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    Add as FriendENRON Scandal

    by: Nahid

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    1 : © 2003 by the AICPA Welcome to my Presentation About on Accounting Fraud
    2 : © 2003 by the AICPA Enron’s History In 1985 after federal deregulation of natural gas pipelines, Enron was born from the merger of Houston Natural Gas and InterNorth, a Nebraska pipeline company. Enron incurred massive debt and no longer had exclusive rights to its pipelines. Needed new and innovative business strategy Kenneth Lay, CEO, hired McKinsey & Company to assist in developing business strategy. They assigned a young consultant named Jeffrey Skilling. His background was in banking and asset and liability management. His recommendation: that Enron create a “Gas Bank”—to buy and sell gas
    3 : © 2003 by the AICPA Enron’s History Created Energy derivative Lay created a new division in 1990 called Enron Finance Corp. and hired Skilling to run it Enron soon had more contracts than any of its competitors and, with market dominance, could predict future prices with great accuracy, thereby guaranteeing superior profits. Skilling began hiring the “best and brightest” traders and rewarded them handsomely—they were allowed to “eat what they killed” Fastow was a Kellogg MBA hired by Skilling in 1990—Became CFO in 1998 Started Enron Online Trading in late 90s Created Performance Review Committee (PRC) that became known as the harshest employee ranking system in the country---based on earnings generated, creating fierce internal competition
    4 : © 2003 by the AICPA Enron Fraud After it received a wide spectrum of rejections, Enron management apparently found a buyer when the board of Dynegy, another energy trader based in Houston, voted late at night on November 7 to acquire Enron at a fire-sale price of about $8 billion in stock.[96] Chevron Texaco, which at the time owned about a quarter of Dynegy, agreed to provide Enron with $2.5 billion in cash, specifically $1 billion up front and the rest when the deal was completed. Dynegy would also be required to assume nearly $13 billion of debt, plus any other debt hitherto occluded by the Enron management's secretive business practices,[96] possibly as much as $10 billion in "hidden" debt.[97] Dynegy and Enron confirmed their deal on November 8, 2001.
    5 : © 2003 by the AICPA How to created Fraud ?? 1993-2001: Enron also used complex & dubious 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 off-balance-sheet subsidiaries; • to engineer off-balance-sheet schemes to funnel money to themselves, friends, and family; • to fraudulently misrepresent Enron’s financial condition in public reports.
    6 : © 2003 by the AICPA Notable Events Jeff Skilling left in August—gave no reason for his departure. By mid-August 2001, the stock price began falling Former CEO, Kenneth Lay, came back in August Oct. 16…announced $618 million loss but not that it had written down equity by $1.2 billion October…Moody’s downgraded Enron’s debt Nov. 8…Told investors they were restating earnings for the past 4 and ¾ years Dec. 2…Filed bankruptcy
    7 : © 2003 by the AICPA Enron’s revenues and income
    8 : © 2003 by the AICPA Who Discovered Enron’s Problems? In early 2001, Jim Chanos, who runs Kynikos Associates, a highly regarded firm specializing in short selling said publicly that “no one could explain how Enron actually made money.” He noted that Enron had completed transactions with related parties that “were run by a senior officer of Enron” and assumed it was a conflict of interest.
    9 : © 2003 by the AICPA Enron’s Cash Flow Ratio Negative Cash Flows: 1st three quarters in 1999, 1st three quarters in 2000, 1st two quarters in 2001.
    10 : © 2003 by the AICPA Why wasn’t Enron caught earlier? Throughout all of this, Enron and its key members were making political contributions to the white house and congress. Kenneth Lay donated $100,000 to President Bush in 2000, and in 2001 Bush invited Lay to become an advisor to his transition team.
    11 : © 2003 by the AICPA Bankruptcy December 2001, Enron filed for chapter 11 bankruptcy It’s share price had collapsed from about $95 to under $1.
    12 : © 2003 by the AICPA Who is to Blame for Enron? • Lax accounting by Arthur Anderson Co? • “Rogue” AA auditor David Duncan • Enron’s senior management for hiding losses in dubious off-balance-sheet partnerships? • CFO Andrew Fastow for setting up these partnerships(6 year prison) • CEO Jeff Skilling (24 year prison) • CEO Kenneth Lay (died 7/23/06 )?

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