ENRON

The scandal, The legend

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Ellis Sanu Mandal- 839

Mohd. Hasim Uddin- 840
Md. Abrar Ibn Rahman- 844
Rezwan Nabi Sakib- 849
Md. Mahmudur Rahman- 854
Abdul Hannan Chowdury-1447
 Enron’s History
In 1985 after federal deregulation of natural gas
pipelines, Enron was born from the merger of Houston
Natural Gas and InterNorth, a Nebraska pipeline
company.
Started new and innovative business strategy
Kenneth Lay, CEO, hired McKinsey & Company to assist
in developing business strategy. They assigned a young
consultant named Jeffrey Skilling.
His background was in banking and asset and liability
management.
His recommendation: that Enron create a “Gas Bank”—
to buy and sell gas

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 Enron’s History (cont’d)
Created Energy derivative
Lay created a new division in 1990 called Enron Finance
Corp. and hired Skilling to run it
Enron soon had more contracts than any of its competitors
and, with market dominance, could predict future prices
with great accuracy, thereby guaranteeing superior profits.
Skilling hired the “best and brightest” traders and rewarded
them handsomely—the reward system was ‘eat what you
kill’
Fastow was a Kellogg MBA hired by Skilling in 1990—
Became CFO in 1998
Started Enron Online Trading in late 90s
Created Performance Review Committee (PRC) that
became known as the harshest employee ranking system
in the country---based on earnings generated, creating
fierce internal competition
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 Enron before December 02,
2001
7th largest company in the USA
+100B $ in revenues
1.8 M $US in benefits announced for 5 years
+88.6% stock price increase in 2000
1996-2001: named most innovative company by fortune
magazine
2000: CEO pictured as a ‘energy messiah’ by The
Economist.

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 Economic Scandal
 Between 1 and 2 M$ in hidden debts

 Artificial increase of stock value

 Cooperation of Arthur Andersen

 No taxes 4 years out of 5 in the US

 Stock option deduction : 600 million $

 Dec 2000: top executives were paid 750 million $

in bonuses whereas the declared net profit was
975 million $

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 Behind the collapse
Conflict of interest- Arthur Andersen
Board of Directors’ indifference
Management dishonesty
Enron’s corporate culture
The common element is deceit or trickery!

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 Key players
Kenneth Lay- former CEO
Jeffrey Skilling- CEO (Aug 14, 2001)
David Duncan- Chief auditor at Andersen
Andrew Fastow- former CFO
Sherron Watkins- whistler blower.

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Enron has been elevated to a symbol. There’s a
whole new level of uncertainty about profits,
about the integrity of the accounting
profession and of Wall Street.
-Woody Dorsey
Market Semiotics
an institutional forecasting service

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 Enron effect
Investors’ confidence reduced
Stock price slashed
Cost of debt increased
Profitability lessened

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 Enron Effect (cont.)
Capital market of other countries e.g.
India, Brazil.
Suspicion against capitalism
Oscillating credibility on SEC, Auditing
firms, Accounting method etc.

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 Will there be another Enron?
Yes
– Recent years have seen an increase in the
number of financial statement frauds
1977-87 (300); 1987-1997 (300); 1997-2002 (over 300)
– Incentives still there (Stock Options, etc.)
No
– Mandatory requirements
Requirement to have internal controls
Rules for accountants (mandatory audit partner rotation;
Oversight Board, limitations on services, etc.)
– Accountants are being much more careful

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 Thank you all !

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