REPORT ON FINANCIAL SCANDAL OF

ENRON CORPORATION, USA.

Submitted To:

Farzana Nasrin
Lecturer
Department of Finance
Jagannath University, Dhaka

Submitted By:
Group No: 08
B.B.A (7th batch)
4th year 2nd semester
Department of Finance
Jagannath University, Dhaka

DATE OF SUBMISSION:- 07TH JANUARY, 2017

 Group No-08

SL ROLL NO NAME
NO
01 B-120203065 Nahid Hassan Suman
02 B-120203070 Md. Osman Gony Sobuj
03 B-120203074 Tanvirul Islam
04 B-120203132 Mamun Hasan Ridoy

Page 1 of 26
 Letter of Transmittal

November 16, 2016

Farzana Nasrin

Lecturer

Department of Finance

Jagannath University, Dhaka,

Sub: Submission of Report on “Enron financial scam, USA”

Dear Madam,

This is a great Pleasure for us to submit the report on “Enron financial scam, USA” which is
partial requirement for our Practical knowledge of the course of “Auditing”. While preparing
this report, we tried our best to follow the instruction that you have given us.

We would like to thank you from the bottom of our heart for assigning us this report, which
have helped us in so many ways to learn so many things about Auditing.

We shall be highly encouraged if you are kind enough to receive this report.

Yours sincerely

Group No: 08

B.B.A (7th batch)

4th year 2nd semester

Department of Finance

Jagannath University,Dhaka.

Page 2 of 26
 ACKNOWLEDGEMENT

We Group No: 08, Department Of Finance, Jagannath University, Dhaka-1100, are highly
grateful to all those who guided us in completing this Report.

First of all, we would like to thank our almighty. Then we would like to pay our heartiest thanks
to our Honorable Course Teacher “Farzana Nasrin”, Lecturer, Department Of Finance,
Jagannath University, Dhaka who gave us the useful tips and suggestions regarding this Report

Last but not least, we would like to thank for her overall co-operation, guidance, advice and
support in preparing this report.

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 Executive Summary

We have prepared this report based on secondary data. For this specific purpose we collected
data and information from various sources like published materials such as the annual report
and Website. We concentrated on arranging and putting the data in such a way that the report
progressively anchors to a desired destination of understanding as well as connect practical
knowledge with theoretical knowledge.

Enron Corp. is a company that reached dramatic heights, only to face a dizzying collapse. The
story ends with the bankruptcy of one of America's largest corporations. Enron's collapse
affected the lives of thousands of employees and shook Wall Street to its core. At Enron's peak,
its shares were worth $90.75, but they plummeted to $0.67 in January 2002 following
bankruptcy. To this day, many wonder how such a powerful business disintegrated almost
overnight and how it managed to fool the regulators with fake, off-the-books corporations for
so long.

Enron was formed in 1985 following a merger between Houston Natural Gas Co. and Omaha-
based InterNorth Inc. Following the merger, Kenneth Lay, who had been the chief executive
officer (CEO) of Houston Natural Gas, became Enron's CEO and chairman, and quickly
rebranded Enron into an energy trader and supplier. Deregulation of the energy markets
allowed companies to place bets on future prices, and Enron was poised to take advantage.

When the recession began to hit in 2000, Enron had significant exposure to the most volatile
parts of the market. As a result, many trusting investors and creditors found themselves on the
losing end of a vanishing market cap.

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 Table of Content

Serial Particulars Topics Page No.

No.
Letter of Transmittal 2
Acknowledgement 3
Executive Summary 4
1 Introduction 6
2 Research Methodology 6
3 About Enron 7
4 chronology of a collapse 8
5 Enron's pipeline of influence 11
6 The Enron Players 12
7 Causes of downfall 14
8 How Enron Corporation walked towards the Scandal 18
9 Causes of Financial Scam 21
New Regulations As a Result of the Enron Scandal 22
10 Current condition of the Enron Corporation 22
11 Punishment and Penalty of verdicts of Enron Corporation 23
12 Finding 24

13 Conclusion 25

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Introduction:-
In 1985, Kenneth Lay merged the natural gas pipeline companies of Houston Natural Gas and
Inter North to form Enron. In the early 1990s, he helped to initiate the selling of electricity at
market prices, and soon after, the United States Congress approved legislation deregulating the
sale of natural gas. The resulting markets made it possible for traders such as Enron to sell
energy at higher prices, thereby significantly increasing its revenue. After producers and local
governments decried the resultant price volatility and asked for increased regulation, strong
lobbying on the part of Enron and others prevented such regulation.

