Entrina
Entrina
Entrina
1990 Jeffrey Skilling (COO at the time) hires Andrew Fastow as CFO.
1993 Enron begins to use special-purpose entities and special purpose vehicles.
1998 Enron merged with Wessex Water, a core asset of the new company by giving
Enron greater international presence.
January Enron opens trading their own high-speed fiber-optic networks via Enron
2000 Broadband.
Aug. 23, Enron stock reaches all time high. Intra-day trading reaches $90.75, closing at
2000 $90.00 per share.
Jan. 23, Kenneth Lay resigns as CEO; Jeffrey Skilling takes his place.
2002
Aug. 14, Jeffrey Skilling resigns as CEO; Kenneth Lay takes his place back.
2001
Aug. 15, Sherron Watkins sends an anonymous letter to Lay expressing concerns of
2001 internal accounting fraud. Enron's stock price had dropped to $42.
Aug. 20, Kenneth Lay sells 93,000 shares of Enron stock for roughly $2 million
2001
Oct. 15, Vinson & Elkins, an independent law firm, concludes their review of Enron
2001 accounting practices. They found no wrongdoing.
Oct. 22, The Securities and Exchange Commission opens a formal inquirity into the
2001 financial accounting processes of Enron.
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2008 Enron settles with financial institutions involved in the scandal, receiving
settlement money to be distributed to creditors.
2. WorldCom Scandal
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The Bottom Line
WorldCom was a telecommunications company that prided itself on providing its
customers with affordable long-distance services. But an aggressive acquisition strategy
and falling revenues led the company to a downward spiral that would ultimately open
the door to one of the largest accounting frauds and bankruptcies in the United States.
The company used questionable accounting techniques to hide its losses while making
itself look more profitable than it was, which helped it retain its place as a darling among
investors. Although it managed to restructure and emerge from bankruptcy, WorldCom's
example helped corporate management teams and investors learn a valuable lesson: If
something looks too good to be true, it probably is.
-Arthur Andersen, Arthur Andersen LLP was one of the largest public accounting firms in
the 1990s, but failed to detect, ignore, or approve accounting frauds for large clients,
including Enron Corp. and WorldCom Inc.
For more than a half century, Arthur Andersen—cofounded as Andersen, DeLany & Co.
in 1913 by Arthur E. Andersen, a young accounting professor who had a reputation for
acting with integrity was primarily an auditing firm focused on providing high-quality
standardized audits. But a shift in emphasis during the 1970s pitted a new generation of
auditors advocating for clients and consulting fees against traditional auditors
demanding more complex auditing techniques. The problem worsened when the
company’s consulting division began generating significantly higher profits per employee
than the auditing division. Auditing revenues had flattened, and growth came primarily
through consulting fees. Consulting schemes encouraged by Andersen partners
included the following:
⦁ Using highly qualified consultants from other regional offices to market their
services during client presentations and then not including them on the project
team after the contract was obtained
⦁ Determining the client’s budget for consulting services and then selling as many
consulting services as possible up to that budget limit, even if the services were
unnecessary
⦁ Charging clients a partner’s high billable-hour rate and then assigning most of
the work to lower-paid and less-qualified staff
-Lehman's collapse roiled global financial markets for weeks, given its size and status in
the U.S. and globally. At its peak, Lehman had a market value of nearly $46 billion,
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which was wiped out in the months leading up to its bankruptcy.
Many questioned the decision to allow Lehman to fail, compared with the government's
tacit support for Bear Stearns, which was acquired by JPMorgan Chase (JPM) in March
2008. Bank of America had been in talks to buy Lehman, but backed away after the
government refused to help with Lehman's most troubled assets. Instead, Bank of
America announced it would buy Merrill Lynch on the same day Lehman filed for
bankruptcy.
5. Tyco Scandal
-The Tyco International scandal refers to the 2002 theft by former company CEO and
Chairman Dennis Kozlowski and former corporate Chief Financial Officer Mark Swartz
of as much as $600 million from the firm. The two accused men vigorously denied any
wrongdoing and fought the charges vehemently. The first trial ended in mistrial due to a
suspicious incident, and a retrial occurred in 2005 in which they were both declared
guilty of more than 30 individual corporate violations. A class action lawsuit followed the
criminal trial with a verdict handed down by Federal District Court Judge Paul Barbadoro
in May of 2007. Tyco consented to pay out $2.92 billion to a class of cheated
shareholders and their corporate auditors Pricewaterhouse Coopers also agreed to pay
$225 million in damages to the injured investors.
Kozlowski and Swartz were convicted of corporate theft and deception, which included
grand larceny, securities fraud, falsifying business records, and conspiracy. They had to
pay an enormous amount of money back in restitution and fines for the benefit of the
thousands of injured share holders. Kozlowski had thrown an extravagant birthday party
for his wife and maintained an $18 million apartment in Manhattan.
Another instruction
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Company Profile: ENRON Scandal
-The Enron scandal drew attention to accounting and corporate fraud as its
shareholders lost $74 billion in the four years leading up to its bankruptcy, and its
employees lost billions in pension benefits.
Several key members of the executive team are often noted as being responsible for the
fall of Enron. The executives includes Kenneth Lay (founder and former Chief Executive
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Officer), Jeffrey Skilling (former Chief Executive Office replacing Lay), and Andrew
Fastow (former Chief Financial Officer)
Some 4,000 Enron employees were let go after the company declared bankruptcy. The
AFL-CIO estimates that 28,500 workers have lost their jobs from Enron, WorldCom and
accounting firm Arthur Andersen alone.
-Executives needed a way to prove WorldCom was still financially viable to its board and
shareholders. WorldCom used a series of questionable accounting techniques to hide
its financial position, which inflated its profits. This amounted to billions in capital
expenditures being improperly recorded on the books.
The fraud was uncovered in June 2002 when the company's internal audit unit, led by
unit vice president Cynthia Cooper, discovered over $3.8 billion of fraudulent balance
sheet entries. Eventually, WorldCom was forced to admit that it had overstated its
assets by over $11 billion.
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People who were involved and what happened to them:
-And as a result of the company's actions, Chief Executive Officer Bernard Ebbers was
sentenced to 25 years in prison, while the company's chief financial officer, Scott
Sullivan, received five years behind bars.
Perhaps those hardest hit, though, are not in boardrooms, but the thousands of former
WorldCom employees like Bill Walters, who lost both their jobs and their insurance and
pensions. Many of their savings were wiped out by the collapse in the price of the
company's stock, and some are still struggling to find work.