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Type efunct ! Asset"less #hell $ndustry formerly Energy Founded %maha, &e'raska, ()*+ ,ead-uarters ,ouston, Te.as, /nited #tates 0enneth 1ay, Founder, former Chairman and CE% Jeffrey #killing, former President, CE% and C%% Andre2 Fasto2, former CF% 0ey people 3e'ecca 4ark"Jus'asche, former 5ice Chairman, Chairman and CE% of Enron $nternational #tephen F6 Cooper, $nterim CE% and C3% John J6 3ay, $$$, Chairman 3evenue 7(8( 'illion 9in :888; We'site http:!!2226enron6com! The Enron scandal, revealed in %cto'er :88(, eventually led to the 'ankruptcy of the Enron Corporation, an American energy company 'ased in ,ouston, Te.as, and the dissolution of Arthur Andersen, 2hich 2as one of the five largest audit and accountancy partnerships in the 2orld6 $n addition to 'eing the largest 'ankruptcy reorgani<ation in American history at that time, Enron 2as attri'uted as the 'iggest audit failure6=(> Enron 2as formed in ()*+ 'y 0enneth 1ay after merging ,ouston &atural ?as and $nter&orth6 #everal years later, 2hen Jeffrey #killing 2as hired, he developed a staff of e.ecutives that, through the use of accounting loopholes, special purpose entities, and poor financial reporting, 2ere a'le to hide 'illions in de't from failed deals and pro@ects6 Chief Financial %fficer Andre2 Fasto2 and other e.ecutives not only misled EnronAs

'oard of directors and audit committee on high"risk accounting practices, 'ut also pressured Andersen to ignore the issues6 #hareholders lost nearly 7(( 'illion 2hen EnronAs stock price, 2hich hit a high of /#7)8 per share in mid":888, plummeted to less than 7( 'y the end of &ovem'er :88(6 The /6#6 #ecurities and E.change Commission 9#EC; 'egan an investigation, and rival ,ouston competitor ynegy offered to purchase the company at a fire sale price6 The deal fell through, and on ecem'er :, :88(, Enron filed for 'ankruptcy under Chapter (( of the /nited #tates Bankruptcy Code6 EnronAs 7CD6E 'illion in assets made it the largest corporate 'ankruptcy in /6#6 history until WorldComAs 'ankruptcy the follo2ing year6=:> 4any e.ecutives at Enron 2ere indicted for a variety of charges and 2ere later sentenced to prison6 EnronAs auditor, Arthur Andersen, 2as found guilty in a /nited #tates istrict Court, 'ut 'y the time the ruling 2as overturned at the /6#6 #upreme Court, the firm had lost the ma@ority of its customers and had shut do2n6 Employees and shareholders received limited returns in la2suits, despite losing 'illions in pensions and stock prices6 As a conse-uence of the scandal, ne2 regulations and legislation 2ere enacted to e.pand the accuracy of financial reporting for pu'lic companies6=D> %ne piece of legislation, the #ar'anes"%.ley Act, e.panded repercussions for destroying, altering, or fa'ricating records in federal investigations or for attempting to defraud shareholders6=E> The act also increased the accounta'ility of auditing firms to remain un'iased and independent of their clients6=D> Contents =hide> ( The rise of Enron : Causes of do2nfall :6( 3evenue recognition :6: 4ark"to"market accounting :6D #pecial purpose entities :6D6( JE $ and Che2co :6D6: White2ing :6D6D 1J4 and 3aptors :6E Corporate governance :6E6( E.ecutive compensation :6E6: 3isk management :6E6D Financial audit :6E6E Audit committee :6+ %ther accounting issues D Timeline of do2nfall D6( $nvestorsA confidence declines D6: 3estructuring losses and #EC investigation D6D 1i-uidity concerns D6E Credit rating do2ngrade D6+ Proposed 'uyout 'y ynegy D6C Bankruptcy E Trials E6( Enron E6: Arthur Andersen

E6D &atWest Three + Aftermath +6( Employees and shareholders +6: #ar'anes"%.ley Act C #ee also F &otes * 3eferences ) Further reading (8 E.ternal links =edit> The rise of Enron

0enneth 1ay in a July :88E mugshot $n ()*+, 0enneth 1ay merged the natural gas pipeline companies of ,ouston &atural ?as and $nter&orth to form Enron6=+> $n the early ())8s, he helped to initiate the selling of electricity at market prices and, soon after, the /nited #tates Congress passed legislation deregulating the sale of natural gas6 The resulting markets made it possi'le for traders such as Enron to sell energy at higher prices, there'y significantly increasing their revenue6=C> After producers and local governments decried the resultant price volatility and pushed for increased regulation, strong lo''ying on the part of Enron and others, 2as a'le to keep the free market system in place6=C>=F> As Enron rose to 'ecome the largest seller of natural gas in &orth America 'y ()):, its gas contracts trading earned earnings 'efore interest and ta.es of 7(:: million, the second largest contri'utor to the companyAs net income6 The &ovem'er ())) creation of the Enron%nline trading 2e'site allo2ed the company to 'etter manage its contracts trading 'usiness6=*> $n an attempt to achieve further gro2th, Enron pursued a diversification strategy6 The company o2ned and operated a variety of assets including gas pipelines, electricity plants, pulp and paper plants, 2ater plants, and 'road'and services across the glo'e6 The corporation also gained additional revenue 'y trading contracts for the same array of products and services it 2as involved in6=)> As a result, EnronAs stock rose from the start of the ())8s until year"end ())* 'y D((G percent, a significant increase over the rate of gro2th in the #tandard H Poor +88 inde.6 The stock increased 'y +CG in ())) and a further *FG in :888, compared to a :8G

increase and a (8G decline for the inde. during the same years6 By ecem'er D(, :888, EnronIs stock 2as priced at 7*D6(D and its market capitali<ation e.ceeded 7C8 'illion, F8 times earnings and si. times 'ook value, an indication of the stock marketIs high e.pectations a'out its future prospects6 $n addition, Enron 2as rated the most innovative large company in America in FortuneAs 4ost Admired Companies survey6=(8> =edit> Causes of do2nfall EnronAs nontransparent financial statements did not clearly depict its operations and finances 2ith shareholders and analysts6=((>=(:> $n addition, its comple. 'usiness model and unethical practices re-uired that the company use accounting limitations to misrepresent earnings and modify the 'alance sheet to portray a favora'le depiction of its performance6=(D> According to 4c1ean and Elkid in their 'ook The #martest ?uys in the 3oom, JThe Enron scandal gre2 out of a steady accumulation of ha'its and values and actions that 'egan years 'efore and finally spiraled out of control6J=(E> $n an article 'y James Bodurtha, Jr6, he argues that from ())F until its demise, Jthe primary motivations for EnronAs accounting and financial transactions seem to have 'een to keep reported income and reported cash flo2 up, asset values inflated, and lia'ilities off the 'ooks6J=(+> The com'ination of these issues later led to the 'ankruptcy of the company, and the ma@ority of them 2ere perpetuated 'y the indirect kno2ledge or direct actions of 1ay, Jeffrey #killing, Andre2 Fasto2, and other e.ecutives6 1ay served as the chairman of the company in its last fe2 years, and approved of the actions of #killing and Fasto2 although he did not al2ays in-uire a'out the details6 #killing, constantly focused on meeting Wall #treet e.pectations, pushed for the use of mark"to"market accounting and pressured Enron e.ecutives to find ne2 2ays to hide its de't6 Fasto2 and other e.ecutives J666created off"'alance"sheet vehicles, comple. financing structures, and deals so 'e2ildering that fe2 people can understand them even no26J=(E> =edit> 3evenue recognition 4ain article: 3evenue recognition Enron and other energy suppliers earned profits 'y providing services such as 2holesale trading and risk management in addition to 'uilding and maintaining electric po2er plants, natural gas pipelines, storage, and processing facilities6=(C> When taking on the risk of 'uying and selling products, merchants are allo2ed to report the selling price as revenues and the productsA costs as cost of goods sold6 $n contrast, an JagentJ provides a service to the customer, 'ut does not take on the same risks as merchants for 'uying and selling6 #ervice providers, 2hen classified as agents, are a'le to report trading and 'rokerage fees as revenue, although not for the full value of the transaction6=(F> Although trading firms such as ?oldman #achs and 4errill 1ynch used the conventional Jagent modelJ for reporting revenue 92here only the trading or 'rokerage fee 2ould 'e reported as revenue;, Enron instead elected to report the entire value of each of its trades as revenue6 This Jmerchant modelJ approach 2as considered much more aggressive in the accounting interpretation than the agent model6=(F> EnronAs method of reporting inflated trading revenue 2as later adopted 'y other companies in the energy trading industry in an attempt to stay competitive 2ith the companyAs large increase in revenue6 %ther energy companies such as uke Energy, 3eliant Energy, and ynegy @oined Enron in the top +8 of the Fortune +88 mainly due to their adoption of the same trading revenue accounting approach as Enron6=(*>