As Enron became the largest seller of natural gas in North America by 1992, its trading of gas
contracts earned $122 million (before interest and taxes), and the second largest contributor to
the company's net income. The November 1999 creation of the Enron Online trading website
allowed the company to better manage its contracts trading business.

In an attempt to achieve further growth, Enron pursued a diversification strategy. The company
owned and operated a variety of assets including gas pipelines, electricity plants, pulp and
paper plants, water plants, and broadband services across the globe. The corporation also
gained additional revenue by trading contracts for the same array of products and services with
which it was involved. This included setting up power generation plants in developing countries
and emerging markets including The Philippines (Subic Bay), Indonesia and India (Dabhol).

Enron's stock increased from the start of the 1990s until year-end 1998 by 311%, only modestly
higher than the average rate of growth in the Standard & Poor 500 index. However, the stock
increased by 56% in 1999 and a further 87% in 2000, compared to a 20% increase and a 10%
decrease for the index during the same years. By December 31, 2000, Enron's stock was priced
at $83.13 and its market capitalization exceeded $60 billion, 70 times earnings and six times
book value, an indication of the stock market's high expectations about its future prospects. In
addition, Enron was rated the most innovative large company in America in Fortune's Most
Admired Companies survey.

RESEARCH MATHODOLOGY
For making this research paper, we have collected secondary information and data through the
internet. This includes various journal publications, BBC News, daily star newspaper, Financial
Express newspaper, BANGLAPEDIA and various publications etc of both present and historical
information.

We have also used some table, graph, and chart in our research paper very carefully.

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About Enron Corporation, USA
Former type Public

Traded as NYSE: ENE

Industry Energy

Fate Bankruptcy

Predecessor Northern Natural Gas Company

Houston Natural Gas

Successor Dynegy

Prisma Energy International

Founded Omaha, Nebraska, United States (1985)

Founder Kenneth Lay

Defunct November 2004

Headquarters 1400 Smith Street

Houston, Texas, United States

Key people Kenneth Lay, Founder, Chairman and CEO

Jeffrey Skilling, former President, and COO

Andrew Fastow, former CFO

Rebecca Mark-Jusbasche, former Vice Chairman,

Chairman and CEO of Enron International

Stephen F. Cooper, Interim CEO and CRO

Enron's headquarters in Downtown Houston was leased from a consortium of banks who had
bought the property for $285 million in the 1990s. It was sold for $55.5 million, just before
Enron moved out in 2004.

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A month-by-month look at Enron's collapse

Behind the Enron Scandal

Guilty of obstruction, Arthur Andersen becomes the first courtroom casualty of the Enron
collapse

CHRONOLOGY OF A COLLAPSE

November 1997

• Enron buys out a partner's stake in a company called JEDI and sells the stake to a firm it
creates, called Chewco, to be run by an Enron officer. Thus begins a complex series of
transactions that enable Enron to hide debts.

February 20, 2001

• A FORTUNE story calls Enron a "largely impenetrable" company that is piling on debt while
keeping Wall Street in the dark.

Stock Close: $75.09

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April 17

• Enron chairman Ken Lay meets with Vice President Dick Cheney and other energy-policy
officials; it's one of six such visits.

August 14

• CEO Jeffrey Skilling resigns, becoming the sixth senior executive to leave in a year. Lay says in
a conference call with stock analysts, "I never felt better about the company." He deflects
analysts' pleas for more disclosure. They lower their ratings on Enron stock, which drops in
after-hours trading to a 52-week low.

Stock Close: $39.55

October 12

• Arthur Andersen legal counsel instructs workers who audit Enron's books to destroy all but
the most basic documents.

October 16

• Enron reports a third-quarter loss of $618 million. Moody's investors Service indicates that it
is considering lowering its credit rating on Enron debt securities.

Stock Close: $33.84

October 22

• Enron discloses that the Securities Exchange Commission has opened an inquiry.

October 24

• Chief financial officer Andrew Fastow, who ran some of Enron's stealth partnerships, is
replaced.

October 26

• The Wall Street Journal reports the existence of the Chewco partnerships run by an Enron
manager. Ken Lay calls Fed Chairman Alan Greenspan to alert him of the company's problems.

Stock Close: $15.40

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October 28

• Lay calls Treasury Secretary Paul O'Neill. In October and November, Enron's president phones
an O'Neill deputy at least six times, seeking help.

October 29

• Lay calls Commerce Secretary Donald Evans, suggesting he help Enron.

November 8

• Enron admits accounting errors, infalting income by $586 million since 1997.

November 9

• Lay again talks to Treasury's O'Neill.

November 29

• The SEC expands its investigation to include auditor Arthur Andersen.

