Overview of Enron Corporation

Enron Corporation was an American energy, commodities, and services providing company
based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed
approximately 20,000 staff and was one of the
world's major electricity, natural gas,
communications, and pulp and paper
companies, with claimed revenues of nearly
$111 billion during 2000. Fortune, an American
business magazine, named Enron "America's
Most Innovative Company" for six consecutive
years. The story ends with the bankruptcy of
one of America's largest corporations. Enron's
collapse affected the lives of thousands of
employees, shareholders and other investors. At
the end of 2001, it was revealed that its reported
financial condition was sustained by an
institutionalized, systematic, and creatively
planned accounting fraud, known since as the Enron scandal. Enron has since become a well-
known example of willful corporate fraud and corruption. The scandal also brought into the
question of the accounting practices and activities of many corporations in the United States
and was a factor in the enactment of the Sarbanes–Oxley Act of 20021. The scandal also
affected the greater business world by causing the dissolution of the Arthur Andersen
accounting firm.

History of Enron Corporation

Birth of the Company

Enron began as Northern Natural Gas Company, organized in Omaha, Nebraska, in 1930 by
three other companies. North American Light & Power Company and United Light &
Railways Company each held a 35 percent stake in the new enterprise, while Lone Star Gas
Corporation owned the remaining 30 percent. The company's founding came just a few
months after the stock market crash of 19292, an inauspicious time to launch a new venture.
Several aspects of the Great Depression actually worked in Northern's favor, however.
Consumers initially were not enthusiastic about natural gas as a heating fuel, but its low cost
led to its acceptance during tough economic times. High unemployment brought the new
company a ready supply of cheap labor to build its pipeline system. In addition, the 24-inch
steel pipe, which could transport six times the amount of gas carried by 12-inch cast iron
pipe, had just been developed. Northern grew rapidly in the 1930s, doubling its system

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The Sarbanes-Oxley Act of 2002 (often shortened to SOX) is legislation passed by the U.S. Congress to
protect shareholders and the general public from accounting errors and fraudulent practices in the enterprise, as
well as improve the accuracy of corporate disclosures. The U.S. Securities and Exchange Commission (SEC)
administers the act, which sets deadlines for compliance and publishes rules on requirements.
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The Wall Street Crash of 1929, also known as Black Tuesday (October 29) that began on October 24, 1929
and was the most devastating stock market crash in the history of the United States.

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capacity within two years of its incorporation and bringing the first natural gas supply to the
state of Minnesota.

Public Offerings in 1940s

The 1940s brought changes in Northern's regulation and ownership. In 1941, United Light &
Railways sold its share of Northern to the public, and in 1942 Lone Star Gas distributed its
holdings to its stockholders. North American Light & Power would hold on to its stake until
1947, when it sold its shares to underwriters who then offered the stock to the public.
Northern was listed on the New York Stock Exchange that year.

Growth through Acquisitions

Northern continued expanding during the 1970s. During the 1970s, Northern became a
principal investor in the development of the Alaskan pipeline3. When completed, that pipeline
allowed Northern to tap vast natural gas reserves it had acquired in Canada. In 1980,
Northern changed its name to InterNorth, Inc. Over the next few years, company
management extended the scope of the company’s operations by investing in ventures outside
of the natural gas industry, including oil exploration, chemicals, coal mining, and fuel-trading
operations. But the company’s principal focus remained the natural gas industry. In 1985,
InterNorth purchased Houston Natural Gas Company for $2.3 billion. That acquisition
resulted in InterNorth controlling a 40,000-mile network of natural gas pipelines and allowed
it to achieve its long-sought goal of becoming the largest natural gas company in the United
States.

Rename to Enron
In 1986, InterNorth changed its name to Enron. Kenneth Lay, the former chairman of
Houston Natural Gas, emerged as the top
executive of the newly created firm that chose
Houston, Texas, as its corporate headquarters.
Lay quickly adopted the aggressive growth
strategy that had long dominated the
management policies of InterNorth and its
predecessor. Lay hired Jeffrey Skilling to serve
as one of his top subordinates. During the
1990s, Skilling developed and implemented a
plan to transform Enron from a conventional
natural gas supplier into an energy-trading
company that served as an intermediary between producers of energy products, principally
natural gas and electricity, and end users of those commodities. In early 2001, Skilling
assumed Lay’s position as Enron’s chief executive officer (CEO), although Lay retained the
title of chairman of the board.