Bet2een ())C to :888, EnronAs revenues increased 'y more than F+8G, rising from 7(D6D 'illion in ())C to 7(886* 'illion in :8886 This e.tensive e.pansion of C+G per year 2as unprecedented in any industry, including the energy industry 2hich typically considered gro2th of :"DG per year to 'e respecta'le6 For @ust the first nine months of :88(, Enron reported 7(D*6F 'illion in revenues, 2hich placed the company at the si.th position on the Fortune ?lo'al +886=()> =edit> 4ark"to"market accounting 4ain article: 4ark"to"market accounting $n EnronAs natural gas 'usiness, the accounting had 'een fairly straightfor2ard: in each time period, the company listed actual costs of supplying the gas and actual revenues received from selling it6 ,o2ever, 2hen #killing @oined the company, he demanded that the trading 'usiness adopt mark"to"market accounting, citing that it 2ould reflect J666 true economic value6J=:8> Enron 'ecame the first non"financial company to use the method to account for its comple. long"term contracts6=:(> 4ark"to"market accounting re-uires that once a long"term contract 2as signed, income 2as estimated as the present value of net future cash flo2s6 %ften, the via'ility of these contracts and their related costs 2ere difficult to @udge6=::> ue to the large discrepancies of attempting to match profits and cash, investors 2ere typically given false or misleading reports6 While using the method, income from pro@ects could 'e recorded, 2hich increased financial earnings6 ,o2ever, in future years, the profits could not 'e included, so ne2 and additional income had to 'e included from more pro@ects to develop additional gro2th to appease investors6=:8> As one Enron competitor pointed out, J$f you accelerate your income, then you have to keep doing more and more deals to sho2 the same or rising income6J=:(> espite potential pitfalls, the /6#6 #ecurities and E.change Commission 9#EC; approved the accounting method for Enron in its trading of natural gas futures contracts on January D8, ()):6=:8> ,o2ever, Enron later e.panded its use to other areas in the company to help it meet Wall #treet pro@ections6=:D> For one contract, in July :888, Enron and Block'uster 5ideo signed a :8"year agreement to introduce on"demand entertainment to various /6#6 cities 'y year"end6 After several pilot pro@ects, Enron recogni<ed estimated profits of more than 7((8 million from the deal, even though analysts -uestioned the technical via'ility and market demand of the service6=::> When the net2ork failed to 2ork, Block'uster pulled out of the contract6 Enron continued to recogni<e future profits, even though the deal resulted in a loss6=:E> =edit> #pecial purpose entities 4ain article: #pecial purpose entity Enron used special purpose entitiesKlimited partnerships or companies created to fulfill a temporary or specific purposeKto fund or manage risks associated 2ith specific assets6 The company elected to disclose minimal details on its use of special purpose entities6 =:+> These shell firms 2ere created 'y a sponsor, 'ut funded 'y independent e-uity investors and de't financing6 For financial reporting purposes, a series of rules dictates 2hether a special purpose entity is a separate entity from the sponsor6 $n total, 'y :88(, Enron had used hundreds of special purpose entities to hide its de't6=::> The special purpose entities 2ere used for more than @ust circumventing accounting conventions6 As a result of one violation, EnronAs 'alance sheet understated its lia'ilities and overstated its e-uity, and its earnings 2ere overstated6=:+> Enron disclosed to its shareholders that it had hedged do2nside risk in its o2n illi-uid investments using

special purpose entities6 ,o2ever, the investors 2ere o'livious to the fact that the special purpose entities 2ere actually using the companyAs o2n stock and financial guarantees to finance these hedges6 This setup prevented Enron from 'eing protected from the do2nside risk6=:+> &ota'le e.amples of special purpose entities that Enron employed 2ere JE $, Che2co, White2ing, and 1J46 =edit> JE $ and Che2co 4ain article: Che2co $n ())D, Enron set up a @oint venture in energy investments 2ith CalPE3#, the California state pension fund, called the Joint Energy evelopment $nvestments 9JE $;6=:C> $n ())F, #killing, serving as Chief %perating %fficer 9C%%;, asked CalPE3# to @oin Enron in a separate investment6 CalPE3# 2as interested in the idea, 'ut only if they could 'e removed as a partner in JE $6=:F> ,o2ever, Enron did not 2ant to sho2 any de't from taking over CalPE3#A stake in JE $ on its 'alance sheet6 Chief Financial %fficer 9CF%; Fasto2 developed the special purpose entity Che2co $nvestments 16P6 2hich raised de't guaranteed 'y Enron and 2as used to ac-uire CalPE3As @oint venture stake for 7D*D million6=:+> Because of Fasto2As organi<ation of Che2co, JE $As losses 2ere kept off of EnronAs 'alance sheet6 $n fall :88(, CalPE3# and EnronAs arrangement 2as discovered, 2hich re-uired the discontinuation of EnronAs prior accounting approach for Che2co and JE $6 This dis-ualification revealed that EnronAs reported earnings from ())F to mid":88( 2ould need to 'e reduced 'y 7E8+ million and that the companyAs inde'tedness 2ould rise 'y 7C:* million6=:*> =edit> White2ing The White"2inged ove is native to Te.as, and 2as also the name of a special purpose entity used as financing vehicle 'y Enron6=:)> $n ecem'er ())F, 2ith funding of 7+F) million provided 'y Enron and 7+88 million 'y an outside investor, White2ing Associates 16P6 2as formed6 T2o years later, the entityAs arrangement 2as changed so that it 2ould no longer 'e consolidated 2ith Enron and 'e counted on the companyAs 'alance sheet6 White2ing 2as used to purchase Enron assets, including stakes in po2er plants, pipelines, stocks, and other investments6=D8> Bet2een ())) and :88(, White2ing 'ought assets from Enron 2orth 7: 'illion, using Enron stock as collateral6 Although the transactions 2ere approved 'y the Enron 'oard, the assets transfers 2ere not true sales and should have 'een treated instead as loans6=D(> =edit> 1J4 and 3aptors 4ain article: 1J4 91ea Jeffrey 4ichael; $n ())), Fasto2 formulated t2o limited partnerships: 1J4 Cayman6 16P6 91J4(; and 1J4: Co"$nvestment 16P6 91J4:;, for the purpose of 'uying EnronAs poorly performing stocks and stakes to improve its financial statements6 1J4 ( and : 2ere created solely to serve as the outside e-uity investor needed for the special purpose entities that 2ere 'eing used 'y Enron6=:*> Fasto2 had to go 'efore the 'oard of directors to receive an e.emption from EnronAs code of ethics 9as he held the title of CF%; in order to run the companies6=D:> The t2o partnerships 2ere funded 2ith around 7D)8 million provided 'y Wachovia, J6P6 4organ Chase, Credit #uisse First Boston, Citigroup, and other investors6 4errill 1ynch, 2hich marketed the e-uity, also contri'uted 7:: million to support the entities6=:*>

Enron transferred to J3aptor $"$5J, four 1J4"related special purpose entities named after the velociraptors in Jurassic Park, more than J7(6: 'illion in assets, including millions of shares of Enron common stock and long term rights to purchase millions more shares, plus 7(+8 million of Enron notes paya'leJ as disclosed in the companyAs financial statement footnotes6=DD>=DE>=D+> The special purpose entities had 'een used to pay for all of this using the entitiesA de't instruments6 The footnotes also declared that the instrumentsA face amount totaled 7(6+ 'illion, and the entities notional amount of 7:6( 'illion had 'een used to enter into derivative contracts 2ith Enron6=DE> Enron capitali<ed the 3aptors, and, in a similar matter to 2hen a company issues stock at a pu'lic offering, then 'ooked the notes paya'le issued as assets on its 'alance sheet 2hile increasing the shareholdersA e-uity for the same amount6=DC> This treatment later 'ecame an issue for Enron and its auditor Arthur Andersen as removing it from the 'alance sheet resulted in a 7(6: 'illion decrease in net shareholder e-uity6=DF> Eventually the derivative contracts 2orth 7:6( 'illion lost significant value6 #2aps 2ere esta'lished at the point the stock price hit its high points6 %ver a year the value of the portfolio under the s2aps fell 'y 7(6( 'illion as the stock prices dropped 9the loss in value meant that the special purpose entities technically no2 o2ed Enron 7(6( 'illion under the contracts;6 Enron, 2hich used a Jfair valueJ accounting method, claimed a 7+88 million gain on the s2ap contracts in its :888 annual report6 The gain 2as responsi'le for offsetting its stock portfolio losses and 2as attri'uted to nearly a third of EnronAs earnings for :888 9'efore it 2as properly restated in :88(;6=D*> =edit> Corporate governance 4ain article: Corporate governance ,ealy and Palepu 2rite that a 2ell"functioning capital market Jcreates appropriate linkages of information, incentives, and governance 'et2een managers and investors6 This process is supposed to 'e carried out through a net2ork of intermediaries that include assurance professionals such as e.ternal auditorsL and internal governance agents such as corporate 'oards6J=(8> %n paper, Enron had a model 'oard of directors comprising predominantly outsiders 2ith significant o2nership stakes and a talented audit committee6 $n its :888 revie2 of 'est corporate 'oards, Chief E.ecutive included Enron among its top five 'oards6=D)> Even 2ith its comple. corporate governance and net2ork of intermediaries, Enron 2as still a'le to Jattract large sums of capital to fund a -uestiona'le 'usiness model, conceal its true performance through a series of accounting and financing maneuvers, and hype its stock to unsustaina'le levels6J=E8> =edit> E.ecutive compensation 4ain article: Corporate ?overnanceM3emuneration!Compensation Although EnronAs compensation and performance management system 2as designed to retain and re2ard its most valua'le employees, the setup of the system contri'uted to a dysfunctional corporate culture that 'ecame o'sessed 2ith a focus only on short"term earnings to ma.imi<e 'onuses6 Employees constantly looked to start high"volume deals, often disregarding the -uality of cash flo2 or profits, in order to get a higher rating for their performance revie26 $n addition, accounting results 2ere recorded as soon as possi'le to keep up 2ith the companyAs stock price6 This practice helped ensure deal" makers and e.ecutives received large cash 'onuses and stock options6=E(> The company 2as constantly focusing on its stock price6 4anagement 2as e.tensively compensated using stock options, similar to other /6#6 companies6 This setup of stock

