpose entities, and poor financial
reporting, were able to hide billions in debt from failed deals and projects. Chief
Financial Officer Andrew Fastow and other executives were able to mislead Enron's
board of directors and audit committee of high-risk accounting issues as well as pressure
Andersen to ignore the issues.
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 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 longterm fixed price contracts for natural gas, typically at prices that assumed long-term
declines in spot prices
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.

Products
1.
2.
3.
4.
5.

Products
Gas Oil
Broadband
Electricity pulp and
paper water

REMARKABLE COMPANY

The worlds largest energy trader.

The total revenue was $101 billion in 2000, 7th of Top 500 companies in the US.
It was a Blue chip company with $80 per share, 21 thousands employees, globalization
enterprise.

BANKRUPTCY

In 2001, a investment agency boss publicly doubts the profitability model of Enron, the
stock price decrease from $80 to 42$ in Aug 2001.
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 2001, stock price falls to $0.26 per share.

2, Dec. formally apply for bankruptcy protection lose nearly $11 billion when it
plummeted to less than $1 by the end of November 2001.
The U.S. Securities and Exchange Commission (SEC) began an investigation, and
Dynegy offered to purchase the company at a fire sale price. When the deal fell through,
Enron filed for bankruptcy on December 2, 2001 under Chapter 11 of the United States
Bankruptcy Code, and with assets of $63.4 billion, it was the largest corporate
bankruptcy in U.S. history until WorldCom's 2002 bankruptcy.
Many executives at Enron were indicted for a variety of charges and were later sentenced
to prison.
Enron's auditor, Arthur Andersen, was found guilty in a United States District Court, but
by the time the ruling was overturned at the U.S. Supreme Court, the firm had lost the
majority of its customers and had shut down .
Employees and shareholders received limited returns in lawsuits, despite losing billions
in pensions and stock prices. As a consequence of the scandal, new regulations and
legislation were enacted to expand the reliability of financial reporting for public
companies. One piece of legislation, the Sarbanes-Oxley Act, expanded repercussions for
destroying, altering, or fabricating records in federal investigations or for attempting to
defraud shareholders. The act also increased the accountability of auditing firms to
remain objective and independent of their clients.

Why?
How did it happen?
1. Accounting method
2. Management group
3. US monitor system
ACCOUNTING METHOD
Enrons 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 network failed to work, Blockbuster pulled out of the contract, Enron
continued to recognize 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,
Enrons 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
Enrons 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). Andersons
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?
The top management operated the problem in very well, but all of the 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 longterm development.(1985-2001 Enron) Where
there is a business ethic, there is a long-term bloom.
Conclusion
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.
Sarbanes- Oxley Act:
Between December 2001 and April 2002, the Senate Committee on Banking, Housing, and
Urban Affairs and the House Committee on Financial Services held multiple hearings about the
collapse of Enron and related accounting and investor protection issues. These hearings and the
corporate scandals that followed Enron led to the passage of the Sarbanes- Oxley Act on July 30,
2002.
The Act is nearly "a mirror image of Enron: The companys perceived corporate governance
failings are matched virtually point for point in the principal provisions of the Act."