December 2

• Enron files for bankruptcy.

Stock Close: 26 cents

December 12

• Andersen CEO Joseph Berardino testifies his firm discovered "possible illegal acts" committed
by Enron.

January 9, 2002

• The Justice Department launches a criminal investigation.

January 10

•Attorney General John Ashcroft rescues himself from the investigation because of
contributions he received from Enron. Andersen acknowledges destroying Enron files.

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Enron's pipeline of influence:-

Page 11 of 26
The Enron Players:-
KENNETH LAY (Former Enron chairman):-

Had he resigned only a few months earlier, Lay might have received a "golden parachute" in
excess of $25 million. Instead, he departed in shame last week, and must defend himself from
lawsuits and hostile questions during televised congressional hearings that start Feb. 4. Still,
Lay, who helped found Enron in 1985 and became its CEO, has received about $200 million in
salary, stock and other compensation from Enron since 1999. He enjoyed privileges rare even
for top CEOs, such as the $7.5 million revolving credit line Enron extended him, which he
reportedly used and repaid with Enron stock 15 times between last February and October. Lay
will maintain his seat on Enron's Board of Directors, a perch from which, some say, he can keep
an eye on the investigators probing the company.

JEFFREY SKILLING (Former Enron CEO):-

A week after his surprise Aug. 14 resignation, the media and public, however skeptically, had
digested Skilling's claim and his colleagues' swift corroboration that the CEO was leaving the
company for personal reasons, after just six months on the job. Between January and August
2001, Skilling sold off about $20 million in Enron stock. He has tried to maintain a low profile--
but last week's suicide by former Enron vice chairman Cliff Baxter brought reminders that,
according to whistle-blower Sherron Watkins, Baxter had complained loudly to Skilling about
Enron's shady bookkeeping.

DAVID DUNCAN (Former Andersen partner):-

Duncan, who had overseen Andersen's Enron audit since 1997, was fired Jan. 15 for leading the
document-shredding brigade--against company policy, according to official statements. His 15
minutes of fame, though, turned out to be less than five--that's the amount of time it took him
to invoke the Fifth Amendment before a House Energy and Commerce subcommittee last
Thursday. That brief appearance opened the door for the two Andersen executives, C.E.
Andrews and Dorsey Baskin Jr., who claimed that they found it "appalling" that he seemed to
manage the shredding "in anticipation of a government request for documents." Duncan, a 20-
year Andersen veteran, initiated a rapid document-destruction campaign on Oct. 23, they said,
the day after the SEC's Enron probe became public, and it lasted until Nov. 9, when Andersen
received a subpoena. Duncan told House investigators that he believes officials at Andersen's
Chicago headquarters tacitly encouraged shredding as early as September.

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NANCY TEMPLE (Andersen lawyer):-

After Duncan declined to answer their questions, the members of the House Committee on
Energy and Commerce made quick work of Temple. Her now well-known Oct. 12 e-mail, first
reported in TIME, routinely laid out the auditor's policy that explains when nonessential
documents such as computer files and e-mail should be kept and when they may be destroyed.
But Duncan and Andersen partner Michael Odom heard the message as a starter's pistol for
what would become a 17-day document-shredding marathon. Some investigators felt they got
a glimpse of Temple's state of mind in a document that emerged last week: Temple told Duncan
to remove her name from a memo relating to Enron to decrease the chances she could be a
witness, "which I prefer to avoid," she wrote on Oct. 16.

THOMAS WHITE (Secretary of the Army):-

A former vice chairman of Enron Energy Services, White faced enemy fire last week for his push
last year to privatize energy utilities that supply the armed forces. The activist group Public
Citizen accused White of making decisions favorable to Enron soon after he officially joined the
Bush Administration last June. Previously, White drew attention for his Enron holdings, more
than 400,000 shares--by far the largest among Bush Administration officials--which he sold
between June and October for an estimated profit of more than $12 million. In those months,
he says he had 30 strictly personal calls or meetings with Enron employees.

SHERRON WATKINS (Enron vice president)

Corporate-development executives make the unlikeliest folk heroes. But Watkins wrote the
prescient Aug. 15 memo to Lay that predicted Enron could "implode in a wave of accounting
scandals"--a line that is already a well-worn mantra among Enron's victims.

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Causes of downfall:-
Enron's complex financial statements were confusing to shareholders and analysts. In addition,
its complex business model and unethical practices required that the company use accounting
limitations to misrepresent earnings and modify the balance sheet to indicate favorable
performance.

