Case Study On Enron Scam: Presented To - Dr. Baljeet Singh Presented by - Mehakpreet Kaur Rollno.-211213

CASE STUDY ON ENRON SCAM
Presented To – Dr. Baljeet Singh

Presented By – Mehakpreet Kaur
Class – B.Com (A&F)
Rollno.- 211213
THE COMPANY PROFILE
 Enron Corporation was an American energy, commodities, and services company
based in Houstan ,Texas.
 It was founded in 1985 by Kenneth Lay as the result of a merger between Houston
Natural Gas and InterNorth.
 Enron Corporation was one of the leading supplier of Natural Gas, Communication,
Pulp and paper.
 Enron employed approximately 20,000 staff with claimed revenues of nearly $101
billion during 2000.
 Fortune named Enron “ America’s Most Innovative Company” for six consecutive
years.
WHAT MADE IT A SCAM ?
During 2001, after a series of revelations involving irregular accounting
procedures bordering on fraud perpetrated throughout the 1990s involving Enron
and its accounting company.
Some highlights of the scandals are:-
-$30 Million of self dealings by the Chief Financial Officer.
-$ 700 Million of Net earnings disappeared.
-$1.2 Billion of Equity Shareholders disappeared.
-Over $4 Billion hidden liabilities.
Many of enron’s recorded assets and profits were inflated or totally fraudulent and
non-existent. Debts and losses were put into entities formed offshore that were not
included in the company’s financial statements.
KEY PLAYERS OF SCANDAL
1. KENNETH LAY
. Enron founder and former CEO
. Lay took up the reins at Enron in 1986.Prior to Enron’s collapse, he was credited
with building Enron’s success. Lay resigned as CEO in December 2000 , and was
replaced by Jeffery Skilling. In August 2001, he resumed leadership after Skilling
resigned. Lay resigned again in January 2002. He Drew Down his $4 Million enron
credit line repeatedly and then repaid the company with the enron shares after
becoming the focus of the anger of employees , stockholders and pension fund
holders who lost billions of dollars in this disaster.
2. JEFFREY SKILLING
. Former Chief Executive, President and Chief Operating Officer.
. He joined Enron in 1990 from the consultancy firm McKinsey, where he had
developed financial instruments to trade gas contracts. He was also seen as a key architect
of the company’s gas-trading strategy.
3. ANDREW FASTOW:
. Former Chief Financial Officer.
. He was fired in October 2001,when Enron made losses amounting to $600 million. He was
allegedly responsible for engineering the off-balance sheet partnerships that allowed Enron
to cover its losses. He was also found by an internal Enron investigation to have secretly
made $30 million from managing one of these partnerships.
4. DAVID DUNCAN:
. Enron’s Chief Auditor at Andersen.
. His job was to check Enron’s accounts. He is accused of ordering the shredding of
thousands of Enron related documents in an effort to hide them from the securities and
Exchange Commission.
5. ENRON’S ACCOUNTING FIRM-ARTHUR ANDERSEN
• Arthur Andersen , was Enron’s auditing firm.
• It’s job was to check that the company’s accounts were a fair reflection of what was really
going on. The company earned large fees from its audit work for Enron and from related
work as consultants to the same company. When the scam broke , the US government began
to investigate the company’s affairs, Andersen’s Chief Auditor for Enron, David Duncan ,
ordered the shredding of thousands of documents that might prove compromising. That
was had ordered an investigation into the speculative actions of Enron. Andersen fired
Duncan.
WHISTLE BLOWER
Sherron Watkins was Vice President of Corporate Development at the Enron Corporation .In
June 2001,she was given the task of finding some assets to sell off but it was very difficult for
her. She prepared a Memo regarding the various problems and placed it into the box but this
Memo was not taken into consideration. On august 22, Watkins handed CEO Lay a seven page
letter and told him that ENRON would implode in a wave of accounting scandals.
In august 2001,Watkins alerted then Enron CEO Kenneth Lay of accounting
irregularities in financial reports. In February 2002, she revealed the various
facts regarding ENRON partnerships and finally resigned in November. But
Watkins revealed all the facts only after Enron filed for bankrupty.
Watkins has been criticized for not reporting the fraud to government authorities and
not speaking up publicly sooner about her concerns, as her memo did not reach the
public until five months after.
What went wrong ?
AUDITING AND ACCOUNTING ISSUES
 As per federal securities law, accounting statement of publicly traded corporations be

