“SUMMARY OF ENRON CORPORATION FRAUD CASE” Enron case may be also termed as world’s most famous fraud scandal in United States. As a result of further deep investigations it was found that the Corporation was forced to file for bankruptcy in DECEMBER 2001. In MAY 2006 the former Chief Executive of Enron JEFFERY SKILLING was sentenced to jail for 24 years and the ex-chairman KENNTH LAY died for heart attack in JULY 2006. The following summary give an insight about the scandal and the reason that why it was emerged along with the discussion of its schemes and financial highlights of the corporation and also puts a light on its falls.
HISTORY OF THE CORPORATION Enron Corporation is referred as the world’s largest fraud scandals in history. As a result of the fraud investigations, the company was forced to file for bankruptcy in DECEMBER 2001. Enron provided products and services related to natural gas, electricity and communications to wholesale and retail customers. Enron Corporation has its roots in OMAHA, NEBRASAKA (US). In 1985, Houston Natural Gas was merged with Inter North to establish an energy company based in Huston, Texas (US). The company united or combined several number of pipeline systems and hence created the first nationwide natural gas pipeline system.
In 1986 Ken Lay, the former chief executive officer of Houston Natural Gas, was named as the chairman and chief executive officer at the young energy company. It’s the time when the company chose its name as Enron Corporation. In 1987, after the discovery of the oil traders in New York have overextended the company's accounts by almost $1 billion, the company works its loss down to $142 million. The loss immediately leads to Enron Corporation developing different sort of services in order to decrease the risk of price level. After one year, Enron Corp. started its first overseas office. The company’s new strategy was revealed to the executives: pursue unregulated markets in addition to its regulated pipeline business in England In a gathering known as the “Come to Jesus” meeting. Jeffrey Skilling joined Enron Corporation in 1989 and launchthe Gas Bank, such a program thatallows the buyers of natural gas to get lock in long-term supplies at fixed prices. In the main while, the corporation also started to offer financing for oil and gas producers. Enron Corp. expended to South America by acquiring Transportadora de Gas del Sur In 1992. The company started to push to extend on the continent. In the same year. Enron’s Teesside power plant began operations a year later in England. It proved itself to be the first successes for Enron’s international strategy. In 1994 the corporation made its first electricity trade which would turn into one of Enron’s biggest profit centers in the next years. Enron entered the European wholesalers market with the establishment of a trading center in London, part of Enron Europe, in 1995. In 1996, construction started on the Dabhol power plant in India. However, the project would be tortured by political problems and finally Enron put the project up for sale in 2001. After one year, Enron bought Portland General Electric Corporation the utility serving the Portland, Oregon (US), which would be sold in 2001 to Northwest Natural Gas Corporation for about $1.9 billion. In the same year, Enron Energy Services was made to provide energy management services to commercial and industrial customers. Enron doesn’t quit its policy of acquiring companies. In 1998 it acquired Wessex Water in the United Kingdom which formed the strong base for its water subsidiary Azurix. But after one year, when one-third of Azurix is sold to the public in an offer made to publicthe company’s problems become more prominent as the shares fell quickly after an early rise. In The same year 1991 Enron Online, the company's commodity trading Internet site, started to work. In the last of the year, Enron Energy Services pulled out its first profit. In 2000, Enron’s annual revenue was $100 billion, more than the year before we can say twice was the profit, which reflects the growing importance of trading. However, the problems with Azurix didn’t come to an end and Rebecca Mark resigned from her position of chairwoman whereas Enron announced its intention to take the subsidiary private. In the same year on the
basis of market capitalization the Energy Financial Group ranked Enron the sixth-largest energy company in the world. In April 2001 by bankrupt California utility Pacific Gas & Electric Co Enron disclosed it had owned $570 million. Where the top executives were likely to be aware of the heavy debt and all the illegal and unethical practices. Until October 2001 the fraud was not revealed to the public. When Enron announced that the company was actually worth $1.2 billion less 195 than previously reported. This problem quickly started an investigation by the Securities and Exchange Commission , which has revealed deception and illegal practices at different levels which were committed by high-ranking Enron executives, investment banking partners, and the company’s accounting firm, Arthur Anderson. At the end of the year Enron’s shares closed at $8.63 per share, there was 89 percent drop since the beginning of the year which is disastrous for any corporation whether its working on a large scale or a small scale. The critical dates which are much notable in the scandal are October 16, 2001 and November 8, 2001. On October 16, Enron disclosed that it had made a huge loss of $618 million that quarter, while on the second date it revealed that it had overstated its earnings since 1997 by $586 million.