The combination of these issues later resulted in the bankruptcy of the company, and the
majority of them were perpetuated by the indirect knowledge or direct actions of Kenneth Lay,
Jeffrey Skilling, Andrew Fastow, and other executives such as Rebecca Mark. Lay served as the
chairman of the company in its last few years, and approved of the actions of Skilling and
Fastow although he did not always inquire about the details. Skilling constantly focused on
meeting Wall Street expectations, advocated the use of mark-to-market accounting (accounting
based on market value, which was then inflated) and pressured Enron executives to find new
ways to hide its debt. Fastow and other executives "created off-balance-sheet vehicles,
complex financing structures, and deals so bewildering that few people could understand them.

Revenue Recognition:-
Enron and other energy suppliers earned profits by providing services such as wholesale trading
and risk management in addition to building and maintaining electric power plants, natural gas
pipelines, storage, and processing facilities. When accepting the risk of buying and selling
products, merchants are allowed to report the selling price as revenues and the products' costs
as cost of goods sold. In contrast, an "agent" provides a service to the customer, but does not
take the same risks as merchants for buying and selling. Service providers, when classified as
agents, are able to report trading and brokerage fees as revenue, although not for the full value
of the transaction.

Although trading companies such as Goldman Sachs and Merrill Lynch used the conventional
"agent model" for reporting revenue (where only the trading or brokerage fee would be
reported as revenue), Enron instead selected to report the entire value of each of its trades as
revenue. This "merchant model" was considered much more aggressive in the accounting
interpretation than the agent model. Enron's method of reporting inflated trading revenue was
later adopted by other companies in the energy trading industry in an attempt to stay
competitive with the company's large increase in revenue. Other energy companies such as
Duke Energy, Reliant Energy, and Dynegy joined Enron in the wealthiest 50 of the Fortune 500
mainly due to their adoption of the same trading revenue accounting as Enron.

Between 1996 and 2000, Enron's revenues increased by more than 750%, rising from $13.3
billion in 1996 to $100.8 billion in 2000. This extensive expansion of 65% per year was

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unprecedented in any industry, including the energy industry which typically considered growth
of 2–3% per year to be respectable. For just the first nine months of 2001, Enron reported
$138.7 billion in revenues, which placed the company at the sixth position on the Fortune
Global 500.

Mark-to-market accounting:-
In Enron's natural gas business, the accounting had been fairly straightforward: in each time
period, the company listed actual costs of supplying the gas and actual revenues received from
selling it. However, when Skilling joined the company, he demanded that the trading business
adopt mark-to-market accounting, citing that it would represent "true economic value." Enron
became the first non-financial company to use the method to account for its complex long-term
contracts. Mark-to-market accounting requires that once a long-term contract was signed,
income is estimated as the present value of net future cash flow. Often, the viability of these
contracts and their related costs were difficult to estimate. Due to the large discrepancies of
attempting to match profits and cash, investors were typically given false or misleading reports.
While using the method, income from projects could be recorded, although they might not
have ever received the money, and in turn increasing financial earnings on the books. However,
in future years, the profits could not be included, so new and additional income had to be
included from more projects to develop additional growth to appease investors. As one Enron
competitor stated, "If you accelerate your income, then you have to keep doing more and more
deals to show the same or rising income." Despite potential pitfalls, the U.S. Securities and
Exchange Commission (SEC) approved the accounting method for Enron in its trading of natural
gas futures contracts on January 30, 1992. However, Enron later expanded its use to other
areas in the company to help it meet Wall Street projections.

For one contract, in July 2000, Enron and Blockbuster Video signed a 20-year agreement to
introduce on-demand entertainment to various U.S. cities by year-end. After several pilot
projects, Enron recognized estimated profits of more than $110 million from the deal, even
though analysts questioned the technical viability and market demand of the service. When the
network failed to work, Blockbuster withdrew from the contract. Enron continued to recognize
future profits, even though the deal resulted in a loss.

Whitewing:-
Whitewing was the name of a special purpose entity used as a financing method by Enron. In
December 1997, with funding of $579 million provided by Enron and $500 million by an outside
investor, Whitewing Associates L.P. was formed. Two years later, the entity's arrangement was

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changed so that it would no longer be consolidated with Enron and be counted on the
company's balance sheet. Whitewing was used to purchase Enron assets, including stakes in
power plants, pipelines, stocks, and other investments. Between 1999 and 2001, Whitewing
bought assets from Enron worth $2 billion, using Enron stock as collateral. Although the
transactions were approved by the Enron board, the asset transfers were not true sales and
should have been treated instead as loans.

Other accounting issues

Enron made a habit of booking costs of cancelled projects as assets, with the rationale that no
official letter had stated that the project was cancelled. This method was known as "the
snowball", and although it was initially dictated that such practices be used only for projects
worth less than $90 million, it was later increased to $200 million.

