PowerPoint Presentation

ENRON SCANDAL

Team Members:Amit Dohre 2014B34Esha Nevse 2014B09Vijeta Kavthekar 2014B06Vivaswata Mohapatra 2014B07Kopal Gupta 2014A31Aghamarshana 2014D49Shardool Rastogi 2014C33AgendaWho was Enron?BackgroundBusiness ModelProduct LineOECD- PrinciplesCause of Down fallThe Whistle-blowerTimelineConclusion

Who was Enron?One Of The World's Leading Supplier Of Electricity, Natural Gas, Communications, And Pulp And Paper .

Development Of Power Plants ,Pipelines .

Enron's predecessor was the Northern Natural Gas Company, which was formed during 1932, in Omaha, Nebraska

BackgroundFormer Type: Public CompanyIndustry: EnergyFounded: Omaha ,Nebraska(1985)Founder(s): Kenneth LayDefunct: December2,2001Headquarters: Houston United StatesKey People: Kenneth Lay, Founder , Chairman And CEO Jeffrey Skilling, Former President, CEO & COO Andrew Fastow, Former CFO

BackgroundFamous for advocacy of energy deregulationIn just 15 years, climb to be 7th largest company in US (Fortune 500, 2000), with 21,000 staff16th largest in the worldIn 2000, stock has crested at $90 a shareMarket capitalization: $80 billionRevenue $139 billionEmployees: 22000 (Year-2000)

It introduced increased Volatility in gas prices- as deregulation generally led to lower prices and increased supply.

Standard Contract(old)- allowed supplier to interrupt gas supply without legal penalty

Enron began offering utilities long term fixed price contracts for natural gas

Off-balance sheet financing vehicle- Special Purpose Entities (SPE), to finance many of these transactions

Enron online- The creation of online trading model

Gas trading model was huge success. By 1992, Enron was the largest merchant of natural gas in North America.

Business ModelPetrochemicalsPlasticsPowerPulp and paperSteelWeather Risk ManagementOil and LNG transportationBroadbandShipping / freightStreaming mediaWater and wastewaterPrincipal InvestmentsRisk management for Commodities etc.Enron traded in more than 30 different products, including the following:Product LineThe 1999 OECD Principles cover five basic subjects:protection of the rights of shareholders equitable treatment of shareholders, including full disclosure of material information and the prohibition of abusive self dealing and insider trading

recognition, and protection of the exercise, of the rights of other stakeholders

timely and accurate disclosure and transparency with respect to matters material to company performance, ownership and governance, which should include an annual audit conducted by an independent auditor

A framework of corporate governance ensuring strategic guidance of the company and effective monitoring of its management by the Board of Directors as well as the Boards accountability to the company and its shareholders.

ORGANIZATION FOR ECONOMIC CO-OPERATION & DEVELOPMENT- CORPORATE GOVERNANCERefer: http://en.wikipedia.org/wiki/Corporate_governance8Causes of Down-fallEnrons complex financial statements were confusing to shareholders & Analyst.

In addition, its complex business model and unethical practices required that the company use accounting limitations to misrepresent earnings and modify balance sheet to indicate favourable performance.

CFO Andrew Fastow and other executives "created off-balance-sheet vehicles, complex financing structures, and deals so bewildering that few people could understand them.

In JUNE 2001,ENRON Vice President Sherron Watkins was given the task of finding some assets to sell off but it was very difficult for her.

Watkins 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 if no further action was taken.

Against Watkins letter Lay, the CEO ,arranged to have a ENRONS Law Firm Vinson and Elkins that looked after all questionable deals.

Watkins continued to do her work and sold stock of 30000 dollar in August,2001 and some in late September.

In February 2002,she revealed the various facts regarding ENRON partnerships and finally resigned in November. But Watkins Revealed iall the facts only after ENRON filed for bankruptcy.

