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ENRON

ENRON. One of the biggest Frauds and Bankruptcies ever. Charlotte Brown Marcelina Czaja Carles Urpí. INDEX. 1- The Beginning 2- Enron before its Bankruptcy 3- Timeline 4- Deregulation 5- Enron Strategies 6- Indictments 7- What could have been done? 8- What has been learned?

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ENRON

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  1. ENRON One of the biggest Frauds and Bankruptcies ever Charlotte Brown Marcelina Czaja Carles Urpí

  2. INDEX 1- The Beginning 2- Enron before its Bankruptcy 3- Timeline 4- Deregulation 5- Enron Strategies 6- Indictments 7- What could have been done? 8- What has been learned? 9- Summary and Sentences

  3. TheBeginning It all begins with… Houston Natural Gas = a gas utility headquartered in Houston, TX. + InterNorth Inc. = (1979) Large Energy company based in Omaha, NE. Specialized in Natural Gas pipelines, and also a force in plastics, coal and petroleum exploration and production.

  4. TheBeginning 1985:Merger between InterNorth and HNG. Name briefly changed to HNG/InterNorth. Initial plan: Dual headquarters in Omaha and Houston, with InterNorth CEO Samuel Segnar in control. Reality: Soon, in 1986, HNG executives took top positions, and it was entirely based in Houston. Company run by former HNG CEO Kenneth Lay. Kenneth Lay

  5. TheBeginning Name changed to ENTERON, due to positive connotations with “Enter” and ”On”. Enteron = digestive system in Greek New and Final name: ENRON. It cost millions in changing advertising, signage, stationery and contracts.

  6. Enron Beforeitsbankruptcy Largest transmission gas system of the USA. 38,000-mile pipeline network. Largest seller of gas in North America (1992). 7th largest company in the USA. Employed 20,000 staff. One of the world’s leading electricity, natural gas, communications and pulp and paper companies. Revenues of nearly $101 billion in 2000. Stock price record at $90 (2000).

  7. Enron Beforeitsbankruptcy Fortune magazine chose Enron as it’s “Best Managed and Most Innovative company” #1 – Quality of Management #2 – Employee Talent Chosen “the most innovative company” for 6 years in a row.

  8. Key factor Key player: Enron’s Audit--> Arthur Andersen, considered one of the “Big Five” accounting firms, along with PwC, Ernst & Young, Deloitte and KPMG. How did they manage to get here?

  9. Timeline

  10. GAS TRADING

  11. CONSEQUENCES of DEREGULATION Deregulation brought risk into selling natural gas Enron founded Gas Bank in 1989 (run by Jeffrey Skilling) Cash up front for producers of gas -> drilling for new gas Transactions paid in gas instead of cash Enron in charge of fixing future prices Long-term contracts involving futures "contract" with offshore entities to deliver natural gas in the future and be paid cash

  12. MARK-TO-MARKET ACCOUNTING Allowance of the company to book the future profits on the day deal was signed. In other words, long-term gas delivery and other trading contracts would be valued at market or fair value rather than the more typical historical cost. Direct translation: Enron was in charge of putting any possible number of earnings (manipulation) and the technique became a generator of huge earnings. http://www.youtube.com/watch?v=ajDeR4nMabY&feature=related http://www.youtube.com/watch?v=hR45ja3VjGE

  13. SKILLING PLAN long-term contracts using mark-to-market -> math models predicting values gain on a 10-year contract to deliver a set amount of gas each month would be booked immediately BUT actual cash flows spread out over the 10-year delivery period traders were experts at gas prices and innovative at developing new gas-related derivatives instruments, enticed by the lucrative profits and remuneration system Internet to promote trading, Enron became the most successful player in the futures game; 90% of Enron’s income came from trades Overstated profitability

  14. SPECIAL PURPOSE ENTITIES SPE’s (or - Vehicles SPV’s)  SPE’s reflect a common financing technique for companies. Companies can cut their risk by moving assets into separate partnerships that can be sold to outside investors. Accounting rules-> SPE´s legally isolated from the company that created it. ENRON´s CASE Losing money assets were sold to partnerships Listed as earnings.