option a2ards caused management to create e.pectations of rapid gro2th in efforts to give the appearance of reported earnings to meet Wall #treetAs e.pectations6 The stock ticker 2as located in lo''ies, elevators, and on company computers6=E:> At 'udget meetings, #killing 2ould develop target earnings 'y asking JWhat earnings do you need to keep our stock price upNJ and that num'er 2ould 'e used, even if it 2as not feasi'le6 =:D> At ecem'er D(, :888, Enron had )C million shares outstanding under stock option plans 9appro.imately (DG of common shares outstanding;6 EnronAs pro.y statement stated that, 2ithin three years, these a2ards 2ere e.pected to 'e e.ercised6=ED> /sing EnronAs January :88( stock price of 7*D6(D and the directorsI 'eneficial o2nership reported in the :88( pro.y, the value of director stock o2nership 2as 7C+) million for 1ay, and 7(FE million for #killing6=D)> #killing 'elieved that if employees 2ere constantly cost"centered, it 2ould hinder original thinking6=EE> As a result, e.travagant spending 2as rampant throughout the company, especially among the e.ecutives6 Employees had large e.pense accounts and many e.ecutives 2ere paid sometimes t2ice as much as competitors6=E+> $n ())*, the top :88 highest"paid employees earned 7()D million from salaries, 'onuses, and stock6 T2o years later, the figure @umped to 7(6E 'illion6=EC> =edit> 3isk management 4ain article: 3isk management Before its fall, Enron 2as lauded for its sophisticated financial risk management tools6 =EF> 3isk management 2as crucial to Enron not only 'ecause of its regulatory environment, 'ut also 'ecause of its 'usiness plan6 Enron esta'lished long"term fi.ed commitments 2hich needed to 'e hedged to prepare for the inevita'le fluctuation of future energy prices6=E*> EnronAs 'ankruptcy do2nfall 2as attri'uted to its reckless use of derivatives and special purpose entities6 By hedging its risks 2ith special purpose entities 2hich it o2ned, Enron retained the risks associated 2ith the transactions6 This setup had Enron implementing hedges 2ith itself6=E)> EnronAs aggressive accounting practices 2ere not hidden from the 'oard of directors, as later learned 'y a #enate su'committee6 The 'oard 2as informed on the rationale for using the White2ing, 1J4, and 3aptor transactions, and after approving them, received status updates on the entitiesA operations6 Although not all of EnronAs 2idespread improper accounting practices 2ere revealed to the 'oard, the practices 2ere dependent on 'oard decisions6=+8> Even though Enron e.tensively relied on derivatives for its 'usiness, the companyAs Finance Committee and 'oard did not have comprehensive 'ackgrounds in derivatives to grasp 2hat they 2ere 'eing told6 The #enate su'committee argued that had there 'een a detailed understanding of ho2 the derivatives 2ere organi<ed, the 'oard 2ould have prevented their use6=+(> =edit> Financial audit 4ain article: Financial audit EnronAs auditor firm, Arthur Andersen, 2as accused of applying reckless standards in their audits 'ecause of a conflict of interest over the significant consulting fees generated 'y Enron6 $n :888, Arthur Andersen earned 7:+ million in audit fees and 7:F million in consulting fees 9this amount accounted for roughly :FG of the audit fees of pu'lic clients for Arthur AndersenAs ,ouston office;6 The auditorsA methods 2ere -uestioned as either 'eing completed solely to receive its annual fees or for their lack of e.pertise in properly

revie2ing EnronAs revenue recognition, special entities, derivatives, and other accounting practices6=+:> Enron hired numerous Certified Pu'lic Accountants 9CPA; as 2ell as accountants 2ho had 2orked on developing accounting rules 2ith the Financial Accounting #tandards Board 9FA#B;6 The accountants looked for ne2 2ays to save the company money, including capitali<ing on loopholes found in ?enerally Accepted Accounting Principles 9?AAP;, the accounting industryAs standards6 %ne Enron accountant revealed JWe tried to aggressively use the literature =?AAP> to our advantage6 All the rules create all these opportunities6 We got to 2here 2e did 'ecause 2e e.ploited that 2eakness6J=+D> AndersenAs auditors 2ere pressured 'y EnronAs management to defer recogni<ing the charges from the special purpose entities as their credit risks 'ecame clear6 #ince the entities 2ould never return a profit, accounting guidelines re-uired that Enron should take a 2rite"off, 2here the value of the entity 2as removed from the 'alance sheet at a loss6 To pressure Andersen into meeting EnronAs earnings e.pectations, Enron 2ould occasionally allo2 accounting firms Ernst H Ooung or Price2aterhouseCoopers to complete accounting tasks to create the illusion of hiring a ne2 firm to replace Andersen6 =+E> Although Andersen 2as e-uipped 2ith internal controls to protect against conflicted incentives of local partners, they failed to prevent conflict of interest6 $n one case, AndersenAs ,ouston office, 2hich performed the Enron audit, 2as a'le to overrule any critical revie2s of EnronAs accounting decisions 'y AndersenAs Chicago partner6 $n addition, 2hen ne2s of #EC investigations of Enron 2ere made pu'lic, Andersen attempted to cover up any negligence in its audit 'y shredding several tons of supporting documents and deleting nearly D8,888 e"mails and computer files6=+:>=++>=+C> 3evelations concerning AndersenAs overall performance led to the 'reak"up of the firm, and to the follo2ing assessment 'y the Po2ers Committee 9appointed 'y EnronAs 'oard to look into the firmAs accounting in %cto'er :88(;: JThe evidence availa'le to us suggests that Andersen did not fulfill its professional responsi'ilities in connection 2ith its audits of EnronAs financial statements, or its o'ligation to 'ring to the attention of EnronAs Board 9or the Audit and Compliance Committee; concerns a'out EnronAs internal contracts over the related"party transactionsJ6=+F> =edit> Audit committee 4ain article: Audit committee Corporate audit committees usually meet for @ust a fe2 times during the year, and their mem'ers typically have only a modest 'ackground in accounting and finance6 EnronAs audit committee had more e.pertise than many6 $t included:=+*> 3o'ert Jaedicke of #tanford /niversity, a 2idely respected accounting professor and former dean of #tanford Business #choolL John 4endelsohn, President of the /niversity of Te.as 46 6 Anderson Cancer Center Paulo Pereira, former president and CE% of the #tate Bank of 3io de Janeiro in Bra<il John Wakeham, former /nited 0ingdom #ecretary for Energy 3onnie Chan, a ,ong 0ong 'usinessman Wendy ?ramm, former Chair of /6#6 Commodity Futures Trading Commission EnronAs audit committee 2as later critici<ed for its 'rief meetings that 2ould cover large amounts of material6 $n one meeting on Fe'ruary (:, :88(, the committee met for an hour and a half6 EnronAs audit committee did not have the technical kno2ledge to properly -uestion the auditors on accounting -uestions related to the companyAs special purpose

