GROUP 01

Group Members ID No.

Lima Akter Antora 21 AIS 002

Abdur Rahim 21 AIS 003
Sharifa Sadia Akter 21 AIS 016
Prince Khan 21 AIS 039
Md Jashim Uddin 21 AIS 043
Enron Corporation: A Case
Study
 Overview of Enron Corporation

 Enron Corporation was an American one of the world's major energy, commodities, and services
providing company based in Houston, Texas.
 Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff with claimed
revenues of nearly $111 billion during 2000.
 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.
 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
2002.
 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, United Light & Railways Company, Lone Star Gas
Corporation).
 Northern grew rapidly in the 1930s, doubling its system capacity within two years of its incorporation
and bringing the first natural gas supply to the state of Minnesota.
 Public Offerings in 1940s

 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

 During the 1970s, Northern became a principal investor in the development of the Alaskan pipeline.
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.
 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 hired Jeffrey Skilling to serve as one of his top subordinates.
 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.
 During fiscal 2000 alone, EnronOnline processed more than $335 billion of transactions, easily
making Enron the largest e-commerce company in the world.
 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”.
 Central Management of Enron Corporation
Kenneth Lay: Chairman, and Jeffrey Skilling: President, Chief operating officer,
Chief executive officer and CEO (February–August 2001)
Andrew Fastow: Chief financial officer Jeff McMahon: CFO of Enron (October
2001-Bankruptcy)
Triton Dietrich: Chief accounting officer Richard Gallagher: Head of Enron Wholesale
Rebecca Mark-Jusbasche: CEO of Global International Group
Enron International and Azurix Kenneth Ken Rice: CEO of Enron Wholesale
and Enron Broadband Services
Lou Pai: CEO of Enron Energy Services
J. Clifford Baxter: CEO of Enron North America
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.
 Products of Enron Corporation

 Products traded on EnronOnline

 Oil and LNG transportation
 Petrochemicals  Broadband
 Plastics  Principal investments
 Power  Risk management for commodities
 Pulp and paper  Shipping / freight
 Streaming media
 Steel
 Water and wastewater
 Weather Risk Management
Enron’s Financial Performance (1996-2000)
 Overview of Arthur Andersen & Co.
 Arthur Andersen & Co. is an accounting firm providing services in assurance,
taxation, corporate finance, and more.
 It is considered as one of the “Big Five” accounting firms among
PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young, and
KPMG.
 This pioneering accounting services firm was founded in Chicago in 1913 by a
young Northwestern University professor, Arthur Andersen, and a partner
named Clarence DeLany.
 During the 1920s, Andersen opened six new offices across the country, and
annual billings rose to $2 million.
 Overview of Arthur Andersen & Co.

 The firm weathered the Great Depression and continued to expand after the founder's death in
1947.
 Between 1947 and 1973, Andersen's client base rose from 2,300 to 50,000, and the Chicago
office increased from about 250 to more than 1,500 employees.
 At beginning of the twenty-first century, Andersen Consulting changed its name to Accenture
Ltd.; and Arthur Andersen became simply Andersen.
 At that time, the consulting and accounting groups together employed nearly 8,500 Chicago-
area residents.
 In the wake of the Enron scandal and the firm's indictment for obstruction of justice in 2002,
Andersen ceased auditing clients in 2002 and began selling its overseas assets to other firms.
The Enron Collapse

Source: bbc.com.uk
Reported and revised income, debt and shareholder equity 1997 – 2000 following special partnership revelations;
Source: Enron, 2000
 WHY ENRON FELL FROM GRACE

• SPE
SPEs are subsidiaries of a larger corporation. Usually the task of a special purpose entity is to isolate risk.
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.
 WHY ENRON FELL FROM GRACE

• Accounting Issue
I. Revenue recognition
 1996 to 2000, Enron’s revenues increased by more than 750%, rising from $13.3
billion in 1996 to $100.8 billion in 2000.
II. Mark-to-market accounting
 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 was estimated as the present value of net future cash
flows.
III. 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”.
 The Crash of Enron

