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Enron case study
1. The best way to do great work is love
what you do.
Steve jobs
2. Case Study
Enron; The Good ,The Bad, The Really Ugly
By Denis Collins
Group Members
Sumaira Munir
Sana Ramzan
Abdul Rahman
3. Enron
Enron was regarded as the most innovative company.
It is the largest buyer/ seller of natural gas and electricity.
It serves as a Gas Bank where producers sold their natural
Gas to the Enron and ten Enron sell this natural gas to the
customers
Enron was heavily involved in the energy brokering ,
electronic energy trading and global commodity
4. Enron history
Enron was formed in 1985 when InterNorth acquired Houston
Natural Gas.
Enron was the merger of two gas pipeline
companies(Houston natural Gas (HNG) & Internorth Natural
Gas)
Ken lay the CEO of HNG sold his company to Internorth for
$2.4million
The company a heavy debt of 4.3 billion to manage Its
activities
Ken lay was hired as a CEO of Enron.
5. Enron’s line of Businesses
Enron was originally involved in transmission of natural gas and electricity but
it also start trading in more than 30 products including:
Petrochemicals
Plastics
Power
Pulp and paper
Steel
Weather risk management
Oil and LNG transportation
7. Ken Lay’s life history
At the age of 42 he became the CEO of Enron.
He was the son of Baptist preacher
He received a scholarship to attend the university of Missouri
He had a master degree in economics
He become a senior economist for a Houston Oil Company.
In 1970 he got a doctoral degree in economics from the
university of Houston.
8. Conti……
During the Vietnam war. He was assigned to conduct
economic analysis at the Pentagon work.
He also serve as a president of government affairs at Florida
Gas.
9. Enron’s Success
At the end of 1990 Enron had become the nation largest
natural gas company with $revenue of 13.2 billion.
It won Fortune Magazine award for 5 consecutive years for
Nation’s most innovative company.
In 1991 gas bank division had contract with more than 35
natural gas producers and 50 consumers.
Enron also negotiated to supply 3 to 4% to the Great
Britain’s.
Enron’s sock price stedily increase to $90.
10. Conti…….
It acquires 41 other companies.
In 1999 Enron succeeded General Electric as the winner
fortune magazine’s best managed company of America.
In 2000 the Enron revenue was more than $100 billion
It was ranked on the 7th on the fortune 500 list.
Enron's stock increased from the start of the 1990s until year-
end 1998.
11. Mark to Market Method
Enron uses Mark to Market Method
With mark to market accounting, the price or value of a
security is recorded on a daily basis to calculate profits and
losses.
Using this method allowed Enron to count projected earnings
from long-term energy contracts as current income. This was
money that might not be collected for many years.
12. Special Purpose Entities
SPEs are the entity that protect company asset from risky
business projects.
SPE is a separate entity rather than a subsidiary.
If an SPE fails, the sponsoring company’s assets are legally
protected from the SPE creditors.
SPEs are used to finance the purchase of assets.
13. Conti…..
According to Accounting standards the SPE status can be
declared if the business entity meets two criteria
An independent owner maintains at least 3% equity
investment tat remains at risk at all times
The independent owner exercises managerial control of the
SPE.
14. Conti......
Andy Fastow was hired for cutting edge finance activities.
He become an expert on Special Purpose Entity (SPEs).
He generated large finance for both Enron and SPE.
The SPE was vey attractive for outside investors because of
increasing economic value of SPE.
SPEs was also used by Fastow to add revenue and decrease
liabilities from Enron which improves the financial statement
of Enron.
15. Violation of Accounting Rules
Enron uses Mark to Market accounting method.
Fastow created an SPE called RADR to purchase the asset
from Enron which protected Enron from tax.
By purchasing a asset for Enron use , the debt associated
with purchase appear on the SPE balance sheet.
Another SPE Chewco was 99% funded by Enron, which was
against Accounting rules.
16. Conti……
Enron had used hundreds of special purpose entities to hide
its debt Enron used a number of special purpose entities,
fraudulently misrepresent Enron’s financial condition in public
reports.
17. Why Enron violate accounting rules
Enron use complex accounting schemes
To reduce Enron’s tax payments
To inflate Enron’s income and profits
To inflate Enron’s stock price and credit rating
To hide losses in balance sheets
To fraudulently misrepresent Enron’s financial condition in
public reports
18. Sherron Watkins -The Whistleblower
On August 15,2001 Sherron Watkins , an Enron vice
president writes to Lay expressing concerns about Enron’s
accounting practices.
On August 22,2001 Sherron Watkins meets with Lay and
gives him a letter in which se says that Enron might be an
elaborate Hoax.
On February 14,2002 she testifies before congressional
panel against Skilling and Lay.
19. Enron’s Fall
The Enron scandal, revealed in October 2001, eventually led
to the bankruptcy of the Enron Corporation.
On October 16, 2001 Lay announced losses of $618 billion.
On November,2001 it admitted accounting errors, inflating
income by $586 million.
It start losing 2 billion in a week.
It stock price dropped to 61 cents.
It had to payback $690 million in 2 weeks.
It was delisted from New York Stock Exchange.
20. Key Elements involved in Enron’s
Scandal
Ken Lay: Chief Executive Officer
Jeffery Skilling: Chief Operating Officer
Andy Fastow: Chief Financial Officer
Michal Kopper: chewco’s managing director
Richard Causey : Chief Accounting Officer
Arthur Andersen: Auditor
21. Conti…..
David Duncan: Enron's chief auditor at Andersen who
shredded key documents relating to the case.
Sherron Watkins: Enron employee and "whistleblower" of
the scandal.
22. Conclusion
The Enron was a massive failure which shook entire US
economy
This action is still considered as an unethical behavior in
business, because the basic intention for conducting this
action is fraudulence.
This made the authorities to realize the importance of ethics
and internal control in business