entities6 The committee 2as also una'le to -uestion the companyAs management due to pressures placed on the committee6=+)> The Permanent #u'committee on $nvestigations of the Committee on ?overnmental AffairsA report accused the 'oard mem'ers of allo2ing conflicts of interest to impede their duties as monitoring the companyAs accounting practices6 When Enron fell, the audit committeeAs conflicts of interest 2ere regarded 2ith suspicion6=C8> =edit> %ther accounting issues Enron made a ha'it of 'ooking costs of cancelled pro@ects as assets, 2ith the rationale that no official letter had stated that the pro@ect 2as cancelled6 This method 2as kno2n as Jthe sno2'allJ, and although it 2as initially dictated that sno2'alls stay under 7)8 million, it 2as later e.tended to 7:88 million6=C(> $n ())*, 2hen analysts 2ere given a tour of the Enron Energy #ervices office, they 2ere impressed 2ith ho2 the employees 2ere 2orking so vigorously6 $n reality, #killing had moved other employees to the office from other departments 9instructing them to pretend to 2ork hard; to create the appearance that the division 2as 'igger than it 2as6=C:> This ruse 2as used several times to fool analysts a'out the progress of different areas of Enron to help improve the stock price6 =edit> Timeline of do2nfall 4ain article: Timeline of the Enron scandal JAt the 'eginning of :88(, the Enron Corporation, the 2orldAs dominant energy trader, appeared unstoppa'le6 The companyAs decade"long effort to persuade la2makers to deregulate electricity markets had succeeded from California to &e2 Oork6 $ts ties to the Bush administration assured that its vie2s 2ould 'e heard in Washington6 $ts sales, profits and stock 2ere soaring6J A6 Berenson and 36 A6 %ppel, Jr6 The &e2 Oork Times, %ct :*, :88(6=CD> $n Fe'ruary :88(, Chief Accounting %fficer 3ick Causey told 'udget managers: JFrom an accounting standpoint, this 2ill 'e our easiest year ever6 WeAve got :88( in the 'ag6J=CE> %n 4arch +, Bethany 4c1eanAs Fortune article $s Enron %verpricedN -uestioned ho2 Enron could maintain its high stock value, 2hich 2as trading at ++ times its earnings6=C+> #he pointed out ho2 analysts and investors did not kno2 e.actly ho2 Enron 2as earning its income6 4c1ean 2as first dra2n to the companyAs situation after an analyst suggested she vie2 the companyAs (8"0 report, 2here she found Jstrange transactionsJ, Jerratic cash flo2J, and Jhuge de't6J=CC> #he called #killing to discuss her findings prior to pu'lishing the article, 'ut he 'rushed her off, calling her JunethicalJ for not properly researching the company6=CF> Fasto2 cited to Fortune reporters that Enron could not reveal earnings details as the company had over (,:88 trading 'ooks for assorted commodities and did J666 not 2ant anyone to kno2 2hatAs on those 'ooks6 We donAt 2ant to tell anyone 2here 2eAre making money6J=C+> $n a conference call on April (F, :88(, no2"Chief E.ecutive %fficer 9CE%; #killing ver'ally attacked Wall #treet analyst 3ichard ?ru'man,=C*> 2ho -uestioned EnronAs unusual accounting practice during a recorded conference call6 When ?ru'man complained that Enron 2as the only company that could not release a 'alance sheet along 2ith its earnings statements, #killing replied JWell, thank you very much, 2e appreciate that 666 asshole6J=C)> This 'ecame an inside @oke among many Enron employees, mocking ?ru'man for his perceived meddling rather than #killingAs lack of tact, 2ith slogans such as JAsk Why, AssholeJ6=F8> ,o2ever, #killingAs comment 2as met 2ith dismay and

astonishment 'y press and pu'lic, as he had previously 'rushed off criticism of Enron coolly or humorously, and many 'elieve that this 'egan a do2n2ard spiral that 2ould unravel the companyAs deceptive practices6 By the late ())8s EnronAs stock 2as trading for 7*8P)8 per share, and fe2 seemed to concern themselves 2ith the opacity of the companyAs financial disclosures6 $n mid"July :88(, Enron reported revenues of 7+86( 'illion, almost triple year"to"date, and 'eating analystsA estimates 'y D cents a share6=F(> espite this, EnronAs profit margin had stayed at a modest average of a'out :6(G, and its share price had dropped 'y over D8G since the same -uarter of :8886=F(> ,o2ever, concerns 2ere mounting6 Enron had recently faced several serious operational challenges, namely logistical difficulties in running a ne2 'road'and communications trading unit, and the losses from constructing the a'hol Po2er pro@ect, a large po2er plant in $ndia6 There 2as also mounting criticism of the company for the role that its su'sidiary Enron Energy #ervices had played in the po2er crisis of California in :888" :88(6 JThere are no accounting issues, no trading issues, no reserve issues, no previously unkno2n pro'lem issues6 $ think $ can honestly say that the company is pro'a'ly in the strongest and 'est shape that it has pro'a'ly ever 'een in6J 0enneth 1ay ans2ering an analystAs -uestion on August (E, :88(6=F:> %n August (E, #killing announced he 2as resigning his position as CE% after only si. months6 #killing had long served as president and C%% 'efore 'eing promoted to CE%6 #killing cited personal reasons for leaving the company6=FD> %'servers noted that in the months leading up to his e.it, #killing had sold at minimum E+8,888 shares of Enron at a value of around 7DD million 9though he still o2ned over a million shares at the date of his departure;6=FD> &evertheless, 1ay, 2ho 2as serving as chairman at Enron, assured stunned market 2atchers that there 2ould 'e Jno change in the performance or outlook of the company going for2ardJ from #killingAs departure6=FD> 1ay announced he himself 2ould re"assume the position of chief e.ecutive officer6 The ne.t day, ho2ever, #killing admitted that a very significant reason for his departure 2as EnronAs faltering price in the stock market6=FE> The columnist Paul 0rugman, 2riting in The &e2 Oork Times, asserted that Enron 2as an illustration of the conse-uences that occur from the deregulation and commodification of things such as energy6=FE> A fe2 days later, in a letter to the editor, 0enneth 1ay defended Enron and the philosophy 'ehind the company:=F+> The 'roader goal of =0rugmanAs> latest attack on Enron appears to 'e to discredit the free" market system, a system that entrusts people to make choices and en@oy the fruits of their la'or, skill, intellect and heart6 ,e 2ould apparently rely on a system of monopolies controlled or sponsored 'y government to make choices for people6 We disagree, finding ourselves less trusting of the integrity and good faith of such institutions and their leaders6 The e.ample 4r6 0rugman cites of Jfinanciali<ationJ run amok 9the electricity market in California; is the product of e.actly his kind of system, 2ith active government intervention at every step6 $ndeed, the only 2inners in the California fiasco 2ere the government"o2ned utilities of 1os Angeles, the Pacific &orth2est and British Colum'ia6 The disaster that s-uandered the 2ealth of California 2as 'orn of regulation 'y the fe2, not 'y markets of the many6

%n August (+, #herron Watkins, vice president for corporate development, sent an anonymous letter to 1ay 2arning him a'out the companyAs accounting practices6 %ne statement in the letter said J$ am incredi'ly nervous that 2e 2ill implode in a 2ave of accounting scandals6J=FC> Watkins contacted a friend 2ho 2orked for Arthur Andersen and he drafted a memo to give to the audit partners over the points she raised6 %n August ::, Watkins individually met 2ith 1ay and gave him a si."page letter further e.plaining EnronAs accounting issues6 1ay -uestioned her as to 2hether she had told anyone outside of the company and then vo2ed to have the companyAs la2 firm, 5inson H Elkins, revie2 the issues, although she argued that using the firm 2ould present a conflict of interest6=FF>=F*> 1ay consulted 2ith other e.ecutives, and although they 2anted to fire Watkins 9as Te.as la2 did not protect company 2histle'lo2ers;, they decided against it to prevent a la2suit6=F)> %n %cto'er (+, 5inson H Elkins announced that Enron had done nothing 2rong in its accounting practices as Andersen had approved each issue6=*8> =edit> $nvestorsA confidence declines #omething is rotten 2ith the state of Enron6 The &e2 Oork Times, #ept ), :88(6=*(> By the end of August :88(, his companyAs stock still falling, 1ay named ?reg Whalley, president and C%% of Enron Wholesale #ervices and 4ark Frevert, to positions in the chairmanAs office6 #ome o'servers suggested that EnronAs investors 2ere in significant need of reassurance, not only 'ecause the companyAs 'usiness 2as difficult to understand 9even Jindeciphera'leJ;=*(> 'ut also 'ecause it 2as difficult to properly descri'e the company in financial statements6=*:> %ne analyst stated JitAs really hard for analysts to determine 2here =Enron> are making money in a given -uarter and 2here they are losing money6J=*:> 1ay accepted that EnronAs 'usiness 2as very comple., 'ut asserted that analysts 2ould Jnever get all the information they 2antJ to satisfy their curiosity6 ,e also e.plained that the comple.ity of the 'usiness 2as due largely to ta. strategies and position"hedging6=*:> 1ayAs efforts seemed to meet 2ith limited successL 'y #eptem'er ), one prominent hedge fund manager noted that J=Enron> stock is trading under a cloud6J=*(> The sudden departure of #killing com'ined 2ith the opacity of EnronAs accounting 'ooks made proper assessment difficult for Wall #treet6 $n addition, the company admitted to repeatedly using Jrelated"party transactions,J 2hich some feared could 'e too"easily used to transfer losses that might other2ise appear on EnronAs o2n 'alance sheet6 A particularly trou'ling aspect of this techni-ue 2as that several of the Jrelated"partyJ entities had 'een or 2ere 'eing controlled 'y CF% Fasto26=*(> After the #eptem'er ((, :88( attacks, media attention shifted a2ay from the company and its trou'lesL a little less than a month later Enron announced its intention to 'egin the process of shearing its lo2er"margin assets in favor of its core 'usinesses of gas and electricity trading6 This move included selling Portland ?eneral Electric to another %regon utility, &orth2est &atural ?as, for a'out 7(6) 'illion in cash and stock, and possi'ly selling its C+G stake in the a'hol pro@ect in $ndia6=*D> =edit> 3estructuring losses and #EC investigation Enron announced on %cto'er (C that restatements to its financial statements for years ())F to :888 2ere necessary to correct accounting violations6 The restatements for the period reduced earnings 'y 7C(D million 9or :DG of reported profits during the period;, increased lia'ilities at the end of :888 'y 7C:* million 9CG of reported lia'ilities and +6+G of reported e-uity;, and reduced e-uity at the end of :888 'y 7(6: 'illion 9(8G of

