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⦁ ENRON Scandal

1990 Jeffrey Skilling (COO at the time) hires Andrew Fastow as CFO.

1993 Enron begins to use special-purpose entities and special purpose vehicles.

1994 Congress began allowing states to deregulate their electricity utilities.

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

April 17, Enron reports a Q1 2001 profit of $536 million.


2001

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. 16, Enron reports a Q3 2001 loss of $618 million.


2001

Oct. 22, The Securities and Exchange Commission opens a formal inquirity into the
2001 financial accounting processes of Enron.

Dec. 2, Enron files for bankruptcy protection.


2001

2006 Enron's last business, Prisma Energy, is sold.

2007 Enron changes its name to Enron Creditors Recovery Corporation.

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2008 Enron settles with financial institutions involved in the scandal, receiving
settlement money to be distributed to creditors.

Causes of the Enron Scandal


Enron went to great lengths to enhance its financial statements, hide its fraudulent
activity, and report complex organizational structures to both confuse investors and
conceal facts. The causes of the Enron scandal include but are not limited to the factors
below.

The Bottom Line


At the time, Enron's collapse was the biggest corporate bankruptcy to ever hit the
financial world (since then, the failures of WorldCom, Lehman Brothers, and
Washington Mutual have surpassed it). The Enron scandal drew attention to accounting
and corporate fraud as its shareholders lost tens of billions of dollars in the years
leading up to its bankruptcy, and its employees lost billions more in pension benefits.
Increased regulation and oversight have been enacted to help prevent corporate
scandals of Enron's magnitude. However, some companies are still reeling from the
damage caused by Enron.

2. WorldCom Scandal

⦁ WorldCom was a telecommunications company that was established in 1983 by


Murray Waldron, William Rector, and early investor Bernard Ebbers among
others.
⦁ The company provided discount long-distance services to its customers and
pursued an aggressive acquisition strategy that propelled it to the largest
company of its kind in the United States.
⦁ WorldCom was in financial trouble and used questionable accounting techniques
to hide its losses from investors and others.
⦁ The company filed for bankruptcy because of the scandal, and several key
figures were punished, including its CEO and CFO.
⦁ WorldCom emerged from bankruptcy, restructured, and was purchased by
Verizon.

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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.

3. Arthur Andersen Scandal

-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

4. Lehman Brothers Scandal

-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

-Enron Corp. is a Houston-based energy and commodities trading holding company


currently under Federal bankruptcy reorganization protection. Through approximately
3,500 domestic and foreign subsidiaries ad affiliates, Enron conducted business in
diverse markets and industries, including wholesale merchant and commodity market
businesses, the Enron Corp., an Oregon corporation, and thirteen of its affiliates filed
voluntary petitions for Chapter 11 bankruptcy reorganization protection on December 2,
2001, in the United States Bankruptcy Court, Southern District of New York.
Simultaneously with the filings, the companies collectively filed a motion requesting
entry of an order jointly administering and consolidating for administrative purposes only
these Chapter 11 cases. Additional affiliated entities were consolidated with the
proceeding subsequent to the original filings.

How the scandal happened

-Enron executives used fraudulent accounting practices to inflate the company's


revenues and hide debt in its subsidiaries. The SEC, credit rating agencies, and
investment banks were also accused of negligence and, in some cases, outright
deception that enabled the fraud.

Amount of money involved

-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.

People who were involved and what happened to them:

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)

Individuals who were affected:

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.

Company Profile: WorldCom Sacandal

WorldCom currently know as MCI, is a telecommunications company which at one time


was the second-largest long distance phone company in the U.S. Today, it is perhaps
best known for a massive accounting scandal that led to the company filing for
bankruptcy protection in 2002.

How the scandal happened

-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.

Amount of money involved

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.

Individuals who were affected:

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.

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