Enron: Before Collapse

Enron’s 2000 annual report discussed the company’s four principal lines of business. Energy
Wholesale Services ranked as the company’s largest revenue producer. That division’s 60
percent increase in transaction volume during 2000 was fueled by the rapid development of
EnronOnline, a B2B (business-to-business) electronic marketplace for the energy industries
created in late 1999 by Enron. During fiscal 2000 alone, EnronOnline processed more than

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One of the world's largest pipeline systems. It is 800 miles (1,287 km) pipeline with the diameter of 48 inches
(122 cm) that conveys oil from Prudhoe Bay, to Valdez, Alaska.

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$335 billion of transactions, easily making Enron the largest e-commerce company in the
world. On the other hand Lay’s position as the chief executive of the nation’s seventh-largest
firm gave him direct access to key political and governmental officials. In June 2001, Skilling
was singled out as “the No. 1 CEO in the entire country,” while Enron was hailed as
“America’s most innovative company. Enron’s chief financial officer (CFO) Andrew Fastow
was recognized for creating the financial infrastructure for one of the nation’s largest and
most complex companies. In 1999, CFO Magazine presented Fastow the Excellence Award
for Capital Structure Management for his “pioneering work on unique financing techniques.”

Enron’s Corporate Profile

Central Management of Enron Corporation

- Kenneth Lay: Chairman, and Chief executive officer

- Jeffrey Skilling: President, Chief operating officer, and CEO (February–August 2001)
- Andrew Fastow: Chief financial officer
- Triton Dietrich: Chief accounting officer
- Rebecca Mark-Jusbasche: CEO of Enron International and Azurix
- Lou Pai: CEO of Enron Energy Services
- Forrest Hoglund: CEO of Enron Oil and Gas
- Dennis Ulak: President of Enron Oil and Gas International
- Jeffrey Sherrick: President of Enron Global Exploration & Production Inc.
- Richard Gallagher: Head of Enron Wholesale Global International Group
- Kenneth "Ken" Rice: CEO of Enron Wholesale and Enron Broadband Services
- J. Clifford Baxter: CEO of Enron North America
- Sherron Watkins: Head of Enron Global Finance
- Jim Derrick: Enron General Counsel
- Mark Koenig: Head of Enron Investor Relations
- Joan Foley: Head of Enron Human Resources
- Richard Kinder: President and COO of Enron (1990-December 1996); co-founder of
Kinder Morgan
- Greg Whalley: President and COO of Enron (August 2001– Bankruptcy)
- Jeff McMahon: CFO of Enron (October 2001-Bankruptcy)

Products of Enron Corporation

Enron traded in more than 30 different products, including the following:

• Products traded on EnronOnline

o Petrochemicals
o Plastics
o Power
o Pulp and paper
o Steel
o Weather Risk Management
• Oil and LNG transportation
• Broadband
• Principal investments
• Risk management for commodities
• Shipping / freight

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 • Streaming media
• Water and wastewater

Enron’s Financial Performance (1996-2000)

Exhibit: 1 Enron Corporation 2000’s Annual Report Financial Highlight Table

(In millions except per share amount)

Conclusion
The Enron Scandal is considered to be one of the most notorious within American history. At
the time of Enron's collapse, it was the biggest corporate bankruptcy ever to hit the financial
world. The Enron scandal drew attention to accounting and corporate fraud, as its
shareholders lost $74 billion in the four years leading up to its bankruptcy, and its employees
lost billions in pension benefits.

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 The Enron Collapse

The Fall of Enron

In May 2001, Enron’s executive Clifford Baxter left the company, apparently in
uncontroversial circumstances. It was rumored that Baxter, who later committed suicide, had
clashed with Jeff Skilling (Enron’s CEO), over the righteousness of Enron’s partnership
transactions.

On 14th August 2001, Jeff Skilling resigned as Chief Executive, citing personal reasons and
Kenneth Lay became Chief Executive Officer. Skilling’s departure was prompted by
concerns over Enron's bungled accounting and bad management.

In mid August 2001, Sherron Watkins, Enron’s Corporate Development Executive, who was
later referred to as the “whistleblower” in the Enron scandal, wrote a letter to Kenneth Lay
warning him of accounting irregularities that could pose a threat to the company. This
development shocked investors who suddenly panicked. The lack of transparency sent a
selling wave in the market. Investors sold millions of shares, knocking almost $ 4 off the
price to less than $40 over the course of the third week of August 2001. In spite of the drop in
price, management still insisted all was well. Despite the air of impending doom, Kenneth
Lay found two banks willing to extend credit. But the worst of revelations were to come yet.