  15. Board of Directors and Senior Management INDICTMENTS OF ENRON´S FAILURE? Analysts Accountants (Andersen) Investment Bankers Lawyers Credit Raters Professional Associations Consultants Companies in other countries Shell, BP, Mobil, Total Countries with Enron operations Argentina, Mozambique, India, Poland

  16. WHY WASN´T ENRON CAUGHT EARLIER? There was no intention to investigate the company. Enron and its key members were making political contributions to the white house and congress. The Enron directors acted in bad faith to shareholders from the outset. The only way it could have existed, would have disclosed the losses and confidential information that was destroyed and buried promptly.  Thus, had stabilized the share price, causing losses but still have the option of reformulating the strategy.

  17. MISUNDERSTANDING

  18. Meeting QuarterlyEarnings Targets Missing these earnings targets, even by a few cents a share, would result in greatly reduced executive compensation. This is where mark to market accounting was used in order to cover up any losses of the firm

  19. PoliticalPressure Enron was willing to bully anyone into getting what they wanted, and this included persuading politicians to act unethically. Enron was a political contributor to both parties from the start. The cash involved kept getting bigger and totaled some $6 million to politicians and political parties. Lay and his wife also contributed almost another $1 million

  20. “Oh, what a tangled web we weave when first we practice to deceive!” Walter Scott, Marimon, VI

  21. Whatcould Enron have done topreventwhathappened?

  22. Ethics It seems that the main problem is that Enron disregarded any form of ethical conduct In Enron's case, its board of directors apparently went so far as to suspend the code of conduct! This speaks volumes for the role of ethics in Enron's corporate culture, especially when you consider that the board of directors is supposed to act as the ethical conscience of an organization.

  23. Whatisto be learntfromthe Enron Scandal? ·Demonstrated the importance of “old economy” questions: How does the company actually make its money? Is it sustainable over the long haul? Is it legal! • Demonstrated the need for significant reform in accounting and corporate governance in the U.S. • Does this necessarily mean government regulation can fix the problem?

  24. After Enron, 89% of investors strongly favor the criminal prosecution of corporate officials who are implicated in serious financial fraud. New York Stock Exchange and the National Association of Securities Dealers issued a proposal that would limit compensation that analysts can receive from investment-banking activity. Other rules: restrict analysts' trading of stocks they cover, ban them from reporting to their firm's investment bankers, and prohibit them from promising favorable ratings to companies they cover.

  25. Didthe Enron scandalhaveaneffectonthemarket? From 2000 to mid-2002 prices of stocks for the nation’s largest companies fell by more than 33 percent, while technology stocks dropped 70 percent (more factors than just Enron).

  26. Investors were left wondering whether they could trust corporations, auditors, or stock analysts. And thebest outcome from the present wave of angst would no doubt be a return to commonsense investing. Investors should place their bets on rationality, not the next skyrocketing stock.

  27. Enron- SUMMARY Pride, arrogance, intolerance, greed It’s share price had collapsed from about $95 to under $1. 16years- 10-65bn of assets,24 days to go bankrupt Shredding documents, 20.000 employees had lost their jobs, 2bln in pensions and retirement funds December 2001, Enron filed for chapter 11 bankruptcy

  28. The veil of incorporation protects the Directors, Shareholders and Employees from the rights and responsibilities of the company. But, as the fraud was committed, the veil disappeared, and the fraudulent parties had to be taken into justice. Veil of incorporation DIRECTORS SHAREHOLDERS EMPLOYEES

  29. Sentences Jeffrey Skilling: 24 year, 4 month sentence and fined $45 million. Andrew Fastow: 6 years in prison. Kenneth Lay: Died while vacationing in July ‘06, about three months before his scheduled sentencing. Lay could have faced 20 to 30 years in prison. Arthur Andersen: Charged for justice obstruction and destruction and alteration of documentsrelated to the Enron’s bankruptcy and its irregularities. Fined $500,000, and deprived the company of auditing and consulting companies listed on the Stock Exchange.

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