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Prepared and presented by Phoenix
” “ The company’s success was based on artificially inflated profits, dubious accounting practices, and – some say – fraud.
<ul><li>In 1985 Enron was born from the merger of Houston Natural Gas and InterNorth. </li></ul><ul><li>Started trading fu...
“ 2001: Enron trading in hundreds of commodities  Interests in: USA, South America, Europe, Asia and Australia” <ul><li>En...
“ 2001: Enron trading in hundreds of commodities  Interests in: USA, South America, Europe, Asia and Australia” <ul><li>En...
<ul><li>Global energy crises by late 90s. </li></ul><ul><li>In India, lost the Dabhol Power project, in which  Enron had c...
<ul><li>Global energy crises by late 90s. </li></ul><ul><li>In India, lost the Dabhol Power project, in which  Enron had c...
<ul><li>Global energy crises by late 90s. </li></ul><ul><li>In India, lost the Dabhol Power project, in which  Enron had c...
<ul><li>Global energy crises by late 90s. </li></ul><ul><li>In India, lost the Dabhol Power project, in which  Enron had c...
<ul><li>Global energy crises by late 90s. </li></ul><ul><li>In India, lost the Dabhol Power project, in which  Enron had c...
<ul><li>Enron was a trading company, yet was given very high PE of 70 as compared to PE of 20, given to other trading comp...
<ul><li>Enron was a trading company, yet was given very high PE of 70 as compared to PE of 20, given to other trading comp...
<ul><li>Enron was a trading company, yet was given very high PE of 70 as compared to PE of 20, given to other trading comp...
<ul><li>Stock had already fallen to $30 from $90 in Feb, 2001. </li></ul><ul><li>Oct, 2001 – Moody’s downgraded Enron’s de...
<ul><li>8 th  Nov, 2001 – Told investors that they were restating earnings for past 4 and ¾ years. </li></ul><ul><li>By en...
Energy producer fears warm weather. Pays Enron to hedge against the collapse of demand and prices due to warm weather. Ele...
SENATE  HOUSE OF REPS  “ Kenneth Lay himself had strong personal ties to two Republican Presidents” Total donations during...
<ul><li>Enron sets up partnership using stock as funding </li></ul><ul><li>Partnership sets up SPE </li></ul><ul><li>SPE a...
 
Negative Cash Flows: 1 st  three quarters in 1999, 2000 & 2001
<ul><li>Sherron Watkins, an Enron vice-president, wrote an anonymous letter to Kenneth Lay setting out her fears of an imp...
<ul><li>Andersen executives including chief Enron auditor David Duncan, decided to consult lawyers over whether or not the...
<ul><li>Arthur Andersen was one of the world’s five leading accounting firms. </li></ul><ul><li>Legal examination of Sherr...
Reported and revised income, debt and shareholder equity 1997-2000 following special partnership revelations. Enron’s   Ac...
In spite of all help, failed to save  Enron ” “ I take responsibility for what happened at Enron, both good and bad. But I...
 
 
Some 25 further companies have declared Enron exposure totaling an estimated $1bn. Total global investment exposure of at ...
” “ Laid-off and retired 4000 employees from the company lost most of their life savings, which was in company stock.
 
 
 
 
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Enron - The accounting disaster

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Enron - The accounting disaster

