The Scandal

Prof. Dr. Robert J. Pichler, MBA

FHWien University of Applied Sciences
Enron - The key players
Kenneth Lay Jeffrey Skilling Andrew Fastow
The Enron Scandal - Timeline
1985
Ken Lay is appointed CEO of ENRON, a
company that was created as a result of
mergers of gas and pipeline companies in
the US Southeast.
His performance is weak and his business
principles questionable.
1987
Lou Borget of Enron Oil Trading is convicted of
money laundering and fraud costing Enron
shareholders about sixty-four million dollars.
The Enron Scandal - Timeline
1990
Jeff Skilling joins Enron Corp after leaving the
failed bank, First City Bank of Houston which
was seized for insolvency.
1993
Enron launches investments in South America
and India. An agreement was reached to
build the massive Dabhol power plant in India
which never operates when ENRON is still in
business.
The Enron Scandal - Timeline
1994
ENRON starts trading electricity
1996
CFO Andrew Fastow constructs off-book entities
in which Enron would make deals with these
companies and then Enron would transfer its
debt into those companies while at the same
time, Fastow and other Senior execs, with
their respective companies, would also be
taking money out of those companies from the
Enron transactions.
The Enron Scandal - Timeline
1997
Andrew Fastow creates an Chewco (managed by Enron's
Michael Kopper) in an effort to hide debt and inflate profits,
but Chewco doesn't meet requirements to keep it off
Enron's balance sheet.
1998
Enron enters into several capital intensive ventures that turn
into financial disasters including a water distribution
scheme and power plants in Brazil.
The Enron Scandal - Timeline
1999
Enron board of directors waive conflict of interest rules in
order to allow Andrew Fastow to run private companies
that do business with Enron. He creates LJM that buys
poorly performing Enron assets. In reality, LJM is used to
hide debt and inflate profits for Enron in order to prop up
its stock price. It is believed that this is the beginning of
the complex and questionable accounting practices that
lead to Enron's demise.
Enron withdraws from oil and gas productions and announces
the launch of EnronOnline, its internet-based commodity
trading.
The Enron Scandal - Timeline
2000
Enron launches EnronCredit.com which buys and sells
credit risk to help companies manage the risk in trading.
Enron and Blockbuster announce a 20-year deal to provide
video-on-demand service over high-speed internet. Eight
months later the deal was terminated.
Ken Lay files fraudulent financial documents
Jeff Skilling signs fraudulent financial reports to Arthur
Andersen
Enron publishes a comprehensive ethics code
The Enron Scandal - Timeline
2001
Enron causes rolling blackouts in California
The inauguration of George W. Bush is attended by Enron
CEO Ken Lay and president Jeff Skilling, who each make
$100,000 contributions for the event.
Jeffrey Skilling commits securities fraud by omitting bad
news and lying to investors. He makes a false presentation
to investors.
Enron executives receive million dollar bonuses
Enron is named "most innovative company in America" for
the sixth consecutive year by Fortune Magazine
The Enron Scandal - Timeline
2001
Skilling is named CEO.
Arthur Andersen tells the Enron board of directors audit
committee that they have no concerns.
Enron announces a first quarter profit of $536 million.
Lay and other Enron officials meet with the energy task
force of Vice President Dick Cheney.
The energy task force issues its report, which endorses
some of Enron's proposals.
Enron announces a first quarter profit of $536 million.
Fortune Magazine issues a story Is ENRON overpriced?"
The Enron Scandal - Timeline
2001
Enron's stock price closes below $59.78, a critical point for
one of the partnerships
Executives start selling ENRON stocks
Enron's stock price closes below $47, a critical point for the
Raptor partnerships.
Citing "personal reasons," Skilling resigns as CEO. Lay
replaces him, stating "Absolutely no accounting issue, no
trading issue, no reserve issue, no previously unknown
problem issues" are involved.
a vice president for corporate development puts a one-
page letter in Lay's suggestion box, questioning Enron's
accounting practices.