On 8th November 2001, the company took the highly unusual move of restating its profits for
the past four years. Enron effectively admitted that it had inflated its profits by concealing
debts in its complicated partnership arrangements (Special Purpose Entities).

On 9th November 2001, the humiliation of Enron appeared complete as it entered

negotiations to be taken over by its much smaller rival, Dynegy. The following graph shows
how Enron’s restated accounts.

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 Reported and revised income, debt and shareholder equity 1997 – 2000 following special partnership revelations;
Source: Enron/Powers Special Report

Enron filed for bankruptcy in December 2001 and filed a suit against Dynegy for pulling out
of the proposed merger. Enron’s share price collapsed from around $ 95 to below $ 1.
Enron’s employees lost their savings as well as their jobs. Mr. Kenneth Lay, the once
renowned visionary chairman of the firm, resigned in January 2002.

It appears now that the phenomenal success of Enron was a daydream and it seems to have
sunk into a financial predicament that is largely of its own creation. In just sixteen years,
Enron grew into one of America's largest companies; however, its success was based on
artificially inflated profits, questionable accounting practices and fraud. Several of the
company’s businesses were losing operations; a fact that was concealed from investors using
off balance sheet vehicles or structured finance vehicles.

Why Enron Fell from Grace

SPE

A special purpose entity, sometimes called a special purpose vehicle, is a legal entity created
for one very limited, particular task. Typically, SPEs are subsidiaries of a larger corporation.
Usually the task of a special purpose entity is to isolate risk. By setting up an SPE dedicated
to the acquisition and financing of specific assets, the parent corporation is protected in case
of bankruptcy, loan default or other loss on those assets. Another use for an SPE is managing
a single asset that has exceptionally complex financial transactions and requires numerous
permits for its operation, such as a factory or a power plant. By placing the asset in the SPE,
it’s easier to keep track of income and expenses associated with this entity. Plus, if the owner
wants to sell the asset, any required permits will transfer with the SPE, eliminating the need
to assign them over separately. This greatly simplifies a potentially difficult sale.

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 Accounting Issue

Enron was one of the first amongst energy companies to begin trading through the internet,
offering a free service that attracted a vast amount of customers. But while Enron boasted
about the value of products that it bought and sold online around $880 billion in just two
years, the company remained silent about whether these trading operations were actually
making any money.

It is believed that Enron began to use sophisticated accounting techniques to keep its share
price high, raise investment against its own assets and stock and maintain the impression of a
highly successful company. These techniques are referred to as aggressive earnings
management techniques Losses from its books if it passed these “assets” to these
partnerships. Equally, investment money flowing into Enron from new partnerships ended up
on the books as profits, even though it was linked to specific ventures that were not yet up
and running. It now appears that Enron used many manipulative accounting practices
especially in transactions with Special Purpose Entities (SPE) to decrease losses, enlarge
profits, and keep debt away from its financial statements in order to enhance its credit rating
and protect its credibility in the market.

The main reason behind these practices was to accomplish favorable financial statement
results, not to achieve economic objectives or transfer risk. These partnerships would have
been considered legal if reported according to present accounting rules or what is known as
“applicable accounting rules”. One of these partnership deals was to distribute Blockbuster
videos by broadband connections. The plan fell through, but Enron had posted $110 million
venture capital cash as profit.

Although these practices were generally disclosed to Enron’s investors, the disclosure was
inadequate. This inadequacy may have stemmed from conflict of interest to avoid revealing,
the extent to which some top Enron executives were enriching themselves, which simply
represents fraud. Another explanation may relate to Enron’s governance whereby Enron’s
structured finance transactions were so complex that disclosure becomes necessarily
imperfect. Therefore Enron’s investors had to rely on their business judgment of Enron’s
management, but such reliance failed due to a tangled web of conflicts of interests. This
becomes crystal clear when it was known that most of the senior Enron executives, especially

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Andrew Fastow, served as the SPE’s principals, receiving massive amounts of compensation
and returns, in order to skew their loyalty in favor of the SPEs.

The Crash of Enron

The shockwaves of the corporate crash resonated worldwide as investors around the world
demanded answers. Congressional hearings began in December 2001. Four of Enron's most
senior executives (Andrew Fastow, Richard Buy, Michael Kopper and Kenneth Lay) pleaded
Fifth Amendment protection against self-incrimination and refused to testify.

In January 2002, the US department of justice announced a criminal investigation. For the
average layman, the collapse of Enron is a scandal of a major energy provider that used to be
the seventh largest corporation in America and became the biggest bankruptcy in the US
corporate history. As revelations of the Enron affair continue to tumble out, employees and
investors are furious at the way a senior executive behaved and at how auditors, analysts,
banks, rating agencies and regulators turned a blind eye to what was going on.