reported e-uity;6=:+> Additionally, Enron asserted that the 'road'and unit alone 2as 2orth 7D+ 'illion, a claim also mistrusted6 An analyst at #tandard H PoorAs said J$ donAt think anyone kno2s 2hat the 'road'and operation is 2orth6J=*E> EnronAs management team claimed the losses 2ere mostly due to investment losses, along 2ith charges such as a'out 7(*8 million in money spent restructuring the companyAs trou'led 'road'and trading unit6 $n a statement, 1ay revealed, JAfter a thorough revie2 of our 'usinesses, 2e have decided to take these charges to clear a2ay issues that have clouded the performance and earnings potential of our core energy 'usinesses6J=*E> #ome analysts 2ere unnerved6 avid Fleischer at ?oldman #achs, an analyst called previously Aone of the companyAs strongest supportersA asserted that the Enron management J666 lost credi'ility and have to reprove themselves6 They need to convince investors these earnings are real, that the company is for real and that gro2th 2ill 'e reali<ed6J=*E>=*+> Fasto2 disclosed to EnronAs 'oard of directors on %cto'er :: that he earned 7D8 million from compensation arrangements 2hen managing the 1J4 limited partnerships6 That day, the share price of Enron fell to 7:86C+, do2n 7+6E8 in one day, follo2ing the announcement 'y the #EC that it 2as investigating several suspicious deals struck 'y Enron, pronouncing Jsome of the most opa-ue transactions 2ith insiders ever seenJ6=*C> Attempting to e.plain the 'illion"dollar charge and calm investors, EnronAs disclosures spoke of Jshare settled costless collar arrangements,J Jderivative instruments 2hich eliminated the contingent nature of e.isting restricted for2ard contracts,J and strategies that served Jto hedge certain merchant investments and other assets6J #uch pu<<ling phraseology left many analysts feeling ignorant a'out @ust ho2 Enron ran its 'usiness6 =*C> 3egarding the #EC investigation, chairman and CE% 1ay said, JWe 2ill cooperate fully 2ith the #6E6C6 and look for2ard to the opportunity to put any concern a'out these transactions to rest6J=*C> =edit> 1i-uidity concerns Concerns a'out EnronAs li-uidity prompted 1ay to participate in a conference call on %cto'er :D, in 2hich he attempted to reassure investors that the companyAs cash resources 2ere ample and no further Jone"time chargesJ loomed6 #econdly, 1ay adamantly insisted there 2ere no improprieties regarding EnronAs transactions 2ith partnerships run 'y Fasto2 and emphasi<ed his support for the CF%6=*+> avid Fleischer, the analyst at ?oldman, 2as again skeptical, telling 1ay and Fasto2, JThere is an appearance that you are hiding something6J &evertheless, Fleischer persisted in recommending the stock, arguing that he didnAt Jthink accountants and auditors 2ould have allo2ed total shenanigans6J=*+> 1ay also attempted to reassure the conferees 'y stressing that all of EnronAs financial and accounting maneuvers had 'een scrutini<ed 'y their auditor, Arthur Andersen6 After several -uestioners pressed the issue, 1ay stated Enron management 2ould Jlook into providingJ more detailed statements for the end of 'etter understanding the companyAs relationship 2ith the special entities as those run 'y Fasto26=*+> T2o days later, on %cto'er :+, despite his reassurances days earlier, 1ay removed Fasto2 from his position, citing J$n my continued discussions 2ith the financial community, it 'ecame clear to me that restoring investor confidence 2ould re-uire us to replace Andy as C6F6%6J=*F> ,o2ever, 2ith #killing and Fasto2 no2 'oth departed, some analysts feared that shedding light on the companyAs practices 2ould 'e made all

the more difficult6=*F> EnronAs stock 2as no2 trading at 7(C6E(, having lost half its value in a little over a 2eek6=*F> %n %cto'er :F the company 'egan 'uying 'ack all its commercial paper, valued at around 7D6D 'illion, in an effort to calm investor fears a'out EnronAs supply of cash6 Enron financed the re"purchase 'y depleting its lines of credit at several 'anks6 While the companyAs de't rating 2as still considered investment"grade, its 'onds 2ere trading at levels slightly 'elo2, making future sales pro'lematic6=**> As the month came to a close, serious concerns 2ere 'eing raised 'y some o'servers regarding EnronAs possi'le manipulation of accepted accounting rulesL ho2ever, analysis 2as claimed to 'e impossi'le 'ased on the incomplete information provided 'y Enron6 =*)> $ndustry analysts openly feared that Enron 2as the ne2 1ong"Term Capital 4anagement, the hedge fund 2hose collapse in ())* threatened systemic failure in the international financial markets6 EnronAs tremendous presence 2orried some a'out the conse-uences of the companyAs possi'le collapse6=CD> Enron e.ecutives 2ere tight" lipped, accepting -uestions in 2ritten form only6=CD> =edit> Credit rating do2ngrade The central short"term danger to EnronAs survival at the end of %cto'er :88( seemed to 'e its credit rating6 $t 2as reported at the time that 4oodyAs and Fitch, t2o of the three 'iggest credit"rating agencies, had slated Enron for revie2 for possi'le do2ngrade6=CD> #uch a do2ngrade 2ould force Enron to issue millions of shares of stock to cover loans it had guaranteed, a move that 2ould 'ring do2n the value of e.isting stock further6 Additionally, all manner of companies 'egan revie2ing their e.isting contracts 2ith Enron, especially in the long term, in the event that EnronAs rating 2ere lo2ered 'elo2 investment grade, a possi'le hindrance in future transactions6=CD> Analysts and o'servers continued their chorus of complaints regarding EnronAs difficulty or impossi'ility of properly assessing a company 2hose financial statements 2ere so mysterious6 #ome feared that no one at Enron apart from #killing and Fasto2 could completely e.plain years of mysterious transactions6 JOouAre getting 2ay over my head,J said 1ay in late August :88( in response to detailed -uestions a'out EnronAs 'usiness, a reaction that 2orried analysts6=CD> %n %cto'er :), responding to gro2ing concerns that Enron might have insufficient cash on hand, ne2s spread that Enron 2as seeking a further 7(P: 'illion in financing from 'anks6=)8> The ne.t day, as feared, 4oodyAs lo2ered EnronAs credit rating from Baa( to Baa:, t2o levels a'ove @unk status6 #tandard H PoorAs also lo2ered EnronAs rating to BBBQ, the e-uivalent of 4oodyAs rating6 4oodyAs also 2arned that it 2ould do2ngrade EnronAs commercial paper rating, the conse-uence of 2hich 2ould likely prevent the company from finding the further financing it sought to keep solvent6=)(> &ovem'er 'egan 2ith the disclosure that the #EC 2as no2 pursuing a formal investigation, prompted 'y -uestions related to EnronAs dealings 2ith Jrelated partiesJ6 EnronAs 'oard also announced that it 2ould commission a special committee to investigate the transactions, headed 'y William C6 Po2ers, the dean of the /niversity of Te.as la2 school6=):> The ne.t day, an editorial in The &e2 Oork Times called for an JaggressiveJ investigation into the matter6=)D> Enron 2as a'le to secure an additional 7( 'illion in financing from cross"to2n rival ynegy on &ovem'er :, 'ut the ne2s 2as not universally admired in that the de't 2as secured 'y assets from the companyAs valua'le &orthern &atural ?as and Trans2estern Pipeline6=)E>

