Enron Scandal – What Went Wrong?

By: Rita Chen and Sahana Sellathurai

 

Enron Scandal

–          an energy company at Houston, Texas

–          was formed in 1985 and merged with InterNorth

–          was one of the world’s leading electricity, natural gas, communications and pulp and paper companies

–          from 1996 – 2000, Enron was named “America’s most innovative Company” by Fortune magazine

–          had claimed revenues of $101 billion dollars in 2000

–          Overstated revenues by 1.2 billion dollars

–          One of the biggest audit failures ever

–          One of the Big 5 auditing companies, Arthur Andersen also collapsed

–          Tried to destroy/shred documents showing evidence of bad auditing and carelessness

 

Timeline

1985

–          Kenneth Lay and Sam F. Segnar merge Houston Natural Gas and InterNorth (more than 37 000 miles of pipeline).

 

1989

–          They begin trading natural gas commodities. Later become the largest natural gas merchant in North America and branch out into trading other commodities such as water, coal and steel.

 

2000

–          Launch EnronCredit.com – buys and sells credit risk to help companies manage the risk in trading.

–          Enron stock peaks at a record high of $90/share

 

2001

–          Report a third-quarter loss of about $640 million

–          Securities and Exchange Commission starts a formal investigation.

–          Enron accounts losses of $586 million

–          Enron files for Chapter 11 bankruptcy protection (more than 4000 workers will be laid off

 

2002

–          The U.S. Justice Department verifies that it has begun a criminal investigation on Enron’s bankruptcy

–          Former Enron auditor Arthur Anderson indicted for obstruction of justice fr destroying Enron-related documents

–          David Duncan, Arthur Andersen’s former top Enron auditor pleads guilty to obstruction of justice

–          Andersen was sentenced to probation and banned from auditing public companies

 

2003

–          Enron announces that it will emerge from bankruptcy as 2 sepearate companies with different names

–          Enron files its bankruptcy reorganization plan and says that most creditors will receive about 1/5 of the estimated $67 million that they owe

 

2004

–          Initial approval of Enron’s plan for bankruptcy reorganization ( creditors would receive $11 billion in cash and stocks)

–          Andrew and Lea Fastow plead guilty

–          Andrew: 10 year prison sentence, forfeit $23.8 million

 

2005

–          Enron broadband trial begins

–          Overturn the conviction of the Arthur Andersen accounting firm

 

2007

–          Enron completes sale of shareholding in to Ashmore Energy International

–          Enron changes corporate name to Enron Creditors Recovery Corporation (doing business as Enron Corporation)

People Involved

Andrew Fastow

–          Former CFO

–          Created Special Purpose Entities to hide debts

–          Sentenced to 6 years in jail in 2006

–          Wife also sentenced to 12 months in jail for filing false tax returns

 

Kenneth Lay

–          Former CEO of Houston Natural Gas

–          Became CEO of Enron and chairman a year later

–          Found guilty of 6 counts of conspiracy and fraud

–          Before he could be sentenced he died of a heart attack in 2006

Jeff Skilling

–          Former president and chief operating officer

–          Driving force behind turning Enron from a natural gas pipeline company into energy trading powerhouse

–          Became CEO for only 6 months before resigning in August 2001 and selling all of his shares

–          Sentenced in 2006 to 24 years, 6months in jail

 

Mark to Market Accounting

–          Instead of going by the cost principle, assets were valued at their market price

–          Assets were vastly overstated

–          There were fewer standards for energy so market value was hard to control and determine

Special Purpose Entities

–          Entity created by a company for special purposes

–          Could be used to transfer debts outside of the company and would not show up on the balance sheet

–          Used by Andrew Fastow to conceal debts

–          Used shares as collateral or compensation for companies who faced risks

–          Andrew Fastow used it for debts and assets that were quickly decreasing in value

 

Impact on Accounting Profession

Sarbanes –Oxley Act of 2002

–          put in place after the Enron scandal

–          purpose is to prevent big companies from committing accounting fraud

–          gives more power to consumers by forcing publicly traded companies to disclose everything to their shareholders

