Enron Scandal: A

Corporate View
Analyzed and prepared by Group 6:

Introduction
Enron Corporation was an American energy, commodities, and services
company based in Houston, Texas. Enron's predecessor was the
Northern Natural Gas Company, which was formed during 1932, in
Omaha, Nebraska. It was reorganized during 1979 as the main
subsidiary of a holding company, Inter-North which was a diversified
energy and energy related products company. During 1985, it bought
the smaller and less diversified Houston Natural Gas company. The
company initially named itself "HNG/Inter-North Inc. however was later
renamed to Enron.
Employed approximately 20,000 staf
One of the world's major electricity, natural gas, communications,
and pulp and paper companies.
Revenues of nearly $101 billion.
Named Enron "America's Most Innovative Company" for six
consecutive years by Fortune.

Source: www.wikipedia.com

Enrons Line of Business

Enron was originally involved in transmitting and distributing electricity and natural
gas throughout the United States. The company developed, built, and operated
power plants and pipelines while dealing with rules of law and other infrastructures
worldwide. Enron owned a large network of natural gas pipelines, which stretched
ocean to ocean and border to border.
Enron traded in more than 30 diferent products, including the following:
1. Petrochemicals
2. Plastics
3. Power
4. Pulp and paper
5. Steel
6. Weather Risk Management
7. Oil and LNG transportation
8. Broadband
9. Shipping / freight
10.Streaming media
11.Water and wastewater
12.Principal Investments
13.Risk management for Commodities etc.
Source: www.wikipedia.com

What made it a SCANDAL?

In 1990s corporate self regulation in the United States of America had
been widely thought to have reached a high plateau of evolutionary
success due to proliferating good practices and sophisticated
institutional monitoring. However, the bankruptcy of Enron shook the
entire system. Some highlights brought about when this scandal had
been exposed were:
1.
2.
3.
4.

$30 million of self dealings by the chief financial officer

$700 million of net earnings disappeared
$1.2 billion shareholders equity disappeared
Over $4 billion in hidden liabilities

Many of Enron's recorded assets and profits were inflated or even wholly
fraudulent and
Nonexistent. Debts and losses were put into entities formed "ofshore"
that were not
included in the company's financial statements, and other sophisticated
and arcane
Source: Analyzed
inputs
from Research
paperscompanies
printed at The George
Washington
University
financial transactions between
Enron
and
related
were
used

Date (Yr
2001)

Stock Price ($s)

January 01

83.12

February 12

79.80

March 26

Events

Skilling named CEO

LJM transactions restructured; Chewco closed out

April 17

60

May 5

59.78

August 14

43

Skilling resigns

August 15

40.25

Sherron Watkins delivers letter to Lay

October 15

33.17

October 16

33.84

Third quarter loss of $618 million announced

October 17

32.20

Rumors of $1.2 billion equity write of circulate on Wall Street

October 17

32.20

401(k) plans frozen

October 17

32.20

Wall Street Journal reports Fastow rake of $30 million

October 18

29

Wall Street Journal reports the $1.2 billion write of

October 22

First quarter profits of $536 million announced

SEC launches investigation of Enron accounting

October 24

16.41

Fastow terminated

October 25

16.35

Merger discussions with Dynegy commence

October 31

13.90

Form 8-K filed; reveals LJM and Chewco earnings write ofs

November 8

8.41

Source: Figures have been extracted from Research papers printed at The George Washington University
Dynegy merger agreement executed and delivered

Catalysts to the Scam!!!

