ENRON

Made by:1. Aastha Thakur 2. Aman Raaj Narang 3. Farhan Aqeel 4. Gandharv Arora 5. Hitesh Nayyar 6. Hitesh Munjal (211003) (211014) (211045) (211046) (211052) (211054)

INTRODUCTION
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Enron was heavily involved in energy brokering, electronic energy trading, global commodity and options trading, etc. Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff with claimed revenues of nearly $101 billion in 2000. Fortune named Enron "America's Most Innovative Company" for six consecutive years a factor in the creation of the SarbanesOxley Act of 2002

ENRON
Industry Energy

Headquarters

Houston, Texas, United States

Kenneth Lay, Founder, former

Key people Chairman Jeffrey Skilling, former President, CEO Andrew Fastow , CFO $101 billion (in 2000) approx. 22,000 in 2000 http://www.enron.com/

Revenue Employees Website

ENRON
Enron, the 7th largest U.S. company in 2001,
filed for bankruptcy in December 2001. Enron investors and retirees were left with worthless stock. Enron was charged with securities fraud (fraudulent manipulation of publicly reported financial results, lying to SEC,)

RISE OF ENRON
1985- Kenneth Lay merged the natural gas pipeline
companies of Houston Natural Gas and InterNorth to form Enron. Early 1990s- He helped to initiate the selling of electricity at market prices and, soon after, the United States Congress passed legislation deregulating the sale of natural gas. Enron rose to become the largest seller of natural gas in North America by 1992. November 1999 - creation of the EnronOnline trading website.

 To achieve further growth, Enron pursued a diversification strategy. Enron's stock rose from the start of the 1990s until year-end 1998 by 311% percent. Enron was rated the most innovative large company in America in Fortune's Most Admired Companies survey

ACCOUNTING PRACTICES
Nontransparent Financial statements and complex business model. Created Partnerships structured as Special Purpose Entities(SPE) SPE 3% Rule: No consolidation needed if at least 3% of SPE total capital was owned independently of Enron.

ENRONS REVENUE ACCOUNTING TECHNIQUES

o INFLATED REVENUES
In 4 years, Enrons Revenues increased by 750%($13.3bn to $100.8bn)

o MARK TO MARKET (Fair Value Accounting)

All Assets and Liabilities are Revalued at Fair Market Value ( Market Value= Present Value of Future Cash Flows) Used by Enron for its Energy Contracts Allowed Enron to count projected future earnings as Current Income

MARK TO MARKET (contd.)

o VIOLATES BASIC CRITERIA FOR REVENUE RECOGNITION:
The service has been provided/mostly provided Revenue is reasonably certain

o ALSO VIOLATES PRINCIPLE OF CONSERVATISM

ENRONS REVENUE ACCOUNTING TECHNIQUES

o MERCHANT MODEL OF REVENUES
Enron adopted an aggressive interpretation of what constitutes Revenue in the trades that took place over its Enron Online Trading Platform Reported entire value of each trade as Revenue

o Traditional Trading firms like Goldman Sachs used the more conservative AGENT MODEL

INFLATED REVENUES

Gross Profit is a Reasonable indicator of the actual revenue that would have been reported by Enron, under the Agent Model without MTM assumptions.

Special Purpose entities are used to fulfill a temporary or specific purposeto fund or manage risks associated with specific assets. SPE 3% Rule: No consolidation needed if at least 3% of SPE total capital was owned independently. Enron transferred troubled assets that were falling in value to SPEs which meant that their losses would be kept off Enrons books . In return IOUs were issued , backed by Enrons stock as collateral.

S.P.E

In 1993 it teamed with Calpers (California Public Retirement System) to create JEDI (Joint Energy Development Investments) fund.

ENRON
INVESTMENT HIGH RISK ASSETS

CALPERS
INVESTMENT

IOUs

JEDI

 In Nov 1997, Calpers wanted to cash out of JEDI. To keep JEDI afloat, Enron needed new 3% partner. It created another partnership Chewco to buy out Calpers stake in JEDI for $383 million. Enron plans to back short-term loans to Chewco to permit it to buy out Calpers stake for $383 million.

ENRON
Short-term loans

CHEWCO
$383 million

CALPERS

$383 million buyout

JEDI

CHEWCOS CAPITAL STRUCTURE

Chewco needs $383 million dollars to give calpers It gets : $240 mil from Barclays bank(Enron guarantee) $132 mil from JEDI To avoid inclusion of JEDIs debt on Enrons books the remaining 3% (about 11.5 mil) from outside sources: $125,000 from William Dodson and Michael Kopper(Enrons CFOs aide) $11.4 mil loans from Big River and Small River(security cash reserve paid by JEDI )

ENRON
383 Mil
Enron aid

CALPERS

KOPPER

JEDI CHEWCO SPE GAMEsole HOW THEY PLAYED THE Enron now
125k
An entity supposedly independent of Enron partner

132 Mil

240 Mil Enron guarantee

11.4mil
11.4mil 6.6mil JEDI

BARCLAYS BANK

BIG RIVER AND LITTLE RIVER

WHAT ENRON EARNED FROM ALL THIS

Enron received $10 mil in guarantee fee + fee based on loan balance to JEDI Enron received a total of $25.7 mil from this source In the first quarter of 2000, the increase in price of Enron stock held by JEDI resulted in 126 million in profit to Enron

BUT
Everything fell apart when Enrons stock prices began to decline in fall of 2000 This started a chain reaction: Enron had hedged against its own stock, so as long as the stock prices were declining, it could not recover from the losses In November 2001 Enron admitted to SEC that Chewco was not truly independent of Enron Chewco went bankrupt shortly after its admission in Enron

AFTERMATH
Enron Corp. is rechristened to Enron Creditors Recovery Corp. (ECRC). ECRC's sole mission is to reorganize and liquidate the operations and assets of "pre-bankruptcy" Enron. Enron's shareholders lost $74 billion in the four years before the company's bankruptcy. In November 2004 (emergence from bankruptcy), a new board of directors was appointed, and they adopted this mandate: obtain the highest value from the company's remaining assets and distribute the proceeds to the company's creditors. Once ECRC has completed all outstanding litigation and monetized all assets, it will make a final distribution to creditors. After that, the company will cease to exist.

ARTHUR ANDERSON
In 2002, the firm voluntarily surrendered its licenses to practice as Certified Public Accountants in the United States. Even before voluntarily surrendering its right to practice before the SEC, it had many of its state licenses revoked. From a high of 28,000 employees in the US and 85,000 worldwide, the firm is now down to around 200. As of 2011, Arthur Andersen LLP has not been formally dissolved nor has it declared bankruptcy. Ownership of the partnership has been ceded to four limited liability corporations named Omega Management I through IV. As of 2011, Arthur Andersen LLP still operates the Q Center conference center in St. Charles, nowadays mostly used for Accenture trainings.

LESSONS
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?