–          increases/creating prison time for scandals

 

Public Company Oversight

–          created to take over the task of regulating the profession from its members

–          new regulations that require CFOs and CEOs to sign statements proving to the accuracy of their financial records

–          it restricted public accounting firms from providing any non-auditing services when auditing

–         

Changes in the Stock Exchange

SEC called for changes in the stock exchanges’ regulations

New York Stock Exchange declared a new governance proposal

Provision includes:

–          all firms must have a majority of independent directors

–          all audit committee members should be financially literate

–          at least one member of the audit committee should have accounting or related financial management expertise.

–          in addition to regular sessions, the board is required to have extra sessions without management

http://www.youtube.com/watch?v=saBOAGzAY9E

 

Works Cited

“Accounting for Special Purpose Entities Revised: FASB Interpretation 46(R).” NYSSCPA.ORG | The Web Site of the New York State Society of CPAs. Web. 10 Mar. 2011. <http://www.nysscpa.org/cpajournal/2004/704/essentials/p30.htm&gt;.

“Enron: Companies.” Lycos. Web. 10 Mar. 2011. <http://www.lycos.com/info/enron–companies.html&gt;.

“Enron Timeline.” AGSM MBA & AGSM Executive Programs – Australian School of Business – UNSW. Web. 10 Mar. 2011. <http://www.agsm.edu.au/bobm/teaching/BE/Enron/timeline.html&gt;.

The Sarbanes-Oxley Act 2002. Web. 10 Mar. 2011. <http://www.soxlaw.com/&gt;.

“CBC News Indepth: Enron.” CBC.ca – Canadian News Sports Entertainment Kids Docs Radio TV. Web. 11 Mar. 2011. <http://www.cbc.ca/news/background/enron/&gt;.

Cunningham, By. “ENRON AND ARTHUR ADNDERSEN: THE CASE OF THE CROOKED E AND THE FALLEN A – Global Perspectives on Accounting Education Articles | Find Articles at CBS MoneyWatch.com.” Find Articles at BNET | News Articles, Magazine Back Issues & Reference Articles on All Topics. Web. 11 Mar. 2011. <http://findarticles.com/p/articles/mi_qa5524/is_200601/ai_n21393163/?tag=content;col1&gt;.

“How Fastow Helped Enron Fall – TIME.” Breaking News, Analysis, Politics, Blogs, News Photos, Video, Tech Reviews – TIME.com. Web. 11 Mar. 2011. <http://www.time.com/time/business/article/0,8599,201871-1,00.html&gt;.

“Enron’s Collapse: The Fall Of A Wall Street Darling.” Investopedia.com – Your Source For Investing Education. Web. 11 Mar. 2011. <http://www.investopedia.com/articles/stocks/09/enron-collapse.asp&gt;.

Thomas, C. William. “The Rise and Fall of Enron.” Journal of Accountancy. Web. 11 Mar. 2011. <http://www.journalofaccountancy.com/Issues/2002/Apr/TheRiseAndFallOfEnron.htm&gt;.

Long, Scott. “TransActions.” GDS Associates, Inc. Web. 11 Mar. 2011. <http://www.gdsassociates.com/news/transactions/vol202.html&gt;.

“Enron Corp. – Timeline of the Rise and Fall of Enron Corp. | Chron.com – Houston Chronicle.”Houston News, Entertainment, Search and Shopping | Chron.com – Houston Chronicle. Web. 11 Mar. 2011. <http://www.chron.com/news/specials/enron/timeline.html&gt;.

Fox, Loren. Enron: the Rise and Fall. Hoboken, NJ: Wiley, 2003. Print.

Dumortier, By Alex. “Mark-to-Market Accounting Basics.” Fool.com: Stock Investing Advice | Stock Research. Web. 11 Mar. 2011. <http://www.fool.com/investing/dividends-income/2008/10/02/mark-to-market-accounting-what-you-should-know.aspx&gt;.

 

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