In 1998, when analysts were given a tour of the Enron Energy Services office, they were
impressed with how the employees were working so vigorously. In reality, Skilling had moved
other employees to the office from other departments (instructing them to pretend to work
hard) to create the appearance that the division was larger than it was. This ruse was used
several times to fool analysts about the progress of different areas of Enron to help improve the
stock price.

Financial audit:-
Enron's auditor firm, Arthur Andersen, was accused of applying reckless standards in its audits
because of a conflict of interest over the significant consulting fees generated by Enron. During
2000, Arthur Andersen earned $25 million in audit fees and $27 million in consulting fees (this
amount accounted for roughly 27% of the audit fees of public clients for Arthur Andersen's
Houston office). The auditor's methods were questioned as either being completed solely to
receive its annual fees or for its lack of expertise in properly reviewing Enron's revenue
recognition, special entities, derivatives, and other accounting practices.

Enron hired numerous Certified Public Accountants (CPAs) as well as accountants who had
worked on developing accounting rules with the Financial Accounting Standards Board (FASB).
The accountants searched for new ways to save the company money, including capitalizing on
loopholes found in Generally Accepted Accounting Principles (GAAP), the accounting industry's
standards. One Enron accountant revealed "We tried to aggressively use the literature [GAAP]

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to our advantage. All the rules create all these opportunities. We got to where we did because
we exploited that weakness."

Andersen's auditors were pressured by Enron's management to defer recognizing the charges
from the special purpose entities as its credit risks became known. Since the entities would
never return a profit, accounting guidelines required that Enron should take a write-off, where
the value of the entity was removed from the balance sheet at a loss. To pressure Andersen
into meeting Enron's earnings expectations, Enron would occasionally allow accounting
companies Ernst & Young or PricewaterhouseCoopers to complete accounting tasks to create
the illusion of hiring a new company to replace Andersen. Although Andersen was equipped
with internal controls to protect against conflicted incentives of local partners, it failed to
prevent conflict of interest. In one case, Andersen's Houston office, which performed the Enron
audit, was able to overrule any critical reviews of Enron's accounting decisions by Andersen's
Chicago partner. In addition, after news of U.S. Securities and Exchange Commission (SEC)
investigations of Enron were made public, Andersen would later shred several tons of relevant
documents and delete nearly 30,000 e-mails and computer files, causing accusations of a cover-
up.

Revelations concerning Andersen's overall performance led to the break-up of the firm, and to
the following assessment by the Powers Committee (appointed by Enron's board to look into
the firm's accounting in October 2001): "The evidence available to us suggests that Andersen
did not fulfill its professional responsibilities in connection with its audits of Enron's financial
statements, or its obligation to bring to the attention of Enron's Board (or the Audit and
Compliance Committee) concerns about Enron's internal contracts over the related-party
transactions".

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How Enron Corporation walked towards the Scandal:-
Misleading financial accounts:
In 1990, Enron's Chief Operating Officer Jeffrey Skilling hired Andrew Fastow, who was well
acquainted with the burgeoning deregulated energy market that Skilling wanted to exploit. In
1993, Fastow began establishing numerous limited liability special purpose entities (a common
business practice in the energy sector); however, it also allowed Enron to transfer liability so
that it would not appear in its accounts, allowing it to maintain a robust and generally
increasing stock price and thus keeping its critical investment grade credit ratings.

Enron was originally involved in transmitting and distributing electricity and natural gas
throughout the United States. The company developed, built, and operated power plants and
pipelines while dealing with rules of law and other infrastructures worldwide. Enron owned a
large network of natural gas pipelines, which stretched ocean to ocean and border to border
including Northern Natural Gas, Florida Gas Transmission, Trans western Pipeline Company and
a partnership in Northern Border Pipeline from Canada. The states of California, New
Hampshire and Rhode Island had already passed power deregulation laws by July 1996, the
time of Enron's proposal to acquire Portland General Electric Corporation. During 1998, Enron
began operations in the water sector, creating the Azurix Corporation, which it part-floated on
the New York Stock Exchange during June 1999. Azurix failed to become successful in the water
utility market, and one of its major concessions, in Buenos Aires, was a large-scale money-
loser.[citation needed] After the relocation to Houston, many analysts, who criticized the Enron
management as being greatly in debt. Enron management pursued aggressive retribution
against its critics, setting the pattern for dealing with accountants, lawyers, and the financial
media.

