Enron

Company Background
Inter North + Houston Natural Gas In 1985 Headquarter in Houston

Enron Scandal Timeline

Video

The Scandal
Grew unexpectedly quick
$100b revenues 90$ share price

Bankruptcy in 2001 Systematic issues Accounting factors Ethical reasons

Systemic Issues
Causes outside the company that drives people to do something.
1. 2. 3. Laws and regulations that provide the framework in which people act ; Economic and social institution that give meaning and direction to the public and ; Culture that shapes the values and perceptions of people and groups.

Systemic causes of the Enrons fall :

The U.S. Securities and Exchange Commission allow Enron to use the mark to market The Legal structure allowed Auditing firm to Audit and offer consulting services - Leads to Conflict of Interest The legal structure and accounting rules allow Enrons

executives set up Special Purpose Entities

Illegal Accounting Practices of Enron

1- Mark to Market Accounting

Illegal Accounting Practices of Enron

2-Special Purposes Entities Off Balance Sheet Transactions

Enrons executives set up Special Purpose Entities which enable Enron to hide its enormous debt.

Illegal Accounting Practices of Enron

3-Prudence Accounts make their revenue stream appear less volatile than it actually is

Illegal Accounting Practices of Enron

4-Arthur Andersen Auditing

firm

Insider trading

Key Players in the Scandal

Kenneth Lay (Chairman)
Charged for bank fraud, making false statements and wire fraud

Dishonest and Lacked Integrity : concealed Enrons massive debts through questionable accounting.

Urged shareholders to buy more shares He quietly sold much of their Enron stock.

failed to comply with the conceptual frameworks faithful representation. full disclosure principle 45 year sentence died 2006

Key Players in the Scandal

Jeffery Skiiling (CEO) accused of fraud and insider trading Hypocritical ,Irresponsible and Dishonest : -adopted the mark-to-market accounting which allowed the company report excessive amounts of revenues in their financial statements -is reported to have sold millions of dollars' worth of company stock after his resignation
Failed to comply with the conceptual frameworks recognition and measurement

concepts which highlight his failure under realization and full disclosure principles

Key Players in the Scandal

Andrew Fastow (CFO) Lacked Integrity and Dishonest : He was allegedly responsible for creating a web of off-balance sheet partnership with external companies that allowed him to hide Enrons very large losses. -The mastermind behind the deceptive accounting practices
was responsible for getting Enron into trouble by manipulating Special Purpose Entities

Key players in the Scandal

David Duncan (Chief auditor)
responsible for Enrons audits. Ordered the shredding of key documents

Key players in the Scandal

Sherron Watkins Honest, Responsible ,Courageous and Integrity : In August 2001 she wrote a letter to Kenneth Lay warning of accounting irregularities that could pose a threat to the company could implode in a wave of financial scandals . , Time chose her as one of the three individuals for People of the Year in recognition for her role in finding the major accounting fraud.

Consequences of the ENRON Scandal

4500 employees lost their jobs. Investors lost about $60 billion within a few days; The pension fund for the company's employees were gone.

Citizens trust in the American economic system was destroyed.

Losses on the financial market amounted to the worst stock value loss in peaceful times. Banks were suspected of collusion. The auditing firm Arthur Anderson lost its accreditation.