enron - the accounting disaster
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Phoenix”“The company’s success was based on artificially inflated profits, dubious accounting practices, and –
some say – fraud.
Phoenix
•In 1985 Enron was born from the merger of Houston Natural Gas and InterNorth.
•Started trading futures in Gas Contracts.
•Soon got the control of over 25% of the all Gas business.
“Mid 1980s: Enron business entirely in the USA, focused on
gas pipelines and power”
Phoenix
“2001: Enron trading in hundreds of commodities
Interests in: USA, South America, Europe, Asia and Australia”
•Entered into the derivatives business.
•Began trading in commodities like steel, coal, weather risk etc.
•By 2000, even stepped into the dot.com business.
Phoenix
“2001: Enron trading in hundreds of commodities
Interests in: USA, South America, Europe, Asia and Australia”
•Entered into the derivatives business.
•Began trading in commodities like steel, coal, weather risk etc.
•By 2000, even stepped into the dot.com business.
Phoenix
•Global energy crises by late 90s.
•In India, lost the Dabhol Power project, in which Enron had committed $2.9bn.
•Beginning of Dot.Com bubble crises and fallout of blockbuster internet deal.
•Enron delivered smoothly growing earnings (but not cash flows).
Phoenix
•Global energy crises by late 90s.
•In India, lost the Dabhol Power project, in which Enron had committed $2.9bn.
•Beginning of Dot.Com bubble crises and fallout of blockbuster internet deal.
•Enron delivered smoothly growing earnings (but not cash flows).
Phoenix
•Global energy crises by late 90s.
•In India, lost the Dabhol Power project, in which Enron had committed $2.9bn.
•Beginning of Dot.Com bubble crises and fallout of blockbuster internet deal.
•Enron delivered smoothly growing earnings (but not cash flows).
Phoenix
•Global energy crises by late 90s.
•In India, lost the Dabhol Power project, in which Enron had committed $2.9bn.
•Beginning of Dot.Com bubble crises and fallout of blockbuster internet deal.
•Enron delivered smoothly growing earnings (but not cash flows).
Phoenix
•Global energy crises by late 90s.
•In India, lost the Dabhol Power project, in which Enron had committed $2.9bn.
•Beginning of Dot.Com bubble crises and fallout of blockbuster internet deal.
•Enron delivered smoothly growing earnings (but not cash flows).
Phoenix
•Enron was a trading company, yet was given very high PE of 70 as compared to PE of 20, given to other trading companies
•During 2000, Enron’s derivatives-related assets increased from $2.2bln to $12bln and derivates-related liabilities increased from $1.8bln to $10.5bln
•Enron’s top management gave it’s managers a blank order to “just do it”
Phoenix
•Enron was a trading company, yet was given very high PE of 70 as compared to PE of 20, given to other trading companies
•During 2000, Enron’s derivatives-related assets increased from $2.2bln to $12bln and derivates-related liabilities increased from $1.8bln to $10.5bln
•Enron’s top management gave it’s managers a blank order to “just do it”
Phoenix
•Enron was a trading company, yet was given very high PE of 70 as compared to PE of 20, given to other trading companies
•During 2000, Enron’s derivatives-related assets increased from $2.2bln to $12bln and derivates-related liabilities increased from $1.8bln to $10.5bln
•Enron’s top management gave it’s managers a blank order to “just do it”
Phoenix
•Stock had already fallen to $30 from $90 in Feb, 2001.
•Oct, 2001 – Moody’s downgraded Enron’s debt.
•May, 2001 – Mr. Baxter, the Vice Chairman resigns.
•14th Aug, 2001 – Jeff Skilling resigned as CEO.
Masterminds: (left to right): founder Ken Lay; Jeff Skilling; Andy Fastow; and Lou Pai
Phoenix
•8th Nov, 2001 – Told investors that they were restating earnings for past 4 and ¾ years.
•By end of Nov, 2001 stock reached $0.3 falling from its peak price $90 in just 8 months.
•2nd Dec, 2001 – Filed Bankruptcy.
Phoenix
Energy producer fears warm weather. Pays Enron to hedge against the collapse
of demand and prices due to warm
weather.
Electricity company fears cold
weather. Pays Enron to hedge
against rise in price and demand due to
cold weather.Enron, as market maker, profits by taking commission on hedge in both eventualities.
Phoenix
SENATE
HOUSE OF REPS
“Kenneth Lay himself had strong personal ties to two
Republican Presidents”
Total donations during 1989-2001 amounted$1,133,981 ($1.1mn)
Phoenix
ENRON
ENRON
PartnershipPartnership
SpecialPurpos
eEntity(SPE)
SpecialPurpos
eEntity(SPE)
AccountIn
Profit
AccountIn
Profit
3
4
2
1
5
1. Enron sets up partnership using stock as funding
2. Partnership sets up SPE3. SPE agrees contract to pay Enron if
its investment declines in value4. Payment made as investment
declines5. Payment posted as profit, even
though it is Enron’s own money
”“A huge hole had opened in the
accounts.-BBC
Phoenix
-2
-1
0
1
2
3
4
3months
6months
9months
Year
1998
1999
2000
2001
Negative Cash Flows: 1st three quarters in 1999, 2000 & 2001
Phoenix
•Sherron Watkins, an Enron vice-president, wrote an anonymous letter to Kenneth Lay setting out her fears of an impending scandal.
•Fearing the predictable collapse she ordered Enron's lawyers to conduct an investigation into the partnerships.
•Mr. Lay was also moving to reassure the markets. He was doing all he could to "restore investor confidence" he told staff and shareholders.
•But amid the selling, Mr. Lay himself joined the crowd as he exercised options on 83,000 shares worth almost $2m.
Sherron Watkins
Kenneth Lay
Phoenix
•Andersen executives including chief Enron auditor David Duncan, decided to consult lawyers over whether or not the partnerships were legal.
•Andersen told Enron that it had no
•At some point after this, staff in Andersen’s Houston office began shredding documents relating to Enron.
other choice but to change the way it was accounting for its special partnerships.
Phoenix
•Arthur Andersen was one of the world’s five leading accounting firms.
•Legal examination of Sherron Watkins's concerns concluded that the partnerships in question, Raptor and Condor, had been approved by Andersen.
•Was paid $52mn in 2000, the majority for non-audit related consulting services.
Arthur Andersen’s Houston branch
The firm said destroying
documents was routine
Phoenix
Year Reported Income
Revised Income
True debt restated by
True equity restated by
1997 $105m $77m Up $771m Down $258m
1998 $733m $600m Up $561m Down $391m
1999 $893m $645m Up $685m Down $710m
2000 $979m $880m Up $628m Down $754m
Reported and revised income, debt and shareholder equity 1997-2000 following special partnership
revelations.
Enron’s Accounts: The Company announced the restated figures
Phoenix
In spite of all help,
failed to save
Enron
”“I take responsibility for what happened at Enron, both good and bad. But I cannot take responsibility
for criminal conduct that I was unaware of. -Kenneth Lay
Phoenix
J P Morgan:$900m
Sumitomo Mitsui Corp:$210m
Citigroup:$800m
Nikko Cordial:$207m
Credit Lyonnais:$250m
Principal Financial Group:$171m
Bank of Tokyo Mitsubishi:$248m
Abbey National:$164m
Chubb Corp:$220m
National Australia Bank:$104m
Canadian Imperial Bank:$215m
Duke Energy Corp:$100m
Some 25 further companies have declared Enron exposure totaling an estimated $1bn.Total global investment exposure of at least
$4bn
Phoenix”“Laid-off and
retired 4000 employees from the company lost most of their life savings, which was in company stock.
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