Enron grew wealthy due largely to marketing, promoting power, and its high stock price. Enron
was named "America's Most Innovative Company" by the magazine Fortune for six consecutive
years, from 1996 to 2001. It was on the Fortune's "100 Best Companies to Work for in America"
list during 2000, and had offices that were stunning in their opulence. Enron was hailed by
many, including labor and the workforce, as an overall great company, praised for its large long-
term pensions, benefits for its workers and extremely effective management until the exposure
of its corporate fraud. The first analyst to question the company's success story was Daniel
Scotto, an energy market expert at BNP Paribas, who issued a note in August 2001 entitled
Enron: All stressed up and no place to go, which encouraged investors to sell Enron stocks,
although he only changed his recommendation on the stock from "buy" to "neutral".

As was later discovered, many of Enron's recorded assets and profits were inflated or even
wholly fraudulent and non-existent. One example of fraudulent records was during 1999 when

Page 18 of 26
Enron promised to repay Merrill Lynch & Co.'s investment with interest in order to show profit
on its books. Debts and losses were put into entities formed "offshore" that were not included
in the company's financial statements, and other sophisticated and arcane financial
transactions between Enron and related companies were used to eliminate unprofitable
entities from the company's books.

The company's most valuable asset and the largest source of honest income, the 1930s-era
Northern Natural Gas company, was eventually purchased by a group of Omaha investors, who
relocated its headquarters back to Omaha; it is now a unit of Warren Buffett's Berkshire
Hathaway Energy. NNG was established as collateral for a $2.5 billion capital infusion by Dynegy
Corporation when Dynegy was planning to buy Enron. When Dynegy examined Enron's financial
records carefully, they repudiated the deal and dismissed their CEO, Chuck Watson. The new
chairman and CEO, the late Daniel Dienstbier, had been president of NNG and an Enron
executive at one time and was forced out of Enron by Ken Lay. Dienstbier was an acquaintance
of Warren Buffett. NNG continues to be profitable now.

Insider Trading; Peak and decline of stock price:-

During August 2000, Enron's stock price attained its greatest value of $90.56 At this time Enron
executives, who possessed inside information on the hidden losses, began to sell their stock. At
the same time, the general public and Enron's investors were told to buy the stock. Executives
told the investors that the stock would continue to increase until it attained possibly the $130
to $140 range, while secretly unloading their shares.

As executives sold their shares, the price began to decrease. Investors were told to continue
buying stock or hold steady if they already owned Enron because the stock price would
rebound during the near future. Kenneth Lay's strategy for responding to Enron's continuing
problems was his demeanor. As he did many times, Lay would issue a statement or make an
appearance to calm investors and assure them that Enron was doing well. In February 2001 an
article by Bethany McLean appeared in Fortune magazine questioning whether Enron stock was
overvalued.

By August 15, 2001, Enron's stock price had decreased to $42. Many of the investors still
trusted Lay and believed that Enron would rule the market. They continued to buy or retain
their stock as the equity value decreased. As October ended, the stock had decreased to $15.
Many considered this a great opportunity to buy Enron stock because of what Lay had been
telling them in the media.

Page 19 of 26
Lay was accused of selling more than $70 million worth of stock at this time, which he used to
repay cash advances on lines of credit. He sold another $20 million worth of stock in the open
market. Also, Lay's wife, Linda, was accused of selling 500,000 shares of Enron stock totaling
$1.2 million on November 28, 2001. The money earned from this sale did not go to the family
but rather to charitable organizations, which had already received pledges of contributions
from the foundation. Records show that Mrs. Lay made the sale order sometime between
10:00 and 10:20 am. News of Enron's problems, including the millions of dollars in losses they
hid, became public about 10:30 that morning, and the stock price soon decreased to less than
one dollar.

Former Enron executive Paula Rieker was charged with criminal insider trading. Rieker obtained
18,380 Enron shares for $15.51 a share. She sold that stock for $49.77 a share during July 2001,
a week before the public was told what she already knew about the $102 million loss.

In 2002, after the tumultuous fall of Enron's external auditor, and management consultant,
Andersen LLP, former Andersen Director, John M. Cunningham coined the phrase, "We have all
been Enroned."

Accounting practices:-
Enron used a variety of deceptive, bewildering, and fraudulent accounting practices and tactics
to cover its fraud in reporting Enron's financial information. Special Purpose Entities were
created to mask significant liabilities from Enron's financial statements. These entities made
Enron seem more profitable than it actually was, and created a dangerous spiral in which, each
quarter, corporate officers would have to perform more and more financial deception to create
the illusion of billions of dollars in profit while the company was actually losing money. This
practice increased their stock price to new levels, at which point the executives began to work
on insider information and trade millions of dollars' worth of Enron stock. The executives and
insiders at Enron knew about the offshore accounts that were hiding losses for the company;
however, the investors knew nothing of this. Chief Financial Officer Andrew Fastow directed the
team which created the off-books companies, and manipulated the deals to provide himself, his
family, and his friends with hundreds of millions of dollars in guaranteed revenue, at the
expense of the corporation for which he worked and its stockholders.