The Enron fiasco is an unprecedented situation. This was a company with an extraordinary
complex and risky business model that entered into highly questionable transactions. The
market capitalization of Enron had reached exceptional valuations relative to the realism of
the company’s ability to produce recurring excess cash flow. What finally brought the
company down is finalized? Internal policies, investment advisors, investment banks,
undetermined criminal activity, poor auditing, and poor rating probably all played a role in its
rapid demise.

Enron’s Auditor (Arthur Andersen)

Arthur Andersen, one of the world's five leading accounting firms, was Enron’s auditing
firm. This means that Andersen’s job was to check that the company’s accounts were a fair
reflection of what was really going on. As such, Andersen should have been the first line of
defense in the case of any fraud or deception.

Arguments about conflict of interest had been thrown at Andersen since they acted as both
auditors and consultants to Enron. The company earned large fees from its audit work for
Enron and from related work as consultants to the same company. When the scandal broke,
the US government began to investigate the company’s affairs, Andersen’s Chief Auditor for
Enron, David Duncan, ordered the shredding of thousands of documents that might prove
compromising. That was after the Securities and Exchange Commission (SEC) had ordered
an investigation into the speculative actions of Enron. Duncan said he was acting on an e mail
from Nancy Temple, a lawyer at Andersen, but Temple denied giving such advice. While
Andersen fired Duncan, its Chief Executive Officer, Joseph Berardino, insisted that the firm
did not act improperly and could not have detected the fraud. Berardino conceded that an
error of judgment was made in shredding documents, but he still protested Andersen’s
innocence.

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 Links with The Government (Bush Administration)

In spite of the fact that there are no suggestions currently that there were any illegal
connections between the current US administration and Enron officials, there are close links
that exist between Enron and the current administration at all levels whether personal, social,
financial, professional or political. According to reports, thirty five administration officials
have held Enron stock, some had six figure investments. Several, less senior officials, have
served as paid consultants for Enron.

According to the US Center for Public Integrity, Lay (CEO of Enron) and Enron donated
more than $ 500,000 to the Bush campaign, thus making Enron the President’s largest single
patron. Bush has championed some issues Enron considered important, such as deregulating
utilities and limiting compensation awards. Bush has also favored more oil exploration and
drilling in spite of opposition from environmentalists.

As for the US Vice President, Dick Cheney, he is alleged to have met Enron executives four
times in 2001 to discuss energy policy. Cheney’s critics say that no company in the US stood
to gain more from the energy policies than Enron. Later the General Accounting Office, the
investigative arm of the US Congress, demanded that the Vice President releases documents
relating to the formulation of government energy policy but he resisted. It is also known that
Cheney was the former Chief Executive of an oil services company named Halliburton,
which built the Enron Field stadium in Houston, when Mr. Cheney was its Chief Executive.
Paul O’Neil, the current US Treasury Secretary, had been contacted by Lay who asked O'Neil
to encourage US banks to extend their credit to Enron, a request refused by O’Neil. SEC
Chairman Harvey Pitts was hand-picked by Lay for the position, due to his notorious
aversion to governmental regulation of any kind.

The Link of Enron with The British Front

Shock waves of the Enron scandal have been felt in Britain too, where Enron acted as a
sponsor of the two main political parties, Labor and Conservatives. The Labor party was
accused of taking Enron’s money in return for access to government ministers. The party had
apparently changed its policy on gas-fired power stations after being lobbied by companies,
including Enron. This was seen by some as possible evidence of Enron's influence on
government policy. However, the UK Government insists its links with Enron have neither
changed policy nor bought access to ministers. The row has renewed campaigners’ calls for
political parties to be funded by the state rather than relying on business donations.
A second front of allegations emerged over Labor’s close ties with Andersen, Enron’s
accountants, a company barred from government work for failing to prevent the DeLorean
car company collapse. This ban was later lifted, which has caused the rise of awkward
questions faced by the Labor party now. Furthermore, Lord Wakeham, a former Conservative
Cabinet Minister and a nonexecutive director in Enron. Lord Wakeham served on the audit
committee that was meant to oversee Enron’s auditing procedures, which is at the heart of the
scandal, and supposed to protect shareholders’ interests. In response to these allegations,
Lord Wakeham stepped down as Chairman of the Media Watchdog, the Press Complaints
Commission (PCC).

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 The consequences of Enron Collapse

Enron stands for the greatest company scandal in the history of the US economy and has
become a symbol of corruption for the whole Western economic system.