Fraud on the part of Enrons certified Independent Auditor Arthur Anderson
possibly arising out of conflict of interest from the consulting services engagements
between both the parties.
Enron used Special Purpose Entities to exclude losses and liabilities from the
parent companies balance sheet thus displaying a very desirable and flawlessly
profitable business.
In 2001, followed by then CEO Jefrey Skillings resignation was a disclosure of
losses incurred by Enron 1st time in 4 years. Furthermore, the losses incurred were to
the tune of $586 million which included re-adjustment of earnings since 1997.
Corporate Governance Issues: While the board of directors is to oversee corporate
management with the purpose of protecting interest of the shareholders, in 1999,
Enrons board waived conflict of interest rules to allow CFO Andrew Fastow to create
private partnership to do business with the firm.
Enrons 401(k) pension scheme: Like most large organizations, Enron also
sponsored a pension plan for its employees who can contribute to this with a portion of
their pay on deferred tax basis. Almost 62% of this pension scheme was Enrons stock
which crashed drastically from over $80 in early 2001 to a mere few cents by the end of
the same year. This questioned the laws and policies concerning such pension schemes.
Relationship with Bankers: Questionable relationship between Enron and bankers
Citigroup and J.P Morgan Chase also contribute to the downfall of Enron. Enron was
lucrative Investment banking business for the banks. In exchange of the potential
profits from IB services, the banks had lend money to Enron and promote its derivates
and securities.
Source: Random articles available on Government websites and news articles

Organization for Economic

Co-operation and
Development Corporate
Governance
The 1999 OECD Principles cover five basic subjects:
(i) protection of the rights of shareholders;
(ii) equitable treatment of shareholders, including full
disclosure of material information and the prohibition
of abusive self dealing and insider trading;
(iii) recognition, and protection of the exercise, of the
rights of other stakeholders
(iv) timely and accurate disclosure and transparency
with respect to matters material to company
performance, ownership and governance, which should
include an annual audit conducted by an independent
auditor
(v) A framework of corporate governance ensuring
strategic guidance of the company and efective
monitoring of its management by the Board of
Directors as well as the Boards accountability to the
company and its shareholders.

Enrons ethics code was

based on respect, integrity,
communication, and
excellence
.
These values were described as follows:

Respect. We treat others as we would like to be treated

ourselves. We do not tolerate abusive or disrespectful
treatment. Ruthlessness, callousness and arrogance
dont belong here.
Integrity. We work with customers and prospects
openly, honestly and sincerely. When we say we will do
something, we will do it; when we say we cannot or will
not do something, then we wont do it.
Communication. We have an obligation to
communicate. Here we take the time to talk with one
another . . . and to listen. We believe that information
is meant to move and that information moves people.
Excellence. We are satisfied with nothing less than the
very best in everything we do. We will continue to raise
the bar for everyone. The great fun here will be for all
of us to discover just how good we can really be

Corporate culture and

ethics.
These dimensions of a firm overlap with corporate
governance, since good corporate governance will
not be achieved in the absence of an ethical
corporate culture. The dividing line between
corporate governance and corporate ethics is
difficult to specify.

Conclusion
The Fate of Enron shook the entire US economy and its global
perception of a well monitored and ethical economy.
The scandal made the authorities realize the importance of ethics and
importance of INTERNAL CONTROL in business enterprises. It also
helped understand the real meaning of Shareholders Wealth
Maximization and the boundaries within which this key objective is to
be achieved. Enrons opaque financial statements and records helped
conceal the true and sordid fate of its investors money.
Subsequently in 2002, US economys face-of with reality resultant
corporate accounting scandals like Enron, Tyco, WorldCom etc, the
Corporate and Auditing Accountability, Responsibility, and Transparency
Act was introduced/presented.

Corporate and Auditing Accountability,

Responsibility, and Transparency Act of
2002 or Sarbanes-Oxley Act
Introduced to the House on 14th February, 2002
Passed the house on April 24, 2002
Passed the Senate as the "Public Company Accounting
Reform and Investor Protection Act of 2002" on July 15,
2002
Reported by the joint conference committee on July 24,
2002; agreed to by the House on July 25, 2002 and by the
Senate on July 25, 2002
Signed into law by President George W. Bush on July 30,
Source: www.wikipedia.com
2002

Sarbanes-Oxley Act
The Sarbanes Oxley Act or more popularly know as the SOX act was
passed in 2002. It is also known as the 'Public Company Accounting
Reform and Investor Protection Act and 'Corporate and Auditing
Accountability and Responsibility Act
This law set new or enhanced standards for all U.S. public company
boards, management and public accounting firms.
It is named after sponsors U.S. Senator Paul Sarbanes (D-MD) and U.S.
Representative Michael G. Oxley.
The main intent of this law is for the top management must now
individually certify the accuracy of financial information. In addition,
penalties for fraudulent financial activity are much more severe. Also,
SOX increased the independence of the outside auditors who review the
accuracy of corporate financial statements, and increased the oversight
role of boards of directors

