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Contents

Introduction of Enron .......................................................................................................................... 1

Rise of Enron ....................................................................................................................................... 1

Characteristics of Enron ....................................................................................................................... 2

Profit making formula for Enron........................................................................................................... 2

The fall................................................................................................................................................. 2

Partners in crime ................................................................................................................................. 2

Impact ................................................................................................................................................. 3

Enron: Rise and FallSubmitted by -

Dileep Bajaj

10DM-045

Section B

The main reason for the fall of Enron was that the companys success was based on artificiallyinflated profits, dubious accounting practices.

Introduction of Enron

In 1985 Enron was born from the merger of Houston Natural Gas and InterNorth. It started

trading futures in Gas Contracts and soon got the control of over 25% of the all Gas business.In

few years it entered into the derivatives business and began trading in commodities like steel,

coal, weather risk etc. By 2000, it even stepped into the dot.com business.

Rise of Enron

Despite Global energy crises by late 90s, losing 2.9bn Dabhol Power project in India, dot com

bubble crises and blockbuster internet deal, Enron continued to deliver smoothly growing

earnings. The earnings were all unreal and there was no cash flow in the company. During 2000,

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Enrons derivatives-related assets increased from $2.2bln to $12bln and derivates-related

liabilities increased from $1.8bln to $10.5bln

Characteristics of EnronThe top management at Enron was low in ethics and made profits the only motto of the

company by giving high salaries to top performers and giving pink slips to 10% of the total

employees each year who were relatively low performers. Ken Lay, Jeff Skilling, Andy Fastow

and Lou Pai were the main culprits for the scam.

Profit making formula for Enron

1. Enron sets up partnership using stock as funding2. Partnership sets up SPE3. SPE agrees contract to pay Enron if its investment declines in value4. Payment made as investment declines5. Payment posted as profit, even though it is Enrons own money

The fall

Sherron Watkins, an Enron vice-president, wrote an anonymous letter to Kenneth Lay setting

out her fears of an impending scandal. Earing the predictable collapse she ordered Enron's

lawyers to conduct an investigation into the partnerships. Mr. Lay was also moving to reassure

the markets. He was doing all he could to restore investor confidence.But amid the selling, Mr.

Lay himself joined the crowd as he exercised options on 83,000 shares worth almost $2m.

Partners in crime

y Bankersy Law Firmsy Rating Agenciesy Bush Administration

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Impact

y 20000 employees lost their jobs and medical insurancey Average severance pay: $4500y Employee lost $1.2 billion in retirement fundsy Retirees lost $2billion in pension funds

o Top executives were paid bonuses totaling $55 milliono Enron's top executive cashed in 116 million in stock