THE WHISTLE BLOWER: AS-IS IncidenceBad investments in new economy ventures

Off-balance-sheet entities created to eliminate losses from the ventures

Rather than face the write-offs, they tried to hide them with accounting

Many off-balance-sheet loans collateralized by Enron stock

Opaque reporting encouraged short sellers

Form over substance in reporting

Enron - What Happened?The Shell Game : Stocks were inflated based on the companys image and not bank account

Enrons executives, aided by timely deregulation of the power-utility industry, turned this loophole into a gold mine.

They posted profits based on how much a given business venture could make, not how much it was actually worth

Concealed losses with the help of Arthur Anderson LLP.

Enron - What Happened?The company had real assets in 1985 but by the late 1990s they existed as numbers in balance sheets.In 2000 they created an artificial energy crisis.Enron drove up the prices of electricity and its profits.This brought the attention of the media and federal investigators.August 2001, the company achieved 100 million in revenues but CEO resigned selling his shares for a massive profit.Investors begin to loose confidence. Share value reduces to below one dollar.(from 90 dollar)Company files for bankruptcy.38 billion outstanding debts.US Justice Department initiates a criminal investigation.The CollapseCatalysts to the Scam!!!90,000 people lost their jobsEnrons 401(k) pension scheme: Almost 62% of this pension scheme was Enrons stock which crashed drastically from over $80 in early 2001 to a mere few cents by the end of the same year. Stockholders lost another $70 billion in the Enron scandal,state of California sued for $6 billion in energy losses.Sarbanes Oxley Act : to develop standards for the preparation of audit reports.Chief executive Ken Lay escaped justice, dying of a heart attack before he could be sentenced.Skilling, Fastow and another dozen executives went to prison.

Effects of the Scam!!!Although Enron's compensation and performance management system was designed to retain and reward its most valuable employees, the system contributed to a dysfunctional corporate culture that became obsessed with short-term earnings to maximize bonuses.

Management was compensated extensively using stock options.

This policy of stock option awards caused management to create expectations of rapid growth in efforts to give the appearance of reported earnings to meet Wall Street's expectations.

Corporate governance : 1) Executive CompensationEnron established long-term fixed commitments which needed to be hedged to prepare for the invariable fluctuation of future energy prices.

Enron's bankruptcy downfall was attributed to its reckless use of derivatives and special purpose entities.

Enron's aggressive accounting practices were not hidden from the board of directors.

Although not all of Enron's widespread improper accounting practices were revealed to the board, the practices were dependent on board decisions.

Even though Enron extensively relied on derivatives for its business, the company's Finance Committee and board did not have enough experience with derivatives to understand what they were being told. 2. Risk ManagementCommentators attributed the mismanagement behind Enrons fall to a variety of ethical and political-economic causes.

Ethical explanations centred on executive greed and hubris, a lack of corporate social responsibility, situation ethics, and get-it-done business pragmatism.

Political-economic explanations cited post-1970s deregulation, and inadequate staff and funding for regulatory oversight.

A more libertarian analysis maintained that Enrons collapse resulted from the companys reliance on political lobbying, rent-seeking, and the gaming of regulations.3. Ethical and political analysis

October 2001 : Securities And Exchange Act Launches A Formal Investigation Into Its Related Party Transactions

November 8,2001 : Enron Restates Its Earning For First Three Quarters Of 2001

December 2, 2001 : Enron Files For Protection From Creditors In New York Bankruptcy Court

December 3, 2001 : Lays Off Five Thousand Employees

TimelineJanuary 9 : The Justice Department Announces That It Is Pursuing A Criminal Investigation Of Enron

January 24 : The Hearings On Enron Begin

February 4 : Improper Financial Transactions And Self Dealing

October 31 : The CFO , Fastow Is Indicted Of Being The Mastermind Behind The Scandal .2002 February 3 : The Creditors Sue Lay And His Wife To Recover $70 Million In Transfers

July 11 : It Settled Its Allegations Of SEC Paying $300 Million .

January 14, 2004 : Fastow Agrees To Serve 10 Years In Prison .

July 8 : Lay Surrenders After Being Indicted .2003Enron challenges some of the core beliefs and practices that have underpinned the academic analysis of corporate law and governance

We rely on assumptions of the efficacy of corporate governance/control in monitoring managerial performanceConclusionThank You!!!