  1. 2. Prepared and presented by Phoenix
  2. 3. ” “ The company’s success was based on artificially inflated profits, dubious accounting practices, and – some say – fraud.
  3. 4. <ul><li>In 1985 Enron was born from the merger of Houston Natural Gas and InterNorth. </li></ul><ul><li>Started trading futures in Gas Contracts. </li></ul><ul><li>Soon got the control of over 25% of the all Gas business. </li></ul>“ Mid 1980s: Enron business entirely in the USA, focused on gas pipelines and power”
  4. 5. “ 2001: Enron trading in hundreds of commodities Interests in: USA, South America, Europe, Asia and Australia” <ul><li>Entered into the derivatives business. </li></ul><ul><li>Began trading in commodities like steel, coal, weather risk etc. </li></ul><ul><li>By 2000, even stepped into the dot.com business. </li></ul>
  5. 6. “ 2001: Enron trading in hundreds of commodities Interests in: USA, South America, Europe, Asia and Australia” <ul><li>Entered into the derivatives business. </li></ul><ul><li>Began trading in commodities like steel, coal, weather risk etc. </li></ul><ul><li>By 2000, even stepped into the dot.com business. </li></ul>
  6. 7. <ul><li>Global energy crises by late 90s. </li></ul><ul><li>In India, lost the Dabhol Power project, in which Enron had committed $2.9bn. </li></ul><ul><li>Beginning of Dot.Com bubble crises and fallout of blockbuster internet deal. </li></ul><ul><li>Enron delivered smoothly growing earnings (but not cash flows). </li></ul>
  7. 8. <ul><li>Global energy crises by late 90s. </li></ul><ul><li>In India, lost the Dabhol Power project, in which Enron had committed $2.9bn. </li></ul><ul><li>Beginning of Dot.Com bubble crises and fallout of blockbuster internet deal. </li></ul><ul><li>Enron delivered smoothly growing earnings (but not cash flows). </li></ul>
  8. 9. <ul><li>Global energy crises by late 90s. </li></ul><ul><li>In India, lost the Dabhol Power project, in which Enron had committed $2.9bn. </li></ul><ul><li>Beginning of Dot.Com bubble crises and fallout of blockbuster internet deal. </li></ul><ul><li>Enron delivered smoothly growing earnings (but not cash flows). </li></ul>
  9. 10. <ul><li>Global energy crises by late 90s. </li></ul><ul><li>In India, lost the Dabhol Power project, in which Enron had committed $2.9bn. </li></ul><ul><li>Beginning of Dot.Com bubble crises and fallout of blockbuster internet deal. </li></ul><ul><li>Enron delivered smoothly growing earnings (but not cash flows). </li></ul>
  10. 11. <ul><li>Global energy crises by late 90s. </li></ul><ul><li>In India, lost the Dabhol Power project, in which Enron had committed $2.9bn. </li></ul><ul><li>Beginning of Dot.Com bubble crises and fallout of blockbuster internet deal. </li></ul><ul><li>Enron delivered smoothly growing earnings (but not cash flows). </li></ul>
  11. 12. <ul><li>Enron was a trading company, yet was given very high PE of 70 as compared to PE of 20, given to other trading companies </li></ul><ul><li>During 2000, Enron’s derivatives-related assets increased from $2.2bln to $12bln and derivates-related liabilities increased from $1.8bln to $10.5bln </li></ul><ul><li>Enron’s top management gave it’s managers a blank order to “just do it” </li></ul>
  12. 13. <ul><li>Enron was a trading company, yet was given very high PE of 70 as compared to PE of 20, given to other trading companies </li></ul><ul><li>During 2000, Enron’s derivatives-related assets increased from $2.2bln to $12bln and derivates-related liabilities increased from $1.8bln to $10.5bln </li></ul><ul><li>Enron’s top management gave it’s managers a blank order to “just do it” </li></ul>
  13. 14. <ul><li>Enron was a trading company, yet was given very high PE of 70 as compared to PE of 20, given to other trading companies </li></ul><ul><li>During 2000, Enron’s derivatives-related assets increased from $2.2bln to $12bln and derivates-related liabilities increased from $1.8bln to $10.5bln </li></ul><ul><li>Enron’s top management gave it’s managers a blank order to “just do it” </li></ul>