=edit> Proposed 'uyout 'y ynegy #ources claimed that Enron 2as planning to e.plain its 'usiness practices more fully 2ithin the coming days, as a confidence"'uilding gesture6=)+> EnronAs stock 2as no2 trading at around 7F, as investors 2orried that the company 2ould not 'e a'le to find a 'uyer6 After it received a 2ide spectrum of re@ections, Enron management apparently found a 'uyer 2hen the 'oard of ynegy, another energy trader 'ased in ,ouston, voted late at night on &ovem'er F to ac-uire Enron at a fire"sale price of a'out 7* 'illion in stock6=)C> Chevron Te.aco, 2hich at the time o2ned a'out a -uarter of ynegy, agreed to provide Enron 2ith 7:6+ 'illion in cash, specifically 7( 'illion up front and the rest 2hen the deal 2as completed6 ynegy 2ould also 'e re-uired to assume nearly 7(D 'illion of de't, plus any other de't hitherto occluded 'y the Enron managementAs secretive 'usiness practices, =)C> possi'ly as much as 7(8 'illion in JhiddenJ de't6=)F> ynegy and Enron confirmed their deal on &ovem'er *, :88(6 Commentators remarked on the different corporate cultures 'et2een ynegy and Enron, and on the Jstraight"talkingJ personality of the CE% of ynegy, Charles Watson6=F> #ome 2ondered if EnronAs trou'les had not simply 'een the result of innocent accounting errors6=)*> By &ovem'er, Enron 2as asserting that the 'illion"plus Jone"time chargesJ disclosed in %cto'er should in reality have 'een 7:88 million, 2ith the rest of the amount simply corrections of dormant accounting mistakes6=))> 4any feared other JmistakesJ and restatements might yet 'e revealed6=(88> Another ma@or correction of EnronAs earnings 2as announced on &ovem'er ), 2ith a reduction of 7+)( million over the stated revenue of years ())FP:8886 The charges 2ere said to come largely from t2o special purpose partnerships 9JE $ and Che2co;6 The corrections resulted in the virtual elimination of profit for fiscal year ())F, 2ith significant reductions for the other years6 espite this disclosure, ynegy declared it still intended to purchase Enron6=))> Both companies 2ere said to 'e an.ious to receive an official assessment of the proposed sale from 4oodyAs and #HP presuma'ly to understand the effect the completion of any 'uyout transaction 2ould have on ynegy and EnronAs credit rating6 $n addition, concerns 2ere raised regarding antitrust regulatory hurdles leading to possi'le divestiture, along 2ith 2hat to some o'servers 2ere the radically different corporate cultures of Enron and ynegy6=)F> Both companies pushed aggressively for the deal, and some o'servers 2ere hopefulL Watson 2as praised for his vision in attempting to create the 'iggest presence on the energy market6=(88> At the time, Watson said JWe feel =Enron> is a very solid company 2ith plenty of capacity to 2ithstand 2hatever happens the ne.t fe2 months6J=(88> %ne analyst called the deal Ja 2hopper =666> a very good deal financially, certainly should 'e a good deal strategically, and provides some immediate 'alance"sheet 'ackstop for Enron6J=(8(> Credit issues 2ere 'ecoming more critical, ho2ever6 Around the time the 'uyout 2as made pu'lic, 4oodyAs and #HP 'oth lo2ered EnronAs rating to @ust one notch a'ove @unk status6 Were the companyAs rating to fall 'elo2 investment"grade, its a'ility to trade 2ould 'e severely limited if there 2as a reduction or elimination of its credit lines 2ith competitors6=(88> $n a conference call, #HP affirmed that, 2ere Enron not to 'e taken over, #HP 2ould cut its rating to lo2 BB or high B, ratings noted as 'eing 2ithin @unk status6=(8:> $n addition, many traders had limited their involvement 2ith Enron, or

stopped doing 'usiness altogether, fearing more 'ad ne2s6 Watson again attempted to re" assure, attesting at a presentation to investors that there 2as Jnothing 2rong 2ith EnronAs 'usinessJ6=(8(> ,e also ackno2ledged that remunerative steps 9in the form of more stock options; 2ould have to 'e taken to redress the animosity of many Enron employees for management after it 2as revealed that 1ay and other top officials had sold hundreds of millions of dollars 2orth of stock in the months leading up to the crisis6=(8(> The situation 2as not helped 'y the disclosure that 1ay, his Jreputation in tattersJ,=(8D> stood to receive a payment of 7C8 million as a change"of"control fee su'se-uent to the ynegy ac-uisition, 2hile many Enron employees had seen their retirement accounts, 2hich 2ere largely 'ased on Enron stock, decimated as the price fell )8G in a year6 An official at a company o2ned 'y Enron stated JWe had some married couples 2ho 'oth 2orked 2ho lost as much as 7*88,888 or 7)88,8886 $t pretty much 2iped out every employeeAs savings plan6J=(8E> Watson assured investors that the true nature of EnronAs 'usiness had 'een made clear to him: JWe have comfort there is not another shoe to drop6 $f there is no shoe, this is a phenomenally good transaction6J=(8:> Watson further asserted that EnronAs energy trading part alone 2as 2orth the price ynegy 2as paying for the 2hole company6=(8+> By mid"&ovem'er, Enron announced it 2as planning to sell a'out 7* 'illion 2orth of underperforming assets, along 2ith a general plan to reduce its scale for the sake of financial sta'ility6=)(> %n &ovem'er () Enron disclosed to the pu'lic further evidence of its critical state of affairs6 4ost pressingly that the company 2as facing de't repayment o'ligations in the range of 7) 'illion 'y the end of :88:6 #uch de'ts 2ere Jvastly in e.cessJ of its availa'le cash6=(8C> Also, the success of measures to preserve its solvency 2ere not guaranteed, specifically as regarded asset sales and de't refinancing6 $n a statement, Enron revealed JAn adverse outcome 2ith respect to any of these matters 2ould likely have a material adverse impact on EnronAs a'ility to continue as a going concern6J=(8C> T2o days later, on &ovem'er :(, Wall #treet e.pressed serious dou'ts that ynegy 2ould proceed 2ith its deal at all, or 2ould seek to radically renegotiate6 Furthermore Enron revealed in a (8"R filing that almost all the money it had recently 'orro2ed for purposes including 'uying its commercial paper, or a'out 7+ 'illion, had 'een e.hausted in @ust +8 days6 Analysts 2ere unnerved at the revelation, especially since ynegy 2as reported to also have 'een una2are of EnronAs rate of cash use6=(8F> $n order to 2alk a2ay from the proposed 'uyout, ynegy 2ould need to legally demonstrate a Jmaterial changeJ in the circumstances of the transactionL as late as &ovem'er ::, sources close to ynegy 2ere skeptical that the latest revelations constituted sufficient grounds6=(8*> The #EC announced it had filed civil fraud complaints against Andersen6=(8)> A fe2 days later, sources claimed Enron and ynegy 2ere renegotiating the terms of their arrangement6=((8> ynegy no2 demanded Enron agree to 'e 'ought for 7E 'illion rather than the previous 7* 'illion6 %'servers 2ere reporting difficulties in ascertaining 2hether or 2hich of EnronAs operations, if any, 2ere profita'le6 3eports descri'ed an en masse shift of 'usiness to EnronAs competitors for the sake of risk e.posure reduction6=((8> =edit> Bankruptcy

EnronAs stock price 9former &O#E ticker sym'ol: E&E; from August :D, :888 97)8; to January ((, :88: 9786(:;6 As a result of the drop in the stock price, shareholders lost nearly 7(( 'illion6=:> %n &ovem'er :*, :88(, EnronAs t2o 2orst"possi'le outcomes came true6 ynegy $nc6 unilaterally disengaged from the proposed ac-uisition of the company and EnronAs credit rating fell to @unk status6 Watson later said JAt the end, you couldnAt give it =Enron> to me6J=(((> The company, having very little cash 2ith 2hich to run its 'usiness, let alone satisfy enormous de'ts, imploded6 $ts stock price fell to 786C( at the end of the dayAs trading6 %ne editorial o'server 2rote that JEnron is no2 shorthand for the perfect financial storm6J=((:> #ystemic conse-uences 2ere felt, as EnronAs creditors and other energy trading companies suffered the loss of several percentage points6 #ome analysts felt EnronAs failure highlighted the risks of the post"#eptem'er (( economy, and encouraged traders to lock in profits 2here they could6=((D> The -uestion no2 'ecame ho2 to determine the total e.posure of the markets and other traders to EnronAs failure6 Early figures put the num'er at 7(*6F 'illion6 %ne adviser stated, JWe donAt really kno2 2ho is out there e.posed to EnronAs credit6 $Am telling my clients to prepare for the 2orst6J=((E> Enron 2as estimated to have a'out 7:D 'illion in lia'ilities from 'oth de't outstanding and guaranteed loans6 Citigroup and JP 4organ Chase in particular appeared to have significant amounts to lose 2ith EnronAs fall6 Additionally, many of EnronAs ma@or assets 2ere pledged to lenders in order to secure loans, thro2ing into dou't 2hat if anything unsecured creditors and eventually stockholders might receive in 'ankruptcy proceedings6=((+> EnronAs European operations filed for 'ankruptcy on &ovem'er D8, :88(, and it sought Chapter (( protection t2o days later on ecem'er :6 $t 2as the largest 'ankruptcy in /6#6 history 9'efore 'eing surpassed 'y WorldComAs 'ankruptcy the follo2ing year;, and resulted in E,888 lost @o's6=:>=((C> The day that Enron filed for 'ankruptcy, the employees 2ere told to pack up their 'elongings and 2ere given D8 minutes to vacate the 'uilding6=((F> &early C:G of (+,888 employeesA savings plans relied on Enron stock that 2as purchased at 7*D in early :88(6 By %cto'er :88(, EnronAs stock later plunged to 'elo2 a dollar6=((*> $n its accounting 2ork for Enron, Andersen had 'een sloppy and 2eak6 But thatAs ho2 Enron had al2ays 2anted it6 $n truth, even as they angrily pointed fingers, the t2o deserved each other6 Bethany 4c1ean and Peter Elkind in The #martest ?uys in the 3oom6=(()>