certified by an independent auditor.
 Enron’s auditor, Arthur Andersen, turned a blind eye to improper accounting practises as well
as he was actively involved in devising complex financial structure and transactions.
 Enrons auditor also violated GAAP ( general accepted accounting principles) and permit
corporation to play “number games”.
 As an organisation of public accountant, Arthur Andersen violated the regulations of the public
Accountant practices because Andersen was not as the internal auditor but also as the external
auditor of enron.
SPE
SPE’s reflect a common financing technique for companies. Companies can

cut their risk by moving assets into separate partnerships that can be sold to
outside investors.
In Enron’s case, assets that were losing money were sold to partnerships.
Enron listed the sales of these assets as earnings. However , to be legitimate,
accounting rules require that an SPE be legally isolated from the company that
created it.
In Enron’s case this was not true. The SPE’s relied upon Enron managers for
leadership and enron stock for capital.
PENSION ISSUES
 Enron sponsored a pension plan for it’s employees that contribute a portion of their pay on
deferred tax basis.
 Almost 62% of assets held in corporation’s 401(k) retirement plan consist of Enron’s stock.
Shares traded in Jan 2001 for more than $80\share become worth less than 70% in Jan 2002.
While the investments grow in the employees 401k account, they do not pay any taxes on it.
Employees accounts were wiped out and losses suffered by participants.
BANKING ISSUES
There was a questionable relationship between Enron and bankers Citigroup and J.P
Morgan Chase also contributed to the downfall of Enron.
Enron was lucrative investment banking business for the banks. In exchange of potential
profits, the banks had lend money to Enron and promote it’s derivative and securities.
SO WHY DID ENRON SCANDAL HAPPEN?
• Due to the lack of corporate social responsibility, situation ethics , and get-it-done business
benefits.
• Due to the large similarities of attempting to match profits and cash, investors were
typically given false or misleading reports as it was difficult to estimate cost.
• Lack of transparency in reporting financial affairs.
• Excessive interest in maintaining stock prices.
ENRON’S ACCOUNTING FRAUD DIAGRAM
CAUSES OF THE ENRON SCANDAL
• Enron’s misleading Accounts
• Mark to market accounting
• Special purpose Entities
• Executive compensation
• Financial Audit
• Over-statement of profits
IMPACT OF ACCOUNTING FRAUD ON DIFFERENT
PARTIES
• Impact on employee:
a. Thousands of employee lost their jobs as well as their retirement savings with
the company.
b. The pension fund for the employees was obliterated.
c. More than half of employees invested about $1.2 billion in Enron stock.
Those shares are now nearly worthless.
• Impact on shareholders:
a. Enron shareholders received limited returns in law suits despite losing billions
in stock prices.
b. No one wants to do any more investment in the enron.
• Impact on Competitors :
a. On 09 November 2001, rival energy trader Dynegy Incorporated decided to
purchase the company for $8 billion in stock.
b. By the end of the month ,Dynegy had backed out of the deal, Enron’s
downgrade to “ junkbond” status and continuing financial irregularities.
• Impact on Customers:
a. Plans to develop natural gas deposits are being cut back dramatically. Lose
their source. Ultimately it results in power shortages and higher cost in future
years, the burden will fall on the customers.
b. Lose their source of supply.
• Impact on Customers:
Enron’s fraud prompted the U.S congress to pass Sarabanes-Oxley corporate

accountability law, which forces corporate executives to take personal
responsibility for the accuracy of company accounts.
Suffered economic losses.
THE DOWN FALL
THE RISE AND FALL OF ENRON
STUNNING COLLAPSE
THE TRUE PICTURE
CONCLUSION
The scandal made the authorities realize the importance of ethics and importance of
INTERNAL CONTROL in business enterprises.
It also helped understand the real meaning of shareholder’s wealth Maximisation and the
boundaries within which this key objective is to be achieved.
The ENRON failure has not been the result of just questionable activities by ENRON’s
executive management team. The cast of contributors to the failure and bankruptcy are
both inside and outside the company. It’s the total system that resulted in failure that needs
to be further understood and investigated.

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CASE STUDY ON ENRON SCAM

Presented To – Dr. Baljeet Singh

 As per federal securities law, accounting statement of publicly traded corporations be

SPE’s reflect a common financing technique for companies. Companies can

Enron’s fraud prompted the U.S congress to pass Sarabanes-Oxley corporate

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