The Enron Scandal - Timeline
2001
Lay tells employees that Enron's accounting practices are
"legal and totally appropriate," that Enron stock is "an
incredible bargain," that he and other executives have
bought Enron stock in the last two months, and that "the
third quarter is looking great" in an online forum.
Arthur Andersen starts document shredding
Enron announces a third quarter loss of $618 million.
Enron's assets (shareholder equity) are reduced by $1.01
billion.
The Enron 401(k) retirement plan is frozen for
administrative changes.
The Enron Scandal - Timeline
2001
Andrew Fastow is forced to leave Enron.
The SEC starts investigating ENRON and Arthur Andersen
Dec 2: ENRON declares bankruptdcy
Dec 3: Ken Lay lays off 21,000 employees
The Enron Scandal - Timeline
2002
The US Dept of Justice confirms reports that it has begun a
criminal investigation into Enron's bankruptcy.
Arthur Andersen states that it destroyed Enron documents.
Congressional investigators state the destruction occurred
from September to November.
Former Enron executive J. Clifford Baxter found dead from
apparent suicide.
The Enron Scandal - Causes of Downfall
Mark-to-market Accounting
Structured Finance/Special Purpose Entities
Corporate Governance
Executive Compensation
Risk Management
Auditing
The trials
Jeff Skilling: 24-year prison term for fraud
convictionts
Ken Lay: Convicted for securities and wire fraud,
prison term up to 45 years. He died before
sentencing
Andy Fastow: 10-year sentence for fraud,
conspiracy, insider trading. The prison term was
reduced to 4 years after he testified in a plea
bargain against Lay and Skilling.
The Enron Scandal - The Aftermath
Shareholders lost $74bn
Bancruptcy of Arthur Andersen
Sarbanes-Oxley Act (SOX)
Federal Restrictions on CPA Services and
Financial Reporting: SOX
Sarbanes-Oxley Act of 2002 (SOX)
Enacted to restore public trust in corporate accounting
practices as a direct response to corporate financial abuses
Restricts non-audit services that CPAs can provide
SOX Compliance Requirements
CFOs and CEOs must pledge that the companys finances
are correct and face severe penalties noncompliance
Whistleblowers must be protected
Creates a national Accounting Oversight Board that, among other activities, must establish
the ethics standards used by CPA firms in preparing audits.
Requires that auditors retain audit working papers for specified periods of time (they cannot
destroy audit records).
Requires auditor rotation by prohibiting the same person from being the lead auditor for
more than five consecutive years.
Requires that the CEO and CFO certify that the company's financial statements are true,
fair, and accurate.
Prohibits corporations from extending personal loans to executives and directors.
Requires that the audited company disclose whether it has adopted a code of ethics for its
senior financial officers.
Requires that the SEC regularly review each corporation's financial statements.
Prevents employers from retaliating against research analysts that write negative reports.
mposes criminal penalties on auditors and clients for falsifying, destroying, altering, or
concealing records (10 years in prison).
mposes fine or imprisonment (up to 25 years) on any person that defrauds shareholders.
ncreases penalties for mail and wire fraud from 5 to 20 years in prison.
Establishes criminal liability for failure of corporate officers to certify financial reports.
Selected Provisions of the Sarbanes-Oxley Act
Hid $3.8 billion in expenses to show an inflated (false) profit instead
of loss in annual income statement.
WorldCom
Overstated income in financial statements (false and misleading
reports) by improperly calculating depreciation and salvage value for
equipment.
Waste
Management
Dennis Kozlowski illegally used company funds to buy expensive art
for personal possession (he received an 8- to 25-year prison
sentence).
Tyco
Defrauded Medicare, Medicaid, and TRICARE through false cost
claims and unlawful billings (must pay $1.7 billion in civil penalties,
damages, criminal fines, and penalties).
HCA,
Columbia/
HCA
Inflated income in financial statements by $500 million through fraud
and errors.
Cendant
America Online (AOL) inflated ad revenues to keep stock prices high
before and after merging with Time Warner.
AOL Time
Warner
Accounting Violation Corporation
Examples of Unethical and Illegal Accounting
Actions