• 4500 employees lost their jobs.

• Investors lost some 60 billion dollars within a few days; for many it meant losing their old-
age security.

• The pension fund for the company's employees was obliterated.

• Citizen’s 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.

• The rules for company financial reporting were drastically sharpened: Sarbanes-Oxley Act
(2002).

• The close ties of the company's founder, Kenneth Lay, to US President George W. Bush –
Lay was an important financial supporter of Bush – came under sharp criticism

The Victim: Employees and Pension Fund Holders

The collapse of Enron has left thousands of people out of work. Thousands lost their personal
investments and pensions after the scandal broke out and Enron's stock plunged. Many
employees had personal pension funds made up of Enron shares - a common situation in
America, where occupational schemes based on final salary payments are increasingly rare
and money purchase schemes, known as 401(K) plans, are the norm. Employees at Enron
were encouraged to do so by the company, which also forbade them from selling their stocks,
when the company share price came down. In contrast, many Enron executives were able to
cash in their share options when the company’s fate became clear.

Creation of Sarbanes-Oxley Act

In response to the auditing and accounting problems laid bare by Enron and other corporate
scandals, Congress enacted the Sarbanes-Oxley Act of 2002 (P.L. 107-204), containing
perhaps the most far-reaching amendments to the securities laws since the 1930s. Very
briefly, the Act does the following:

• Creates a new oversight board to regulate independent auditors of publicly traded

companies – a private sector entity operating under the oversight of the Securities and
Exchange Commission;

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 • raises standards of auditor independence by prohibiting auditors from providing
certain consulting services to their audit clients and requiring preapproval by the
client’s board of directors for other non-audit services;

• Requires top corporate management and audit committees to assume more direct
responsibility for the accuracy of financial statements;

• Enhances disclosure requirements for certain transactions, such as stock sales by

corporate insiders, transactions with unconsolidated subsidiaries, and other significant
events that may require “real-time” disclosure;

• Directs the SEC to adopt rules to prevent conflicts of interest that affect the
objectivity of stock analysts;

• Authorizes $776 million for the SEC in FY 2003 (versus $469 million in the
Administration’s budget request) and requires the SEC to review corporate financial
reports more frequently; and

• Establishes and/or increases criminal penalties for a variety of offenses related to

securities fraud, including misleading an auditor, mail and wire fraud, and destruction
of records.

Punishment

Kenneth Lay

Born April 15, 1942

Tyrone, Missouri, USA

Died July 5, 2006

Conviction(s) fraud, false statement

Penalty died before sentencing, conviction vacated

Status died of a heart attack before his sentencing

Jeffrey Skilling

Born November 25, 1953

Conviction(s) conspiracy, securities fraud, false statement, insider trading

Penalty imprisoned 24 years and 4 months, fined $45 million

Status in prison

Occupation prisoner/Failed Businessman

Spouse Rebecca Carter

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Andrew Fastow

On October 31, 2002, Fastow was indicted by a federal grand jury in Houston, Texas
on 78 counts including fraud, money laundering, and conspiracy.
On January 14, 2004, he pled guilty to two counts of wire and securities fraud, and
agreed to serve a ten-year prison sentence.
He also agreed to become an informant and cooperate with federal authorities in the
prosecutions of other former Enron executives in order to receive a reduced sentence.
As of November 2006, Fastow is Inmate #14343-179 at the Federal Detention Center
(FDC) in Oakdale, Louisiana, with a projected release date of December 17, 2011

David Duncan

Jan. 10, 2002: Arthur Andersen says its employees destroyed a "significant but
undetermined“ number of Enron documents
David Duncan were cited as the responsible managers in this scandal as they had
given the order to shred relevant documents
On April 9, 2002 he pleaded guilty; the maximum sentence for his crimes is ten years,
but since he pleaded guilty and became a witness for the prosecution he would have
presumably received a much smaller sentence.
The final blows came when Andersen was banned from US government work after being
indicted by a federal grand jury on the charge of obstruction of justice. This was coupled with
the case brought by the US Department of Justice against the Andersen UK office for joining
in the shredding of Enron documents. This caused Andersen UK practices to reopen merger
talks with other accounting firms in response to these claims made against the office. Both
KPMG and Deloitte had been interested in Andersen's UK business, but KPMG's interest
trailed off as more information became available about Andersen's financial situation and the
potential risk of litigation. Andersen UK agreed to join with Deloitte, Touché & Tohmatsu. In
addition, Deloitte reached agreements with Andersen partners in Spain, Portugal, the US and
Mexico.

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