Corporate scams

It turns out that creative accounting is a

creative term for WHITE COLLAR
CRIMES!!!
ENRON CORPORATION..

Background
Enron is a US based company formed in 1985
by Kenneth Lay from a merger of Houston
Natural Gas Company and Inter North Inc.
It was the first nationwide natural gas pipeline
network in Houston, Texas.
It was ranked 7
th
on the Fortune 500 list of
companies.
Although its core business was transmission and
distribution of power, it branched into non-energy
fields like risk management, weather derivatives
and internet bandwidth.
Enron was one of the leading
electricity, natural gas, pulp, paper and
communication companies, with
claimed revenues of nearly $101 billion
in 2000.
Enron was also called Americas most innovative
company for 6 consecutive years from 1996 to
2001.
The Structure
ENRON
CORPORATION
ENRON
WHOLESALE
SERVICES
ENRON
ENERGY
SERVICES
ENRON
GLOBAL
ASSETS
What went wrong???
Who were the people
involved???
THE TRUTH
MEASURES TAKEN
Creative Accounting
In just 15 years, Enron grew into
one of Americas largest companies.
Enron used accounting limitations
to its advantage in managing both
its earnings and balance sheet to
portray a favorable depiction of its
performance.
Was it really making profits?
1.Use of mark to market accounting.
MARK TO MARKETING HISTORIC COST
Introduced by President Jeffrey
Skilling in Enron.





An accounting conception
generally used.
Accounting for the fair value of
the asset/ liability based on the
current market price.
Accounting based on the past
transactions.
This method allowed Enron to
count projected earnings from
long term energy contracts as
current income.
Shows correct profits as it shows
current income. Does not inflate
profit.
2. Creating Special Purpose Entities
(Vehicles)..
Enrons rapid growth in 1990s-Use
the diversification strategy.
Units not expected to generate
significant cash flow in short term.
Enron thought of
a temporary
solution to solve
the cash
problems - SPE
MISUSE of Special Purpose
Entities.


SPEs are legal entities created to fulfill
narrow, specific or temporary objectives. It
is used by companies to isolate the firm
from financial risk.

They would back the SPEs borrowings by
loaning shares in Enron as security.

Enron used hundreds of these off- balance
sheet transactions as a way to hide debt
and improve its liquidity.
Main People Involved
The CEO, Mr. Kenneth Lay took no
action despite being aware of the
malpractices.

The Chief Financial
Officer Mr. Andrew Fastow also played a major role
in the scandal.

Arthur Andersen, was a major support for the
scandal as it was the internal and external auditor
of Enron.
The Enron Scandal - Timeline
Whistle blowing!!( 2001)
February CEO Ken Lay retires (Jeffrey takes
over as the CEO)
14
th
August Jeffrey resigns stating personal
reasons.
Mid-August Vice-President Sherron Watkins
writes an anonymous letter to the
CEO Mr. Kenneth Lay.
16
th

October
Announces 1
st
quarterly loss worth
$618 million from Raptors (SPE).
October SEC announces investigation
1
st
Nov Stock price falls to less than $1.(was
US $90.75/share at one time)
8
th
Nov Told investors that they were
restating earnings for the past 4 and
years.
2
nd
Dec Filed for bankruptcy ( was the
biggest bankruptcy till then with
Enrons assets worth $63.4 billion)
Since 1997,
TOTAL LOSS= $591 million
TOTAL DEBT= $628 million
THE TRUTH
1. Investigation revealed that there had been a
total loss of $586million.
2. $30million of self dealings by the CFO.
3. $700million of net earnings disappeared.
4. $1.2billion of shareholders equity disappeared.
5. $4billion was in hidden liabilities.
6. Over $2billion loss on retirement and pension
funds.
7. 25000 employees losing their jobs and medical
insurance.
Measures taken
The Sarbanes Oxley Act was passed by President
George W Bush on July 30
th
, 2002.
The disclosure requirements as per this new Act are-

1. All material including off balance sheet
transactions.
2. The Special Purpose Entities must be disclosed in
annual and quarterly financial reports.
3. Auditor independence.
4. White Collar Crime Penalty Enhancement.
Duty without devotion ,
Education without character,
Politics without principles and
Commerce without ethics
are not only useless but also dangerous.

- BHAGWAN SRI SATHYA SAI BABA
PRESENTATION BY
SREE KUMARI. S . RAJU
II B.Com (Hons.)
Register no.: 132308