1. By Aleksandra Whistle, Rachel Davis and Jie li
The Enron Scandal
By Aleksandra Whistle, Rachel Davis and Jie li

2. Background Information
Enron was an energy giant that just exploded in the 1990s. It was considered to be the “It” stock on Wall Street and was frequently labeled one of America’s most innovative companies. Enron was considered to be a global leader in electricity, natural gas, communications and pulp and paper industries. Moreover, it later became known for its unique trading businesses and creating brand new markets for commodities such as broadcast time for advertisers, weather futures and Internet bandwidth.
On Dec Enron declared Chapter 11 bankruptcy making it one of the largest bankruptcy cases and auditing failures in US history. In 2000, Enron was reporting over $100 billion in annual revenues but it was later revealed that its reported financial condition was substantially sustained by systematic accounting fraud. Stock prices dropped from $90 per share in the mid 2000s to less than $1 per share at the end of This drop in stock price caused shareholders to lose nearly $11 billion. When Enron revised their financial statements for the previous 5 years they reported $586 million in losses.
The Enron scandal was the outcome of corporate irresponsibility and involves both illegal and highly unethical behaviour by the company’s senior management executives who have since faced criminal charges. A huge reason why Enron was able to get away with the fraud for as long as they did was because they invested a huge amount of time and money to creating a public image that made everyone accept them at face value, and to never question their financials. And for a long time, it worked. People kept pumping money into the company by buying stock and it took til 2001 for people to start question how Enron made their money.
Throughout this presentation we will explain in greater detail how Enron orchestrated this accounting fraud, as well as some of the legal and social implications for this scandal. One thing to keep in mind is that this case is massive and in the interests of time we’ve chosen to talk about just 2 overarching concepts: match to market accounting and the implementation of SPEs.

3. Kenneth Lay Chairman and CEO of Enron
First, we’re going to briefly overview some of the key players, beginning with Kenneth Lay who was the

4. Jeffrey Skilling
CEO of Enron

5. Andrew Fastow
Chief Financial Officer

6. Arthur Andersen One of the top 5 largest accounting firms in the U.S.
Found guilty of criminal charges; lost license
Destroyed Enron documents
- used to be considered one of the top 5 auditing companies in the United States until it had to surrender its license when it was found guilty of criminal charges in regards to their business relations with Enron
- There was a fundamental conflict of interest btwn Enron and Arthur Andersen who was an auditor and also a consultant to Enron.
- However, the most damaging piece of information that came out about them was that the firm admitted to employees destroying documents and correspondence related to Enron.

7. Sharron Watkins Vice President for Corporate Development at Enron
Whistle-Blower
Wrote an autonomous letter to Lay informing him of financial discrepancies

8. “Mark to Market” Accounting
allowed them to record estimated future net cash flow from deals at the same time the deal was signed.
Enron never changed their assumptions even through there was evidence that those assumptions were no longer valid.
One of the first things that led to Enron’s collapse was its abuse of mark to market accounting. Mark to Market accounting allows companies to record estimated future net cash flows from deals at the time the deal was signed. In other words, Enron was able to record potential future profits on the very day a deal was signed regardless of how much cash actually came in from the deal. This was problematic because there was a lot of discretion, very little oversight and it was vulnerable to manipulation.
Enron was extremely profit driven and a significant reason for their downfall was the greed and pride of its top managing executives who wanted to cash in on short term gains and didn’t want to admit that they were wrong or that the company wasn’t growing. A huge part of mark to market accounting is estimating future profits which includes making assumptions about future market factors. Because Enron was so motivated by profit, there was an incentive to be very aggressive with these estimates to maximize potential future profits.
And because of the minimal disclosure standards, it was extremely difficult for investors to assess whether or not assumptions about the future market might be too aggressive or unrealistic as well as what market changes might invalidate a company’s assumptions-and force earnings revisions.

9. Enron in India Constructed a power plant in India
Lost $1 billion on the investment
Executives earned multi-million bonuses
Enron built a huge power operation in India and failed to see the very basic concept that most people in India couldn’t afford the power that Enron was producing. The company lost $1 billion on the investment but top executives still managed to earn multi-million dollar bonuses because of their abuse of mark to market accounting.
The concept of mark to market accounting is that you estimate future earnings based on assumptions about the market and future trends. As time goes on a company has to adjust those earnings based on how the market changes and this means that your profits can go up or they can go down. Enron failed to properly mark to market because there was strong evidence that the investment wasn’t going to work out and that they were not going to earn their expected profits. What they should have done was to write the investment down and record it as an expense to take the loss. However, Enron did not do this and they continued to emphasize their expected profits without adjusting their income statements to account for any losses.
Another example of Enron’s failure to record losses occurred in July 2000,when Enron and Blockbuster Video signed a 20-year agreement to introduce on-demand entertainment to various U.S. cities by year-end. Enron recognized estimated profits of more than $110 million from the deal, even though Blockbuster withdrew from the contract later. Enron continued to recognize future profits, even though the deal resulted in a loss.
This leads us to the second aspect of their accounting fraud, the implementation of Special Purpose Entities (SPEs)

10. Special Purpose Entities (SPEs)
Removes liabilities off of the balance sheet and hides them in SPEs
SPEs were created by Fastow to hide the company’s debt and losses
To maintain a high credit rating and raise capital, Enron relocated many of its assets off the balance sheet into complex off-the book partnerships or Special Purpose Entities (SPEs).
Andrew Fastow was the Chief Financial Officer at Enron and his job was to keep the stock prices up by hiding the fact that the company was $30 billion in debt. He did this by creating hundreds of companies (also known as SPEs) that were specifically designed to hide Enron’s losses and debt. To outside investors it looked like Enron was making money when in reality Enron was just stashing its debt in Fastow’s companies where investors couldn’t see it.

11. Implications

12. Skilling was indicted on 45 counts in 2006 and is scheduled for release in 2019
Lay was found guilty of 10 counts in 2006, but died of a heart attack before he could serve his sentence
Fastow was indicted on multiple counts and sentenced to six years; he was released in 2011
Baxter committed suicide in 2001
Arthur Anderson was originally convicted of obstructing justice, but the case was overturned

13. Collateral Damage
20,000 employees lost their jobs and medical insurance
Employees lost $20 billion in retirement funds
Retirees lost $2 billion in pension funds
But the top executives were paid bonuses of $55 million and cashed in $116 million in stock…

14. Sarbanes-Oxley Act
Established the Public Company Accounting Oversight Board to develop standards for the preparation of audit reports
Requires executives to sign off on financial reports and individually certify the accuracy of financial information
Requires the company to disclose knowable conflicts of interest
Enhances penalties for white collar crime and protects whistle-blowers

15. Sociocultural Implications
Society was disillusioned with corporate culture
Support for deregulation before the scandal; after, people were not so sure anymore
Millions of dollars were lost in Enron stock investments by individual and institutional investors

16. Conclusion
Just to briefly conclude, everything that Enron did was about maintaining their stock price as high as possible and in turn maximizing their own personal short term gains. And they did this by confusing and misleading investors through different techniques which continually overstated their earnings and their financial position.