During 1999, Enron initiated Enron Online, an Internet-based trading operation, which was used
by virtually every energy company in the United States. Enron president and chief operating
officer Jeffrey Skilling began advocating a novel idea: the company didn't really need any
"assets". By promoting the company's aggressive investment strategy, he helped make Enron

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the biggest wholesaler of gas and electricity, trading over $27 billion per quarter. The
corporation's financial claims, however, had to be accepted at face value. Under Skilling, Enron
adopted mark to market accounting, in which anticipated future profits from any deal were
tabulated as if currently real. Thus, Enron could record gains from what over time might turn
out to be losses, as the company's fiscal health became secondary to manipulating its stock
price on Wall Street during the so-called "Tech boom". But when a company's success is
measured by undocumented financial statements, actual balance sheets are inconvenient.
Indeed, Enron's unscrupulous actions were often gambles to keep the deception going and so
increase the stock price. An advancing price meant a continued infusion of investor capital on
which debt-ridden Enron in large part subsisted (much like a financial "pyramid" or "Ponzi
scheme"). Attempting to maintain the illusion, Skilling verbally attacked Wall Street Analyst
Richard Grubman, who questioned Enron's unusual accounting practice during a recorded
conference telephone call. When Grubman complained that Enron was the only company that
could not release a balance sheet along with its earnings statements, Skilling replied "Well,
thank you very much, we appreciate that . . . asshole." Though the comment was met with
dismay and astonishment by press and public, it became an inside joke among many Enron
employees, mocking Grubman for his perceived meddling rather than Skilling's offensiveness.
When asked during his trial, Skilling declared that industrial dominance and abuse was a global
problem: "Oh yes, yes sure, it is."

Causes of Financial Scam of the Enron Corporation:-

Ethical and political analyses:-
Commentators attributed the mismanagement behind Enron’s fall to a variety of ethical and
political-economic causes. Ethical explanations centered 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 Enron’s collapse
resulted from the company’s reliance on political lobbying, rent-seeking, and the gaming of
regulations.

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New Regulations As a Result of the Enron Scandal:-
Enron's collapse and the financial havoc it wreaked on its shareholders and employees led to
new regulations and legislation to promote the accuracy of financial reporting for publicly-held
companies. In July of 2002, then-President George W. Bush signed into law the Sarbanes-Oxley
Act. The Act heightened the consequences for destroying, altering or fabricating financial
records, and for trying to defraud shareholders. (For more on the 2002 Act, read: How the
Sarbanes-Oxley Act Era Affected IPOs.)

The Enron scandal resulted in other new compliance measures. Additionally, the Financial
Accounting Standards Board (FASB) substantially raised its levels of ethical conduct. Moreover,
company's boards of directors became more independent, monitoring the audit companies and
quickly replacing bad managers. These new measures are important mechanisms to spot and
close the loopholes that companies have used, as a way to avoid accountability.

Current condition of the Enron Corporation

1. Enron Gets a New Name
Once Enron's Plan of Reorganization was approved by the U.S. Bankruptcy Court, the new
board of directors changed Enron's name to Enron Creditors Recovery Corp. (ECRC). The
company's new sole mission was "to reorganize and liquidate certain of the operations and
assets of the 'pre-bankruptcy' Enron for the benefit of creditors." The company paid its
creditors more than 21.7 billion from 2004-2011. Its last payout was in May 2011.

2. Employees and shareholders

Night image of several tall skyscrapers taken from a street view, looking up, several lights and
traffic lights can be seen on the street, along with a round walkway above the street.

Enron's headquarters in Downtown Houston was leased from a consortium of banks who had
bought the property for $285 million in the 1990s. It was sold for $55.5 million, just before
Enron moved out in 2004.

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Enron's shareholders lost $74 billion in the four years before the company's bankruptcy ($40 to
$45 billion was attributed to fraud). As Enron had nearly $67 billion that it owed creditors,
employees and shareholders received limited, if any, assistance aside from severance from
Enron. To pay its creditors, Enron held auctions to sell assets including art, photographs, logo
signs, and its pipelines.