 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.
 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.
 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.
 Threats of independence.
 Conflict of interest
 Inadequate auditor opinion
 Destruction of documents
 Corporate governance

 it has to fulfill three specific functions: have expertized members, ensure the company does
not breach any law and that information given to external are accurate as well as to evolve a
business plan.
 Further reasons why the board did not discover any inconsistencies in the firm’s statements
will be outlined at this point. Firstly, the board was heavily deceived by management, in
particular by Skilling and Lay. They did not have full access to information and those
information they received were falsified or incomplete. Secondly, members of Enron’s
board were not independent since a lot of the directors found themselves in a conflict of
interest as they also provided capital for special purpose entities or peculiar donations have
been made to chiefly related companies.
 Thirdly, corporate governance mixes in 2001 existed but their outcome did not correspond
to the intention of their creators. By using the example of Enron’s audit committee which
was a subcommittee of the board the problem of the existing mixes becomes obvious:
Members of the committee had also been paid with stock.
 Links with the Government (Bush Administration)

 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.
 As for the US Vice President, Dick Cheney, he is alleged to have met Enron executives
four times in 2001 to discuss energy policy.
 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.
 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.
Who was morally responsible for the collapse of ENRON?

• From Individuals’ Angle

 The chairman of the board, Kenneth Lay, and CEO, Jeffrey Skilling, to allowed the then
CFO, Andrew Fastow, to build private cooperate institution secretly and then transferred
the property illegally.
 The Jeffrey Skilling, ordered conspiratorial employees to carry out an act that both of
them knowing is wrong, these employees are also morally responsible for the act.
 From Corporation’s Angle
 However, the shareholders of Enron didn't know and realize this matter from the
superficial high stock price. Therefore, the whole corporation was not of responsibility
for this scandal.
 if the board and other shareholders paid more attention to those decisions made by the
chief, CEO, CFO and those relevant staffs, ENRON can avoid this result.
 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.

 Thousands 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.
 Enron Scandal impacts on economy and Stock market
 Enron is not fully responsible, but it was a large contributor to the collapse of the stock
market in the early 2000’s.as like-
 In the year following the 9/11 hit to country’s economy the DOW lost close to 4500 points;
down to 7500 from almost 12000, it did gain some back, but considering the great
depression was only a decline of 2000 points or so, this is obviously a considerable impact
on the economy.
 However, stock inflations such as these occurring across the entirety of the economy are
probably responsible for the sudden jump of the DOW over 10,000 points back in 1998.
 At the time, Enron's collapse was the biggest corporate bankruptcy to ever 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.
 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.
 Creation of Sarbanes-Oxley Act

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;
 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;
 Punishment

 Kenneth Lay

 Born April 15, 1942

 Died July 5, 2006

 Conviction(s) fraud, false statement

 Status died of a heart attack before his sentencing

 Punishment

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

 Occupation prisoner/Failed Businessman
 Punishment

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.
 Arthur Andersen & Co

 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.
 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.
 What Happened to Arthur Andersen?

 The indictment alleged that Arthur Andersen continued to shred documents and delete computer files
relating to its audit client, Enron, after it was aware that civil litigation and government investigations
were imminent and even after Enron had received an informal request for information from the
Securities and Exchange Commission
 On June 15, 2002, a jury convicted Arthur Andersen. (Interestingly, reports of post-trial interviews with
jurors indicate that the jurors did not focus on shredded or deleted documents or computer files to
convict the company.
 On October 16, 2002, Arthur Andersen received the maximum possible sentence with a $500,000 fine
and five years of probation.
 From a "Big 5" to Collapse

 By 2002, all of the trust and glory came tumbling down. That June, Andersen was convicted of
obstruction of justice for shredding documents related to its audit of Enron, resulting in what
infamously became known as the Enron scandal.
 Even the Securities and Exchange Commission (SEC) did not emerge unscathed. Many accused the
oversight commission of being "asleep at the wheel.
 More faulty audits on behalf of Arthur Andersen were discovered in the course of the Enron indictment
and investigation. Big-name accounting scandals linked to Arthur Andersen went on to include Waste
Management, Sunbeam, and WorldCom.
 What then is the Solution?

 The financial markets, the analysts, the Securities and Exchange Commission, and the public
accountants have all by now absorbed many of the intricacies of SPE abuse.
 we now know for what to look and efforts be focused accordingly. So how do we prevent another
Enron from happening again? The standard-setters and the gatekeepers, in spite of all the accounting
and disclosure reform, need to appreciate with what they are dealing.
 Accordingly focus on ferreting out SPE abuse should be primarily placed on the abusers themselves,
not the SPEs formed to perpetrate such abuse.
 The forefront of the approach should be a narrow and isolated focus on SPE abusers. Although the
matter has not been completely resolved, the evidence suggests that actual SPE abusers represent a
small pool of companies relative to the total population of public companies.
 The initial stages of the focus would merely involve a close and scrutinizing look at those companies’
annual and periodic reports for evidence of SPE abuse or any other type of financial reporting
irregularities.
 Three lessons from Enron collapse

 First, it's critical not to have too much of your portfolio invested in a single stock.
 Company employees should be especially cautious about buying their employer's stock
 make sure you understand how a company's business works. Most shareholders couldn't
understand Enron's sophisticated trading business, but they didn't really care as long as the
stock was moving higher.
 What is the Andersen Effect?

