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:FROM PARAGON TO PARISH

Raymond Edward
Trie Yudha Gautama William

ENRON
Enron is a American energy company based in Houston, Texas, US. Enron founded in 1930 as Northern Natural Gas Company, a consortium of Northern American Power and Light Company, Lone Star Gas Company, and United Lights and Railways Corporation. Consortium ownership is gradually and surely dissolved between

1941 and 1947 through public offering.

ENRON
In 1979, Northern Natural Gas organized itself as a holding company, InterNorth, which exchange Northern Natural Gas in New York Stock Exchange. Enron was one of the popular company in electricity, natural gas, pulp, and paper. Enron claimed that they have profit $ 101 billion in 2000.

Enron bankrupt in 2001.

PIPES TO RICHES IN WONDERLAND


Kenneth L. Lay became chairman and COO (Chief Operation Officer) of Houston Natural Gas in June, 1984. Company owned pipelines, and it transported natural gas to customers. He snapped up a small pipeline company in Florida then (July, 1985) merged with InterNorth, Inc., to give him 40.000 miles of pipelines. He change the company name into Enron in 1986.

PIPES TO RICHES IN WONDERLAND


Due to the lobbying efforts of Kenneth L. Lay and others of his mind, most of the regulation came off the production and sale of the energy in the last years of 1980s. By 1989 Enron was trading natural gas on the commodities market. In 1990, Kenneth L. Lay hired Jeffry K. Skilling, a Harvard MBA, away from his consulting job at McKinsey & Co., to head up the new energy-

trading operations.

PIPES TO RICHES IN WONDERLAND


It was Jeffrey K. Skilling who transformed the operation from a simple transportation service to an immense trading center, a gas bank purchasing large amounts of natural gas from the producers and reselling it to customers here and abroad on long-term contracts. By the end, they were selling broadband, water, and weather derivatives-hedges against bad weather that might affect business

operations.

PIPES TO RICHES IN WONDERLAND


Federal regulators permitted Enron to use mark-to-market accounting, a way of evaluating future income that works reasonably well in securities trading.

In Enrons case, it allowed the company to calculate projected income


as present profit, a practice that can be taken to extremes; in 1999, for instance, the company claimed a $65 million profit based on its projections of natural-gas sales from a South American pipeline project. The pipeline had yet to be built.

JEDI I
In 1993 Enron had formed a partnership with the California Public Employees Retirement System (Calpers) to invest in energy trades; each partner put in $250 million.

The partnership, a special purpose entity (SPE) was called the Joint
Energy Development Investment (JEDI), and prospered, so they started another one. But Calpers wanted to cash out its first investment (JEDI I), to the

tune of $383 million at that point, before it started JEDI II.

JEDI I
That posed a problem for Enron because JEDI was not on its balance sheets (since, as an SPE, it was an outside partnership), and simply buying out Calpers would have put it on Enrons books, cutting the companys

reported profits and increasing its debt by over half a billion dollars.
So Enron found, or more accurately founded, Chewco Investments, a partnership of Enron executives and unidentified others. Enron lent Chewco $132 million and then guaranteed a $240 million

loan, toward Chewcos purchase of Calpers share in JEDI I.

JEDI I
That left $11.5 million of Calpers share to complete the purchase. The amount was significant: 3% of Chewcos capital had to come from outsiders in order for Chewco to be an independent company that

doesnt show up in the books, and $11.5 million


In the event, even that amount was largely underwritten by Enron in the form of loan and subsidies, leading to the conclusion that from 1997 on, both Chewco and JEDI I should have showed up on Enrons books as

one enormous debt. But they didnt.

JEDI I
CEO of Andersen later explained that Enron had concealed its subsidies to that last three percent. For the moment, this accounting irregularity raised Enrons 1997 profits by 75%; keeping it going for the next 3 years resulted in $396 million in inflated profits.

RAPTORS
LJM2, again in company with its parent Enron, created a new set of four investment vehicles called the Raptors. It is funded with Enron Stock, and with stock from New Power, a publicly traded company that had been founded and spun off by Enron. New Powers stock providing Enron with a $370 million profit. The purpose of the Raptors was to hedge, or lock in, that profit, and

profit from other start-up ventures.

RAPTORS
Enron was insuring itself, and if anything happened to the price of New Power stock, Enron would have to absorb the loss both as stockholders and as insurer.

TAX FREE
Enron had paid no income taxes in four of the last five years, making good use of about 900 subsidiaries in tax-haven countries to cover their revenues.

It even collected $382 million in tax refunds.


In the year 2000, the company got $278 million in refunds. Enrons skills in locating its partnerships offshore and keeping cash flow small had make the tax division a significant profit center for the

company, saving $1 billion over the five years.

STRATEGY
The impression left by all of the above is that Enron is in constant motion, always innovating, always daring, always out in front of some field, but also doing rather little to earn a living. Shortly, Enrons financial activities well outstripped its pipelines and its natural gas trade in the amount of money generated.