In clear and bold words, Enron’s accounts for the last four years had not shown the true state of its huge obligation.
Analyzing the Fraud and Financial Highlights As the bankruptcy of a small company is taken as a routine, Enron’s case is different as the company was ranked seventh by Fortune. Enrone which proved itself to be so strong until DECEMBER 200 made a decision to restate its financial statements this proved to be fatal and the corporation had to go for a bankruptcy. During the 1990s, Enron unfolded quickly into several areas such as developing a power plant and a pipeline. This expansion, however, thus required a large initial capital investments and long development period. By that time, Enron already has raised a large number of debt funds from the market and hence at that time any other attempt to raise funds would definitely affect Enron’s credit rating position. But in order to continue business Enron had to maintain the credit ranking at investment rate. On top of that, the company wasn’t making enough profits either at that time, as much as it promised to its investors. Hence for the sake to survive Enron began making partnerships and other special “arrangements” (Special Purpose Entity, or SPE).
These companies were used to keep Enron’s heavy debts and losses away from its balance sheets definitely which would affect the financial condition of the corporation badly, therefore they allowed it to have a good credit rating and look good in front of the investors here they made use of a technique called WINDOW DRESSING which means showing that financial condition of the business which is far away from the reality. Window dressing means “an
adroit but superficial or misleading presentation of something, designed to create a favourable impression”
Enron: Discovering Fraud On August 15, Sherron Watkins, an Enron Vice President, wrote an undefined letter to Ken Lay that suggested that Skilling had left because of the accounting wrong doings or misconduct and other illegal actions. She questioned Enron's accounting methods and specifically cited the Raptor transactions. Later in the same month, Chung Wu, a UBS PaineWebber broker in Houston, sent an e.mail to almost 73 investment clients saying Enron was in trouble and then giving them a piece of advice to them to consider selling their shares. Sherron Watkins then met with Ken Lay in person, adding more details to her charges. She noted that the SPEs had been controlled by Enron's Chief Finance Officer, Fastow, and that he and other Enron employees had made their money and left only Enron at risk for the support of the Raptors. When Enron's stock fell below than a certain point, the Raptors' losses would begin to appear on Enron's financial statements. On October 16, Enron announced a third quarter loss of $618 million. During 2001, Enron's stock fell from $86 to 30 cents. On October 22, the Security Exchange Comission started doing an investigation into Enron's accounting procedures and partnerships. In November, Enron officials finally admitted that they have overstated company earnings by $57 million since 1997. Enron, then was filed for bankruptcy in December of 2001.
What about them all? Enron's Chief Finance Office, Andrew Fastow, was actually behind the suspicious and difficult network of partnerships and many other questionable practices. He was charged with a large number of 78 counts of fraud, conspiracy, and the illegle activities money laundering as well.
Fastow accepted a appeal agreement in January 2004. After pleading guilty to two counts of conspiracy, he was given a 10-year punishment and was sentenced to jail and ordered to pay $23.8 million in exchange for performing such acts against other Enron executives.According to the web site of the corporation "Enron is in the midst of liquidating its remaining operations and distributing its assets to its creditor Jeff Skilling and Ken Lay were both accused in 2004 for their roles in the fraud.,Both Skilling and Lay were found guilty. Jeff Skilling was convicted of 19 counts of conspiracy, fraud, insider trading and making wrong statements. Ken Lay was declared to guilty of six counts of conspiracy and fraud On May 25, 200 by, a jury in a Houston, Texas federal court. In another separate trial, Lay was also found guilty on four counts of bank fraud. Kenneth Lay died of a heart attack on July 5, 2006, and a federal judge ruled that his conviction was void because he died before he had a chance to appeal. On October 23, 2006, Skilling was sentenced to 24 years in prison.
How the Hidden game ended New requirements from the Financial Accounting Standards Board now require SPEs to be listed on a company's balance sheet. Section 401(a) of the Sarbanes-Oxley Act requires that annual and quarterly financial reports disclose all material off-balance sheet transactions, arrangements, and obligations. The rules also require most companies to provide an overview of known contractual obligations in an "easy-to-read tabular form”
Now This new ruling has necessarilyeradicated the days of the SPE and the synthetic lease -- even though they are still legal practices.