In May 2004, more than 20,000 of Enron's former employees won a suit of $85 million for
compensation of $2 billion that was lost from their pensions. From the settlement, the
employees each received about $3,100.The next year, investors received another settlement
from several banks of $4.2 billion. In September 2008, a $7.2-billion settlement from a $40-
billion lawsuit, was reached on behalf of the shareholders. The settlement was distributed
among the main plaintiff, University of California (UC), and 1.5 million individuals and groups.
UC's law firm Coughlin Stoia Geller Rudman and Robbins, received $688 million in fees, the
highest in a U.S. securities fraud case. At the distribution, UC announced in a press release "We
are extremely pleased to be returning these funds to the members of the class. Getting here
has required a long, challenging effort, but the results for Enron investors are unprecedented."

Punishment and Penalty of verdicts of Enron Corporation

1. Enron Executives and Accountants Prosecuted

Once the fraud was discovered, two of the preeminent institutions in U.S. business, Arthur
Andersen LLP, and Enron Corp. found themselves facing federal prosecution. Arthur Andersen
was one of the first casualties of Enron's prolific demise. In June 2002, the firm was found guilty
of obstructing justice for shredding Enron's financial documents to conceal them from the SEC.
The conviction was overturned later, on appeal; however, despite the appeal, like Enron, the
firm was deeply disgraced by the scandal.

Several of Enron's executives were charged with a slew of charges, including conspiracy, insider
trading, and securities fraud. Enron's founder and former CEO Kenneth Lay was convicted of six
counts of fraud and conspiracy and four counts of bank fraud. Prior to sentencing, though, he
died of a heart attack in Colorado.

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Enron's former star CFO Andrew Fastow plead guilty to two counts of wire fraud and securities
fraud for facilitating Enron's corrupt business practices. He ultimately cut a deal for cooperating
with federal authorities and served a four-year sentence, which ended in 2011.

Ultimately, though, former Enron CEO Jeffrey Skilling received the harshest sentence of anyone
involved in the Enron scandal. In 2006, Skilling was convicted of conspiracy, fraud, and insider
trading. Skilling originally received a 24-year sentence, but in 2013 his sentence was reduced by
ten years. As a part of the new deal, Skilling was required to give $42 million to the victims of
the Enron fraud and to cease challenging his conviction. Skilling remains in prison and is
scheduled for release on Feb. 21, 2028.

2. Arthur Andersen LLP v. United States (Audit firm)

Arthur Andersen was charged with and found guilty of obstruction of justice for shredding the
thousands of documents and deleting e-mails and company files that tied the firm to its audit of
Enron. Although only a small number of Arthur Andersen's employees were involved with the
scandal, the firm was effectively put out of business; the SEC is not allowed to accept audits
from convicted felons. The company surrendered its CPA license on August 31, 2002, and
85,000 employees lost their jobs. The conviction was later overturned by the U.S. Supreme
Court due to the jury not being properly instructed on the charge against Andersen. The
Supreme Court ruling theoretically left Andersen free to resume operations. However, the
damage to the Andersen name has been so great that it has not returned as a viable business
even on a limited scale.

Findings and learning:-

Findings:-
The Bottom Line

At the time, Enron's collapse was the biggest corporate bankruptcy to ever hit the financial
world. Since then, WorldCom, Lehman Brothers, and Washington Mutual have surpassed Enron
as the largest corporate bankruptcies. 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. As one researcher states, the

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Sarbanes-Oxley Act is a "mirror image of Enron: the company's perceived corporate governance
failings are matched virtually point for point in the principal provisions of the Act." (Deakin and
Konzelmann, 2003). Increased regulation and oversight have been enacted to help prevent
corporate scandals of Enron's magnitude.

Conclusion:-
Enron Corp. is a company that reached dramatic heights, only to face a dizzying collapse.
The story ends with the bankruptcy of one of America's largest corporations. Enron's
collapse affected the lives of thousands of employees and shook Wall Street to its core. At
Enron's peak, its shares were worth $90.75, but they plummeted to $0.67 in January 2002
following bankruptcy. To this day, many wonder how such a powerful business
disintegrated almost overnight and how it managed to fool the regulators with fake, off-
the-books corporations for so long.

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REFERANCE
1. The Enron Players By Eric Roston Sunday, Jan. 27, 2002 Follow @TIME
2. http://news.bbc.co.uk/2/hi/business/1780075.stm
3. http://www.nytimes.com/2001/11/29/business/enron-s-collapse-the-overview-enron-
collapses-as-suitor-cancels-plans-for-merger.html
4. https://en.wikipedia.org/wiki/Enron_scandal#Enron
5. https://en.wikipedia.org/wiki/Enron
6. http://www.investopedia.com/updates/enron-scandal-summary/

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