ENRONS CULTURE
The Enrons nature: ambition, greed, and contempt to everyone who wasnt part of the cheering section. Nothing mattered except getting rich, very rich, and the company was

led by people who were completely convinced that rich was what they
deserved to be. Enrons day-to-day managers sent clear signals to ignore the law, the rules, the accounting practices, and all other manifestations of the lesser

breeds without the New Economy.

ENRONS CULTURE
Those who stood in the way of the top people were quickly silenced, transferred, fired. When banks hesitated to invest in the new funds, they were given to

understand that their continued opportunity to do business with Enron


required that they overcome their hesitations. When Arthur Andersen auditors objected to keeping those new funds off the books, they were warned that Enron might take its lucrative

consulting business to another auditing firm.

ENRONS CULTURE
Even at the end, in August 2001, when Chung Wu, a broker at UBS Paine Webber from Houston, e-mailed his clients to consider selling their Enron shares, given the difficulties that the company was experiencing, his employer rapidly reversed his recommendation and fired him. Theres no indication that any organization would have put up more resistance to Enron, ranked in March 2000 as the 6th largest energy

company in the world (7th in the Fortune 500).

THE NEW ACCOUNTING


The mark-to-market accounting allowed Enron to record as profits assets that were very difficult to evaluate, contracts for future income, income projected from deals made but not implemented, income fantasized. The permission to use that accounting had come from the general government itself.

THE NEW ACCOUNTING


But the major problem facing the others responsible for monitoring American business, the banks, the investment analysts, the accountants-Enrons outside auditors, Arthur Andersen Inc.- was that they had a very lucrative consulting relationship with Enron, and they were given to understand that they would lose it if they asserted and maintained accounting standards for Enrons deals.

ENDGAME BEGINS
In the beginning of year 2001, Enrons stock had been good, high $90, and reached $83 in late Fall 2000. Jeffrey Skilling may not have known how bad things were when he accepted the office of CEO of Enron in February 2001; at the time the price of the stock was $79; and he cheerfully proclaimed that it should be $126.

ENDGAME BEGINS
Most of the SPEs that he had helped put together depended for their creditworthiness on the value of the Enron stock that backed them up. If the Raptors and other SPEs started losing money, Enron had

promised to repay the investors with Enron stock.


By March, 2001, a second rescue operation had to be mounted for the failing Raptors; 12 million Enron shares, worth at that moment $700 million was needed to bail them out - Arthur Andersen had been inclined

not to approve it.

ENDGAME BEGINS
Enron would have to report $500 million loss for the first quarter of 2001. That news would have wiped out all the rest of the partnership.

The stock was below $50 in June 2001 when Federals regulators finally
responded to the California crisis by putting strict price controls on the Western electricity market; it had not yet sunk below $40 on August 14, 2001, when Jeffry Skilling resigned from Enron.

He swore that when he left the company was in good financial shape.

ENDGAME BEGINS
Kenneth L. Lay returned from his own retirement to take on the post of CEO. Vice President Sherron S. Watkins tell Kenneth L. Lay about everything. She gotten a temporary assignment to look into the LJM partnerships, including the Raptors, and was horrified by what she saw.

ENDGAME BEGINS
On August 15, the day after Skilling resigned, Watkins wrote a long anonymous letter to Lay suggesting that Skilling knew what he was running away from. The letter spoke the danger that we will implode in a wave of accounting scandals, when the problems with Condor and Raptor came out; there would be suspicions of accounting improprieties,

because of Enrons aggressive accounting.

ENDGAME BEGINS
But the warning fell stillborn; Lehman Brothers went on to recommended buying Enrons stock on August 17, when it had dropped to $36 per share.

An internal investigation, led by Enrons law firm, Vinson & Elkins


LLP, began. Andrew Fastow reassured the investigators that the deals, while apparently questionable, were really sound, and repeated pledges of

confidence in Enrons golden future.

ENDGAME BEGINS
On September 26, when the stock fell to $25 per share. As the end of the third quarter became imminent, the habits acquired in previous years reasserted themselves. Enron worked out one more prepay deal for $350 million on September 28. Enron and Qwest arranged a purchase of networks for another

$112 million, a deal that made very little business sense.

ENDGAME BEGINS
With all that cash to pump up earnings, third-quarter losses still had to be admitted, and somehow spun to the Wall Street analysts on whose approval the company depended.

On October 8, Lay addressed the companys outside board of


directors with the same bad news. When the meeting was over, in which the demise of the Raptors had been cheerfully described as a one-time setback, the directors left thinking

the company was basically in the good shape.

ENDGAME BEGINS
October 16, Enrons news release on its third-quarter problems had much the same message; the losses were one-time, non-recurring, and the companys future was roxy. An accounting error, he told a reporter on the phone, resulted in a $1.2 billion loss in equity. Seems Enron had counted a Raptors acknowledgement of $1.2 billion transferred from Enron to the SPEs as shareholder equity.

