ENRON CORPORATION About the Company Enron was a

ENRON CORPORATION

About the Company • Enron was a Houston-based energy company founded by a brilliant entrepreneur Kenneth Lay. • The company was created in 1985 by a merger of two American gas pipeline companies in Nebraska and Texas. • Lay assumed the role of chairperson and CEO, a position he held through most of the next 16 years, until the company's downfall in 2001. • As Enron became the largest seller of natural gas in North America by 1992, its trading of gas contracts earned $122 million, the second largest contributor to the company's net income.

• 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. • In a period of 16 years the company was transformed from a relatively small concern, involved in gas pipelines, oil and gas exploration, to the world's largest energy trading company. • Enron's stock increased from the start of the 1990 s until year-end 1998 by 311% percent. • 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.

Scandal • At the end of 2001, it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud, known as the "Enron scandal". • Enron has since become a popular symbol of willful corporate fraud and corruption.

Enron’s Fall • The Enron scandal was a financial scandal involving Enron Corporation and its accounting firm Arthur Andersen, that was revealed in late 2001. • After a series of revelations involving irregular accounting procedures conducted throughout the 1990 s, Enron was on the verge of bankruptcy by November of 2001. • 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. • Enron filed for bankruptcy on December 2, 2001.

Profit to Enron from all this? • Enron received $10 million in guarantee fee + fee based on loan balance to JEDI. • Enron received a total of $25. 7 million revenues from this source. • In first quarter of 2000, the increase in price of Enron stock held by JEDI resultedin $126 million in profits to Enron. • But everything fell apart when Enron’s share price started to drop in Fall 2000. • In November 2001, Enron admitted to the SEC that Chewco was not truly independent of Enron. • Chewco went bankrupt shortly after this admission by Enron.

Bad Accounting Practices? • Auditing companies often consult for the companies they audit. • Audit company partners often later accept jobs from their client companies. • Companies often retain the same auditing company for long periods of time. • Auditing companies have been allowed to police themselves.

• Appointment of auditor company is in theory by shareholders but in practice by senior management. • Audit Committee members often are not independent of senior management - insiders are the ones with the most accurate understanding. • Audit Committee members have typically been required to own company stock to align their incentives with those of company.

The Whistleblower • In June 2001, Enron Vice President Sherron Watkins was given the task of finding some assets to sell off but it was very difficult for her. • Watkins prepared a Memo regarding the various problems and placed it into the box but this Memo was not taken into consideration. • On August 22, Watkins handed CEO Lay a seven page letter and told him that Enron would implode in a wave of accounting scandals”.

• Against Watkins letter Lay, the CEO, arranged to have a Enron's Law Firm Vinson and Elkins that looked after all questionable deals. • Watkins continued to do her work and sold stock of 30000 dollar in August, 2001 and some in late September. • In February 2002, she revealed the various facts regarding Enron partnerships and finally resigned in November. • But Watkins Revealed all the facts only after Enron filed for bankruptcy.

Corporate Issues In Enron • The Enron deception was practicing the accounting fraud by creating the SPS (Special Purpose Entity) which exchange the debt and failing investment into sales revenue in financial statement. • This Fraud is done by the cooperation of Enron CFO, few of Enron people and Andersen’s chief auditor for Enron.