%n January (F, :88: Enron fired Arthur Andersen as its auditor, citing its accounting advice and the destruction of documents6 Andersen countered that they had already severed ties 2ith the company 2hen Enron entered 'ankruptcy6=(:8> =edit> Trials =edit> Enron 4ain article: The trial of 0enneth 1ay and Jeffrey #killing Fasto2 and his 2ife, 1ea, 'oth pleaded guilty to charges against them6 Fasto2 2as initially charged 2ith )* counts of fraud, money laundering, insider trading, and conspiracy, among other crimes6=(:(> Fasto2 pleaded guilty to t2o charges of conspiracy and 2as sentenced to ten years 2ith no parole in a plea 'argain to testify against 1ay, #killing, and Causey6=(::> 1ea 2as indicted on si. felony counts, 'ut prosecutors later dropped them in favor of a single misdemeanor ta. charge6 1ea 2as sentenced to one year for helping her hus'and hide income from the government6=(:D> 1ay and #killing 2ent on trial for their part in the Enron scandal in January :88C6 The +D" count, C+"page indictment covers a 'road range of financial crimes, including 'ank fraud, making false statements to 'anks and auditors, securities fraud, 2ire fraud, money laundering, conspiracy, and insider trading6 istrict Judge #im 1ake had previously denied motions 'y the defendants to hold separate trials and to move the case out of ,ouston, 2here the defendants argued the negative pu'licity surrounding EnronAs demise 2ould make it impossi'le to get a fair trial6 %n 4ay :+, :88C, the @ury in the 1ay and #killing trial returned its verdicts6 #killing 2as convicted of () of :* counts of securities fraud and 2ire fraud and ac-uitted on the remaining nine, including charges of insider trading6 ,e 2as sentenced to :E years and E months in prison6=(:E> 1ay pleaded not guilty to the eleven criminal charges, and claimed that he 2as misled 'y those around him6 ,e attri'uted the main cause for the companyAs fall to Fasto26=(:+> 1ay 2as convicted of all si. counts of securities and 2ire fraud for 2hich he had 'een tried, and he faced a total sentence of up to E+ years in prison6=(:C> ,o2ever, 'efore sentencing 2as scheduled, 1ay died on July +, :88C6 At the time of his death, the #EC had 'een seeking more than 7)8 million from 1ay in addition to civil fines6 The case surrounding 1ayAs 2ife, 1inda, is a difficult one6 #he sold roughly +88,888 shares of Enron ten minutes to thirty minutes 'efore the information that Enron 2as collapsing 2ent pu'lic on &ovem'er :*, :88(6=(:F> 1inda 2as never charged 2ith any of the events related to Enron6=(:*> Although 4ichael 0opper 2orked at Enron for over seven years, 1ay did not kno2 of 0opper even after the companyAs 'ankruptcy6 0opper 2as a'le to keep his name anonymous in the entire affair, as the spotlight remained on Fasto26=(:)> 0opper 2as the first Enron e.ecutive to plead guilty6=(D8> Chief Accounting %fficer 3ick Causey 2as indicted 2ith si. felony charges for disguising EnronAs financial shape during his tenure6 =(D(> After pleading not guilty, he later s2itched to guilty and 2as sentenced to seven years in prison6=(D:> All told, si.teen people pleaded guilty for crimes committed at the company, and five others, including four former 4errill 1ynch employees, 2ere found guilty6 Eight former Enron e.ecutives testifiedKthe star 2itness 'eing Fasto2Kagainst 1ay and #killing, his former 'osses6=((C> Another 2as 0enneth 3ice, the former chief of Enron Corp6As high" speed $nternet unit, 2ho cooperated and 2hose testimony helped convict #killing and 1ay6 $n June :88F, he received a :F"month sentence6=(DD>

=edit> Arthur Andersen 4ain article: Arthur Andersen 11P v6 /nited #tates Arthur Andersen 2as charged 2ith and found guilty of o'struction of @ustice for shredding the thousands of documents and deleting e"mails and company files that tied the firm to its audit of Enron6=(DE> The conviction 2as later overturned 'y the /6#6 #upreme Court due to the @ury not 'eing properly instructed on the charge against Andersen6=(D+> espite the reversal, Andersen had already lost the ma@ority of its clients and had 'een 'arred from auditing pu'lic companies6 Although only a small num'er of Arthur AndersenAs employees 2ere involved 2ith the scandal, the firm 2as closed and resulted in *+,888 employees losing their @o's6=(DC>=(DF> =edit> &atWest Three 4ain article: &atWest Three ?iles ar'y, avid Bermingham, and ?ary 4ulgre2 2orked for ?reen2ich &atWest6 The three British men had 2orked 2ith Fasto2 on a special purpose entity he had started called #2ap #u'6 When Fasto2 2as 'eing investigated 'y the #EC, the three men met 2ith the British Financial #ervices Authority 9F#A; in &ovem'er :88( to discuss their interactions 2ith Fasto26=(D*> $n June :88:, the /6#6 issued 2arrants for their arrest on seven counts of 2ire fraud, and they 2ere then e.tradited6 %n July (:, a potential Enron 2itness scheduled to 'e e.tradited to the /6#6, &eil Coul'eck, 2as found dead in a park in north"east 1ondon6=(D)> The /6#6 case alleged that Coul'eck and others conspired 2ith Fasto26=(E8> $n a plea 'argain in &ovem'er :88F, the trio plead guilty to one count of 2ire fraud 2hile the other si. counts 2ere dropped6=(E(> ar'y, Bermingham, and 4ulgre2 2ere each sentenced to DF months in prison6=(E:> $n August :8(8, Bermingham and 4ulgre2 retracted their confessions6=(ED> =edit> Aftermath =edit> Employees and shareholders

EnronAs head-uarters in o2nto2n ,ouston 2as leased from a consortium of 'anks 2ho had 'ought the property for 7:*+ million in the ())8s6 $t 2as sold for 7++6+ million, @ust 'efore Enron moved out in :88E6=(EE> EnronAs shareholders lost 7FE 'illion in the four years 'efore the companyAs 'ankruptcy 97E8 to 7E+ 'illion 2as attri'uted to fraud;6=(E+> As Enron had nearly 7CF 'illion that it o2ed creditors, employees and shareholders received limited, if any, assistance aside

