Enron Scandal Overview

Introduction

• Early 2001: Enron was a major corporation with 30,000 employees and $100 billion in revenue.
• End of 2001: Enron faced the largest bankruptcy in history.
  • Arthur Andersen, one of the Big Five accounting firms, also collapsed.

Background

• Enron formed from a merger in 1985 between InterNorth and Houston Natural Gas.
• CEO: Kenneth Lay.
• Paul Rand designed Enron’s logo.
• Energy market deregulation in the '80s & '90s led to volatile prices.
• Enron set up a trading subsidiary; Jeffrey Skilling became CEO of Enron Capital and Trade in 1991.

Key Strategies and Practices

• Mark-to-Market Accounting: Assets were valued based on future price predictions.
  • Allowed for manipulation of profit reports.
• Fortune's "most innovative company" for 6 years.
• Enron stock peaked at $90/share in 2000.
• Investments in various projects, including overseas.
  • Losses hidden behind false asset valuations.

Financial Practices and Issues

• Used Special Purpose Vehicles (SPVs) for borrowing.
  • Lenders couldn't retrieve money if Enron struggled.
• Dot-com bubble burst in 2000 impacted Enron’s assets.
• Investor skepticism grew.

Collapse Timeline

• 2001:
  • February: Lay steps down, Skilling becomes CEO; stock halves to $40.
  • August: Skilling resigns; Lay resumes CEO.
  • October: Enron reports first quarterly loss in 4 years; SEC investigates.
  • November: Overstated profits by $591 million (1997-2000).
  • Pension plans locked; Dynergy merger called off; stock drops to 26 cents.
  • December 2: Files for bankruptcy.

Aftermath

• Massive job and savings loss for employees.
• Shareholders sued banks, winning $7.2 billion.
• Executives (Lay & Skilling) charged with 39 counts of fraud and conspiracy.
  • Lay died; Skilling sentenced to 24 years, served 12.

Impact on Arthur Andersen

• Found guilty of destroying relevant documents.
• Lost its auditing license; closed down.
• Consulting branch became Accenture.

Legislative Response

• Implementation of Sarbanes-Oxley Act.
  • Created a board to oversee audit reports.
  • Imposed restrictions on auditor services.
  • Required executives to sign off on financial reports.

Legacy

• Enron scandal still influences finance industry regulations and practices.