Source: www.wikipedia.com

SOX Act: Contd

The act contains 11 titles, or sections, ranging from additional corporate
board responsibilities to criminal penalties, and requires the Securities
and Exchange Commission (SEC) to implement rulings on requirements
to comply with the law.
1. Public Company Accounting Oversight Board (PCAOB)
2. Auditor Independence
3. Corporate Responsibility
4. Enhanced Financial Disclosures
5. Analyst Conflict of Interest
6. Commission resources and Authority
7. Studies and Reports
8. Corporate and Criminal Fraud Accountability
9. White Collar crime penalty enhancement
10.Corporate Tax Return
11.Corporate Fraud Accountability

Source: www.wikipedia.com

Important Sections and

Provisions of the Sox Act
Section 302: Disclosure controls
Under SarbanesOxley, two separate sections came into efectone
civil and the other criminal.
- Civil: 15 U.S.C. 7241 (Section 302)
- Criminal: 18 U.S.C. 1350 (Section 906)
Section 302 mandates:
1. Set of internal procedures designed to ensure accurate financial
disclosure.
2. The signing officers must verify They are responsible for establishing and maintaining internal
controls
They have designed such internal controls to ensure that material
information relating to the company and its consolidated
subsidiaries is made known to such officers by others within those
entities, particularly during the period in which the periodic reports
are being prepared
The officers must "have evaluated the efectiveness of the
company's internal controls as of a date within
90 days
prior to the
Source:
www.wikipedia.com
report" and "have presented in the report their conclusions about

Provisions of the Sox Act

contd..
SarbanesOxley Section 401: Disclosures in periodic reports (Offbalance sheet items)
This act required the disclosure of all material of-balance sheet items. It also required an SEC study
and report to better understand the extent of usage of such instruments and whether accounting
principles adequately addressed these instruments.

SarbanesOxley Section 404: Assessment of internal control

This act requires management is required to produce an "internal control report" as part of each
annual Exchange Act report. The report must affirm "the responsibility of management for establishing
and maintaining an adequate internal control structure and procedures for financial reporting

SarbanesOxley Section 906: Criminal Penalties for CEO/CFO financial

statement certification
Section 906 states: Failure of corporate officers to certify financial reports:
- Each periodic report containing financial statements SOX is to be accompanied by a written
statement by the chief executive officer and chief financial officer (or equivalent thereof) of the issuer
- Information contained in the periodic report fairly presents, in all material respects, the financial
condition and results of operations of the issuer
- If the periodic report accompanying the statement does not comport with all the requirements set
forth in this section shall be fined not more than $1,000,000 or imprisoned not more than 10 years, or
both or willfully certifies any statement that does not comport with all the requirements set forth in
this section shall be fined not more than $5,000,000, or imprisoned not more than 20 years, or both.

Source: www.wikipedia.com

Equivalent Indian Law and

provisions
CARO(Companies Auditor report)order 2003
In exercise of the powers conferred by sub-section (4A) of section 227 of the Companies
Act, 1956 (1 of 1956)
The law states that:
In the case of listed companies and/or other companies having a paid-up capital and reserves
exceeding Rs. 50 lakhs as at the commencement of the financial year concerned, or having an
average annual turnover exceeding five crores rupees for a period of three consecutive
financial years immediately preceding the financial year concerned, whether the company has
an internal audit system commensurate with its size and nature of its business?
The purpose of internal audit is to ensure three things:
1. Ensuring compliance with the existing internal controls in place;
2. Appraising the adequacy of existing internal controls;
3. Ensuring the promptness in recording the business and other transactions of the entity.

The Internal Audit team is not a sub function of Finance or accounts. It can be a team
consisting
of engineers, consultants etc.

Source: ICAI Website

Thank You!!!