from severance from Enron6=(EC> To pay its creditors, Enron held auctions to sell assets including art, photographs, logo signs, and its pipelines6=(EF>=(E*>=(E)> 4ore than :8,888 of EnronAs former employees in 4ay :88E 2on a suit of 7*+ million for compensation of 7: 'illion that 2as lost from their pensions6 From the settlement, the employees each received a'out 7D,(88 each6=(+8> The follo2ing year, investors received another settlement from several 'anks of 7E6: 'illion6=(E+> $n #eptem'er :88*, a 7F6:" 'illion settlement from a 7E8"'illion la2suit, 2as reached on 'ehalf of the shareholders6 The settlement 2as distri'uted among the lead plaintiff, /niversity of California 9/C;, and (6+ million individuals and groups6 /CAs la2 firm Coughlin #toia ?eller 3udman and 3o''ins, received 7C** million in fees, the highest in a /6#6 securities fraud case6=(+(> At the distri'ution, /C announced in a press release JWe are e.tremely pleased to 'e returning these funds to the mem'ers of the class6 ?etting here has re-uired a long, challenging effort, 'ut the results for Enron investors are unprecedented6J=(+:> =edit> #ar'anes"%.ley Act $n the Titanic, the captain 2ent do2n 2ith the ship6 And Enron looks to me like the captain first gave himself and his friends a 'onus, then lo2ered himself and the top folks do2n the life'oat and then hollered up and said, ABy the 2ay, everything is going to 'e @ust fine6A /6#6 #enator Byron organ6=(+D> 4ain article: #ar'anes"%.ley Act Bet2een ecem'er :88( and April :88:, the #enate Committee on Banking, ,ousing, and /r'an Affairs and the ,ouse Committee on Financial #ervices held multiple hearings a'out the collapse of Enron and related accounting and investor protection issues6 These hearings and the corporate scandals that follo2ed Enron led to the passage of the #ar'anes"%.ley Act on July D8, :88:6=(+E> The Act is nearly Ja mirror image of Enron: the companyAs perceived corporate governance failings are matched virtually point for point in the principal provisions of the Act6J=(++> The main provisions of the #ar'anes"%.ley Act included the esta'lishment of the Pu'lic Company Accounting %versight Board to develop standards for the preparation of audit reportsL the restriction of pu'lic accounting firms from providing any non"auditing services 2hen auditingL provisions for the independence of audit committee mem'ers, e.ecutives 'eing re-uired to sign off on financial reports, and relin-uishment of certain e.ecutivesA 'onuses in case of financial restatementsL and e.panded financial disclosure of firmsA relationships 2ith unconsolidated entities6=(+E> %n Fe'ruary (D, :88:, due to the instances of corporate malfeasances and accounting violations, the #EC called for changes to the stock e.changesA regulations6 $n June :88:, the &e2 Oork #tock E.change announced a ne2 governance proposal, 2hich 2as approved 'y the #EC in &ovem'er :88D6 The main provisions of the final &O#E proposal include:=(+E> All firms must have a ma@ority of independent directors6 $ndependent directors must comply 2ith an ela'orate definition of independent directors6 The compensation committee, nominating committee, and audit committee shall consist of independent directors6 All audit committee mem'ers should 'e financially literate6 $n addition, at least one mem'er of the audit committee is re-uired to have accounting or related financial management e.pertise6

$n addition to its regular sessions, the 'oard should hold additional sessions 2ithout management6
1985 - Houston Natural Gas merges with InterNorth to form Enron. 1989 - Enron begins trading natural gas commodities. Se !""" - Enron #E$ %enneth &a' contributes (!9")""" to the residential cam aign of George * +ush.

,ecember !""" - -effre' S.illing ta.es o/er as chief e0ecuti/e officer. Enron Stoc. hits 5!-wee. high of (81.82. -an !""1 - Enron3s %enneth &a' is made a art George * +ush3s transition team. -un !""1 - 4he *hite House admits that olitical ad/iser %arl 5o/e was in/ol/ed in administration energ' olic' meetings. 4his was at the same time as he was holding stoc. in energ' com anies including Enron. 6ugust !""1 - -effre' S.illing resigns as Enron3s #E$ after 7ust si0 months. %enneth &a' once again resumes his #E$ role. $ct !""1 - Enron re orts a (898 million third-:uarter loss and discloses (1.! billion reduction in the /alue of shareholders3 sta.e in the com an'. $ct !""1 - Enron ac.nowledges that the Securities and E0change #ommission has begun an in:uir'. $ct !""1 - Enron3s #E$ %enneth &a' as.s #ommerce Secretar' ,on E/ans) to ersuade ;ood' from downgrading Enron3s credit rating. $ct !""1 - Enron announces that the SE# in:uir' has been u graded to a formal in/estigation. No/ !""1 - Enron re/ises financial statements for the re/ious fi/e 'ears to account for (588 million in losses. No/ !""1 - 6rthur 6ndersen recei/es a federal sub oena for Enron documents.

No/ !""1 - Enron stoc. lunges under (1. ,ec !""1 - Enron files for #ha ter 11 ban.ru tc'. ,ec !""1 - Enron la's off 1)""" em lo'ees. Jan :88: " The /6#6 Justice epartment confirms it has 'egun a criminal investigation of Enron6 Jan :88: " A former Enron employee testifies that she sa2 people shredding documents after the investigation 2as announced6 Jan :88: " 0enneth 1ay resigns as chairman and CE% of Enron6

Jan :88: " The 'ody of former Enron vice chairman John Clifford Ba.ter is found in his car6 ,is suicide note is released in April6 Fe' :88: " The epartment of Justice instructs the White ,ouse to preserve all Enron documents6 Fe' :88: " #killing testifies, saying he kne2 of no pro'lems at Enron 2hen he resigned6 4arch :88: " Former Enron auditor Arthur Andersen is indicted for destroying Enron documents6 June :88: " Former Enron auditor Arthur Andersen convicted of o'struction6 %ct :88: " Arthur Andersen is sentenced to pro'ation and fined 7+88,8886 %ct :88: " Fasto2 is indicted on F* charges including, conspiracy, fraud, and money laundering6 Jul :88D " Enron pays the state of &e2 Jersey 7(8),888 to settle claims that the corporation had made illegal state campaign contri'utions in ()))6 #ept :88D " Former Enron treasurer Ben ?lisan Jr6 pleads guilty to conspiracy6 ,e is sentenced to five years in @ail6

Jan :88E " Andre2 Fasto2 pleads guilty to conspiracy6 ,e receives a reduced (8"year sentence for helping in the continuing Enron investigation6 1ea Fasto2 pleads guilty to filing false ta. forms6 #he receives %ne year in a federal prison6 Jan :88E " Former chief accountant 3ichard Causey pleads innocent to conspiracy and fraud charges6 Fe' :88E " #killing indicted, pleads innocent to D+ counts of Fraud, and Conspiracy6 July :88E " 1ay surrenders to FB$6 ,e is $ndictment under accusations of participating in a conspiracy to manipulate EnronAs -uarterly financial results, and making false pu'lic statements concerning the companyAs financial performance6

$nd vs china

India vs China Economy

4aking an in depth study and analysis of $ndia vs6 China economy seems to 'e a very hard task6 Both $ndia and China rank among the front runners of glo'al economy and are among the 2orldAs most diverse nations6 Both the countries 2ere among the most ancient civili<ations and their economies are influenced 'y a num'er of social, political, economic and other factors6 ,o2ever, if 2e try to properly understand the various economic and market trends and features of the countries, 2e can make a comparison 'et2een $ndian and Chinese economy6 ?oing 'y the 'asic facts, the economy of China is more developed than that of $ndia6 While $ndia is the (:th largest economy in terms of the e.change rates, China occupies the third position6 Compared to the estimated 7(6:8) trillion ? P of $ndia, China has an average ? P of around 7F6* trillion6 $n case of per capital ? P, $ndia lags far 'ehind China 2ith @ust 7(8(C compared to 7C,(88 of the latter6 To make a 'asic comparison of $ndia and China Economy, 2e need to have an idea of the economic facts of the countries6

Facts GDP GDP growth Per capital GDP Inflation Labor Force Unemployment

India around 7(6:8) trillion C6FG 7(8(C F6* G +:D6+ million C6* G

China around 7F6* trillion )6(G 7C,(88 "(6: G *8F6F million E6D G

$f 2e make the analysis of the $ndia vs6 China economy, 2e can see that there are a num'er of factors that has made China a 'etter economy than $ndia6 First things first, $ndia 2as under the colonial rule of the British for around ()8 years6 This drained the countryAs resources to a great e.tent and led to huge economic loss6 %n the other hand, there 2as no such instance of coloni<ation in China6 As such, from the very 'eginning, the country en@oyed a planned economic model 2hich made it stronger6 Agriculture Agriculture is another factor of economic comparison of $ndia and China6 $t forms a ma@or economic sector in 'oth the countries6 ,o2ever, the agricultural sector of China is more developed than that of $ndia6 /nlike $ndia, 2here farmers still use the traditional and old methods of cultivation, the agricultural techni-ues used in China are very much developed6 This leads to 'etter -uality and high yield of crops 2hich can 'e e.ported6 Liberalization of the mar et $n spite of 'eing a #ocialist country, China started to2ards the li'erali<ation of its market economy much 'efore $ndia6 This strengthened the economy to a great e.tent6 %n the other hand, $ndia 2as very slo2 in em'racing glo'ali<ation and open market economies6 While $ndiaAs li'erali<ation policies started in the ())8s, China 2elcomed foreign direct investment and private investment in the mid ()*8s6 This made a significant change in its economy and the ? P increased considera'ly6 Difference in infrastructure and other aspects of economic growth Compared to $ndia, China has a much 2ell developed infrastructure6 #ome of the important factors that have created a stark difference 'et2een the economies of the t2o countries are manpo2er and la'or development, 2ater management, health care facilities and services, communication, civic amenities and so on6 All these aspects are 2ell developed in China 2hich has put a positive impact in its economy to make it one of the 'est in the 2orld6 Although $ndia has 'ecome much developed than 'efore, it is still plagued 'y pro'lems such as poverty, unemployment, lack of civic amenities and so on6

$n fact unlike $ndia, China is still investing in huge amounts to2ards manpo2er development and strengthening of infrastructure6