ENDGAME BEGINS
On October 18, when the Wall Street Journal found out about that one, it wrote a sharp article calling for better explanations. Lay responded to the investment fund manager concerns, and the question triggered by the article, by attacking the press and promising, over and over, that the loss was a one-time thing, that there were no more write-offs hiding in the books.

ENDGAME BEGINS
Not quite satisfied with that explanation, on October 22 the SEC launched an investigation into Enron. By the end of the day the stock stood at $20.65.

On October 28, Lay announced the formation of a special


investigative committee, headed up by the Dean of the University of Texas Law School, William Powers, who hired William R. McLucas, former SEC enforcement chief and currently with the law firm of

Wilmer, Cutler & Pickering to do the actual investigating.

ENDGAME BEGINS
McLucas hired some accountants from Deloitte & Touche to look into the books, and they found all those hidden overstatements of profits, and there was no longer any chance of keeping them hidden. When McLucas issued his report, the company was essentially finished.

ENDGAME BEGINS
There was one more attempt to save the company by selling it, to its smaller rival Dynegy. Cash was draining rapidly, as creditors called in debts, banks refused to

lend, and even EnronOnline, the computer energy trading company, that
generated most of Enrons actual revenue, was losing money. Its European trading operations, for which it had claimed a $53 million operating profit in the July-September quarter, turned out to have

actually lost $21 billion.

ENDGAME BEGINS
Meanwhile, this was too much for Dynegy. On November 26, the deal officially died. On December 2, 2001, Enron filed bankruptcy. In the end, Kenneth L. Lay sold $37.683.887 in stock just before the crash came; Jeffry Skilling cashed out $14.480.755; Lou Pai, Unit CEO, received $62.936.552; Andrew Fastow had made $45 million on

his LJM entities.

THE SHREDDING OF ARTHUR ANDERSEN


Arthur Andersen is an accounting firm and they are one of the most powerful arguers, and arguments for trusting the profession with the job of telling the truth to the public.

Arthur Andersen has to take some of the responsibility for was happened in
Enron. They signed off on all of the deals that Enron had made. Carl Bass one of auditors had protested the practices of Enron in the past, about aggressive hedging strategy of derivatives. By the request of Enron, Arthur Andersen fired Bass in 2000.

THE SHREDDING OF ARTHUR ANDERSEN


In March 2001 matters came to a head when Fastow and Skilling rescued failing Raptors by cross collateralization Arthur Andersen had been fined $ 7 million by SEC due to signed off on false and misleading financial statements issued, the largest case ever assessed against an accounting firm, the Waste Management case. The Waste Management case had used as evidence the contents of

Anderson own files, seized by the SEC and used against them.

THE SHREDDING OF ARTHUR ANDERSEN


In the first weeks of October instructions came down in Houston and in Chicago to follow the firm document retention policy of destroying extraneous or unneeded documents. Duncans office got to work and started destroying. Over the week end of October 13-14, 2001, bag after plastic bag was filled with the shredded remains of Enron document.

THE SHREDDING OF ARTHUR ANDERSEN


Enrons late firing of Andersen as its Auditors was inconsequential the state-by-state decisions to suspend the firms license to practice and has been fined $500,000 After the case, Andersen s reputation for in integrity was gone, its clients left immediately for other accounting firms, its partners quickly hired away to continue works else where and very soon after the

verdict the firm closed its doors.

THE SHREDDING OF ARTHUR ANDERSEN


By the time sentence was handed down, there were about 2,000 employees left, closing out operations of the 85,000 they had had at one time.

THE ULTIMATE FAILURE OF THE SYSTEM


What they do so the system became failure:
Buy, sell, trading, and otherwise using derivatives Creative accounting generally, the purpose of which is to get profits and losses (selectively) off the books, off the shore, off the tax rolls. Make Tax division as a profit center.

THE ULTIMATE FAILURE OF THE SYSTEM


Enrons board approved the creation of the SPE and allowed Andrew Fastow to run them was told that they would allow the company to sell underperforming assets to improve its balance sheet.

According to the government, Andrew Fastow struck a secret


agreement with Richard A. Causey Enrons Chief Accounting Officer promising that the assets could be sold back to Enron at a

profit.

THE ULTIMATE FAILURE OF THE SYSTEM


In September 1999, Fastow created LJM to buy part of the Cuiaba, the power plant in Brazil that wasnt making money, to take it off the books. In December 1999, Merrill Lynch bought a share of the Nigerian

Barges, three electricity-generating power barges anchored off the coast


of Nigeria, which were making no money, for $7 million, enough to get them off the books. On June 29, 2000, LJM2 bought Merrils stake for $7.5 million, and

Enron paid LJM2 a solid fee for the deal.

THE ULTIMATE FAILURE OF THE SYSTEM


Then there was AVICI, the profit on whose stock was locked in by a hedging agreement with the SPE Raptor I, specifying future sale of AVICI at a high price (the stock was falling at the time). Raptor I was actually a subsidiary of Talon, which was financed by Enron and LJM2. Fastow lied about Talons independence, backdated the hedge so

that Enron could avoid loss.