 The Andersen Effect gets its name from former Chicago-based accounting firm Arthur
Andersen LLP.
 By 2001, Arthur Andersen had grown into one of the Big 5 accounting firms, joining the
likes of PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young, and KPMG.
At its peak, Arthur Andersen employed nearly 28,000 people in the U.S., and 85,000
worldwide.
 The firm was known globally for its ability to deploy experts internationally to advise
multinational businesses across its auditing, tax, and consulting practices.
 Case Questions Solution

Q#1. The Enron debacle created what one public official reported was a “crisis of confidence” on
the part of the public in the accounting profession. List the parties who you believe are the most
responsible for that crisis. Briefly justify each of your choices.

 Executives of Enron - Kenneth Lay, Jeffery Skilling, and Andrew Fastow were all
responsible for the crisis.
 Arthur Andersen - The auditing firm did not present itself with the professionalism and
responsibility that an audit firm should.
 Case Questions Solution

Q#2. List three types of consulting services that audit firms have provided to their audit
clients in recent years. For each item, indicate the specific threats, if any, that the provision
of the given service can pose for an audit form’s independence.

 Internal Auditing
 Designing Accounting Systems
 Professional Consulting
 Case Questions Solution

Q#3. For purposes of the question, assume that the excerpts from the Powers Report provide
accurate descriptions of Andersen’s involvement in Enron’s accounting and financial reporting
decisions. Given this assumption, do you believe that Andersen’s involvement in those decisions
violated any professional auditing standards? If so, list those standards and briefly explain your
rationale.

 Yes, Andersen’s involvement in the accounting and financial reporting decisions violated
professional auditing standards of the independence in mental attitude.
 The significant amount of earnings that Andersen received when performing accounting
services to Enron goes against auditing standards.
 Case Questions Solution

Q#4. Briefly describe the key requirements included in professional auditing standards
regarding the preparation and retention of audit workpapers. Which party “owns” audit
workpapers: the client or the audit firm?
 The auditor must state in the auditor’s report whether the financial statements are
presented in accordance with GAAP.
 The auditor must bring to light an instances in which the GAAP were not consistent
during the current period.
 When informative disclosures are not adequate, the auditor must state so in the
report.
 The auditor must state an opinion in regards to the financial statements. If the auditor
cannot state an opinion, this much be noted in the report.
 Case Questions Solution
Q#5. Identify and list five recommendations that have been made recently to
strengthen the independent audit function. For each of these recommendations,
indicate why you support or do not support the given measure.
I. Revise the rules related to the non-audit services that, if provided to an audit
client, would impair an accounting firm's independence.
II. Require the auditor to report certain matters to the issuer's audit committee,
including "critical" accounting policies used by the issuer.
III. Require the issuer's audit committee to pre-approve all audit and non-audit
services provided to the issuer by the auditor.
IV. Require disclosures to investors of information related to audit and non-audit
services provided by, and fees paid to, the auditor.
V. Establish rules that an accounting firm would not be independent if certain
members of management of that issuer had been members of the accounting
firm's audit engagement team within the one-year period preceding the
commencement of audit procedures.
 Case Questions Solution
Q#6. Do you believe that there has been a significant shift or evolution over the past
several decades in the concept of “professionalism” as it relates to the public accounting
discipline? If so, explain how you believe that concept has changed or evolved over that
time frame and identify the key factors responsible for any apparent changes.
 Yes, I believe that there has been a significant shift over the past several decades, in
which it has occurred towards a standpoint via setting up standards and regulations
which allows accountants and auditors to be more accountable for their work. Key
factors in this evolution are laws, regulations, and the implantation of GAAP and
GAAS.
 Case Questions Solution

Q#7. As pointed out in this case, the SEC does not require public companies to have their
quarterly financial statements audited. What responsibilities, if any, do audit firms have
with regard to the quarterly financial statements of their clients? In your opinion, should
quarterly financial statements be audited? Defend your answer.
 I believe that it is the responsibility of an auditor to examine quarterly statements
during a yearly audit. An auditor should always be skepticism when performing audit
service to any client. If an audit was done quarterly on a company opposed to yearly,
and misstatements and fabrications would appear sooner to an audit firm.