  14. 15. <ul><li>Stock had already fallen to $30 from $90 in Feb, 2001. </li></ul><ul><li>Oct, 2001 – Moody’s downgraded Enron’s debt. </li></ul><ul><li>May, 2001 – Mr. Baxter, the Vice Chairman resigns. </li></ul><ul><li>14 th Aug, 2001 – Jeff Skilling resigned as CEO. </li></ul>Masterminds: (left to right): founder Ken Lay; Jeff Skilling; Andy Fastow; and Lou Pai
  15. 16. <ul><li>8 th Nov, 2001 – Told investors that they were restating earnings for past 4 and ¾ years. </li></ul><ul><li>By end of Nov, 2001 stock reached $0.3 falling from its peak price $90 in just 8 months. </li></ul><ul><li>2 nd Dec, 2001 – Filed Bankruptcy. </li></ul>
  16. 17. Energy producer fears warm weather. Pays Enron to hedge against the collapse of demand and prices due to warm weather. Electricity company fears cold weather. Pays Enron to hedge against rise in price and demand due to cold weather. Enron, as market maker, profits by taking commission on hedge in both eventualities.
  17. 18. SENATE HOUSE OF REPS “ Kenneth Lay himself had strong personal ties to two Republican Presidents” Total donations during 1989-2001 amounted $1,133,981 ($1.1mn)
  18. 19. <ul><li>Enron sets up partnership using stock as funding </li></ul><ul><li>Partnership sets up SPE </li></ul><ul><li>SPE agrees contract to pay Enron if its investment declines in value </li></ul><ul><li>Payment made as investment declines </li></ul><ul><li>Payment posted as profit, even though it is Enron’s own money </li></ul>ENRON Partnership Special Purpose Entity (SPE) Account In Profit 3 4 2 1 5 ” “ A huge hole had opened in the accounts. -BBC
  19. 21. Negative Cash Flows: 1 st three quarters in 1999, 2000 & 2001
  20. 22. <ul><li>Sherron Watkins, an Enron vice-president, wrote an anonymous letter to Kenneth Lay setting out her fears of an impending scandal. </li></ul><ul><li>Fearing the predictable collapse she ordered Enron's lawyers to conduct an investigation into the partnerships. </li></ul><ul><li>Mr. Lay was also moving to reassure the markets. He was doing all he could to &quot;restore investor confidence&quot; he told staff and shareholders. </li></ul><ul><li>But amid the selling, Mr. Lay himself joined the crowd as he exercised options on 83,000 shares worth almost $2m. </li></ul>Sherron Watkins Kenneth Lay
  21. 23. <ul><li>Andersen executives including chief Enron auditor David Duncan, decided to consult lawyers over whether or not the partnerships were legal. </li></ul><ul><li>Andersen told Enron that it had no </li></ul><ul><li>At some point after this, staff in Andersen’s Houston office began shredding documents relating to Enron. </li></ul>other choice but to change the way it was accounting for its special partnerships.
  22. 24. <ul><li>Arthur Andersen was one of the world’s five leading accounting firms. </li></ul><ul><li>Legal examination of Sherron Watkins's concerns concluded that the partnerships in question, Raptor and Condor, had been approved by Andersen. </li></ul><ul><li>Was paid $52mn in 2000, the majority for non-audit related consulting services. </li></ul>Arthur Andersen’s Houston branch The firm said destroying documents was routine
  23. 25. Reported and revised income, debt and shareholder equity 1997-2000 following special partnership revelations. Enron’s Accounts: The Company announced the restated figures Year Reported Income Revised Income True debt restated by True equity restated by 1997 $105m $77m Up $771m Down $258m 1998 $733m $600m Up $561m Down $391m 1999 $893m $645m Up $685m Down $710m 2000 $979m $880m Up $628m Down $754m
  24. 26. In spite of all help, failed to save Enron ” “ I take responsibility for what happened at Enron, both good and bad. But I cannot take responsibility for criminal conduct that I was unaware of. - Kenneth Lay
  25. 29. Some 25 further companies have declared Enron exposure totaling an estimated $1bn. Total global investment exposure of at least $4bn J P Morgan: $900m Sumitomo Mitsui Corp: $210m Citigroup: $800m Nikko Cordial: $207m Credit Lyonnais: $250m Principal Financial Group: $171m Bank of Tokyo Mitsubishi: $248m Abbey National: $164m Chubb Corp: $220m National Australia Bank: $104m Canadian Imperial Bank: $215m Duke Energy Corp: $100m
  26. 30. ” “ Laid-off and retired 4000 employees from the company lost most of their life savings, which was in company stock.

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