Enron Corporation

By:
Ayushi Tiwari
M.V.Dayanand
Kranti Kumar
Nivedita R Tata
Prateesh P
Priti Thakur
Souvik Dey
Introduction
An American energy company

Houston Natural Gas merges with
InterNorth to form Enron

Established in 1985, by Kenneth Lay


The Rise
Begins trading natural gas commodities in
1989
Became the largest seller of Natural gas in
North America
Rated most innovative large company.
Created EnronOnline in 1999
Shares hit 52-week high of $84.87 on
Dec. 28 2000.

The Downfall
Investors' confidence declines
Restructuring losses and SEC
investigation
Liquidity concerns
Credit rating downgrade
Proposed buyout by Dynegy
THE MAIN REASONS FOR
DOWNFALL
DEREGULATION
government decision to let gas prices
float with the currents of the market
MARK-TO-MARKET
accounting practice that allowed Enron
to book potential future profits on the very
day a deal was signed

Continued...
SPECIAL PURPOSE ENTITIES

Legal entity (usually a limited company of
some type or, sometimes, a limited
partnership)created to full fill narrow,
specific or temporary objectives. SPE's are
typically used by companies to isolate the
firm from financial risk.
A company will transfer assets to the SPE for
management or use the SPE to finance a larg
e
project thereby achieving a narrow set of goal
s without putting the entire firm at risk

SPEs
Normally, once a company owns >50% of
another, it must consolidate it under the 1959
rules. But parent companies own 0% of SPE
equity.
The parent can bankroll up to 97% of the initial
investment in an SPE (debt) without having to
consolidate it into its own accounts.
The controversial exception: outsiders need
invest only 3% of an SPE's capital
Enrons SPEs
JEDI and Chewco

Whitewing

LJM and Raptors

Mark to market accounting
system

Present value of all future profits from a contract when
the contract is signed.

Complete contrast to traditional accounting system in
U.S.A

It was accepted in U.S.A

Illustration

Build an asset like a power plant

Immediately claim the profits in the books

No profit is there at all

If revenue less than projected amount
Illustration

Transfer assets to off shore company

losses go unreported

Attitude that it cannot make losses

Write off any loss without hurting bottom line

Mark-to- Model
Creative abuse of accounting rules.

Formulation of hypothetical model.

Over the counter derivative.

SarbanesOxley Act of
2002
Public Company Accounting Oversight
Board (PCAOB)

Auditor Independence

Corporate Responsibility