Enron Final Power Point

8/11/2019 Enron Final Power Point

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ENRONSmartest Guys in the Room

Daphne Quiquin

Widmaeir Gallimor

Michael Milana

Alfred Zeiler


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Companys Profile

By early 2001, Enron was the 7th largest U.S. company,

and the largest U.S. buyer/seller of natural gas and

electricity

Employed approximately 22,000 employees

One of the world's leading electricity, natural gas, pulp,

paper, and communications companies, with claimed

revenues of nearly $101 billion in 2000

Named "America's Most Innovative Company" for six

consecutive years

Houston-based natural gas pipeline company formed

by merger in 1985 of Houston Natural Gas Company

and InterNorth, Inc


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Areas of Business

Enron

WholesaleServices

EnergyServices

TransportationServices

Enron Online

BroadbandServices


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Wholesale Services

Global wholesale businesses that market, transport

and provide energy commodities

Two business lines:

1. Commodity Sales and Services

2. Assets and Investments


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Retail arm of Enron that sells or manages the

delivery of natural gas, electricity, liquids and other

commodities.

Energy Services


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Transportation Services

Oversees Enron's natural gas pipelines


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Broadband Services

Provides broadband intermediation capabilitiesincluding network services, such as:

dark fiber

circuits

Internet Protocol service

data storage


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Enron Online

Web-based system

Gave access to more than 1,200 products

o Petrochemical, Plastics, Power, Pulp &

Paper, Steel, Weather Risk Management

Transacting directly with Enron Set prices


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Enron

Wehave metamorphosed from an asset-based

pipeline and power generating company to a

marketing and logistics company whose biggest

assets are its well-established business approach

and its innovative people.

Kenneth Lay, Chairman


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Enron What Happened

On October 16, 2001 - the first major public

sign of trouble - Enron announces a huge

third-quarter loss of $618 million

On October 22, 2001 - the SEC begins aninquiry into Enrons accounting practices

On December 2, 2001 - Enron files for


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Post Enron Era

22 Enron executives & partners plead guilty or were

convicted of criminal charges

Arthur Andersen was found guilty of fraud; the

conviction was later overturned on appeal

Several Andersen partners were also personally

convicted of crimes


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Post Enron Era Contd.

20,000 employees of Enron lost most of their savings

and pension plans

In 2004 Enron's name was changed to EnronCreditors Recovery Corporation with the mission to

liquidate any remaining assets and operations of

Enron

Upon completion of its mission and final distributionto creditors, the company would no longer exist


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Conditions Allowing Fraud to Occur

Deregulation of gas and electric utilities

Change in Management Culture

Change in Accounting Practices

o Special Purpose Entities


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DeregulationRegulated &

InefficientMonopolies

Create Competition

Increase Efficiency

Cheaper Energy

Happy Consumers


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Richard Kinder - Enrons president from 1986to 1996

Enron operated with a highly effectivemanagement control system


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Formal code of ethics

Elaborate performance review and bonus

structure

Risk Assessment and Control group

Big-5 auditor

Conventional powers of boards and relatedcommittees


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Jeff Skilling - Enrons president from 1997 to2001

Exercised control over almost all facets of the

organization, particularly its accounting

procedures


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On trading activities, Enron used the merchant

model

Other firms used the agent model


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During the last four years before Enron filed for

bankruptcy it reported an annual growth of

16.9% on average fornet incomeand 164.6%

annual growth for revenue. This decreased

Enrons net profit margins to a very lowpercentage.


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In 1991-2001 Enron reported negative free cash

flows, high operating cash flows with

decreasing and low profit margins.


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Discovery of the Financial Fraud

On August 2001, Sherron Watkins, VP wrote an

anonymous letter to Ken Lay stating that Skilling

had left because of accounting improprieties and

other illegal actions. She questioned Enron's

accounting methods and mentioned the Raptor

(SPEs) transactions. She also mentioned CFO, Fastow and other Enron

employees had made their money, leaving Enron

in danger for the support of the Raptors.

Sherron Watkins The Whistleblower


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Weeks later, Chung Wu, a UBS PaineWebber

broker in Houston, sent an e-mail to 73

investment clients saying Enron was in troubleand advising them to consider selling their shares.

Enron would compensate SPE investors shares of

Enrons common stock for the losses.


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The accounting firm Arthur Andersen was paid

one million dollars a week for signing off the

annual reports of Enron and being their

consultant.

A lawyer firm, Vinson and Elkins examined the

business partnerships of Enron and was paid

$900,000 a week to make the investments of

Enron look legitimate.


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On October 16 2001, Enron declared a third

quarter loss of $618 million. During 2001, Enron's

stock fell from $86 to 30 cents.

On October 22, the SEC began an investigationEnron's accounting methods and partnerships.

In November, Enron representatives admitted to

overstating company earnings by $57 millionsince 1997.


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Descriptions of the Fraud

Valuation estimates overstated earnings

Unrealized trading gains accounted for slightly

more than half of the companys $1.41 billion

reported pretax profit for 2000

Used special purpose entities (SPE) to access

capital or hedge risk


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Sold leveraged assets to the SPE, then booked

profit

Only 3% of the SPE needed to be owned by an

outside investor

Extremely complex derivative financial

instruments


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Transferring troubled assets to SPEs

From 1999 through July 2001, these entities paid

Fastow more than $30 million in management fees


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Enron failed to consolidate SPEs into their

financial statements

Very confusing footnotes

Bragging that the stock should be trading higher


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On August 14, six

months after being

named CEO, Skilling

resigned for personal

reasons


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Legal Ramifications of the Fraud

Andrew Fastow

Faced 98 counts

Plead guilty to one charge of conspiracy to commit

wire fraud

Plead guilty to one charge of conspiracy to commit

securities fraud

Agreed to serve 6 years in prison


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Named in 35-count indictment

Pleads not guilty to wire fraud

Pleads not guilty to securities fraud

Pleads not guilty to conspiracy

Pleads not guilty to insider trading

Pleads not guilty to making false statements on

financial reports

Jeffrey Skilling


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Jeffrey Skilling was

sentenced to 24 years inprison.

His sentence was reduced to14 years.

He has been in jail since

2006.


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Ken Lay, was convicted of 10 counts of fraud and

conspiracy in two cases He died of a he died a heart attack before

sentencing was scheduled

In all 16 people pleaded guilty


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Was charged and found guilty for obstruction of

justice

The sec is not allowed to accept audits from

convicted felons

The company surrendered it s CPA license

The conviction was later over turned


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Ramifications for Accountants

Passed by congress in 2002

The PCAOB was created to develop standards for

preparing audit reports

This was to protect the interest of investors

All rules and standards must be approved by the

sec

Sarbanes Oxley act


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The Process


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Conclusion and Group Reaction

Ethics

Increased regulation

Fraud

Reputation

Independence


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Documents

Enron Final Power Point