Enron

Submitted to:

Shaikh Masrick HasanAssistant professor,Department of FinanceJagannath University, Dhaka.

Submitted by:

MD. Asif Ibne AhsanOn behalf of GroupMBA 6th BatchDepartment of FinanceJagannath University, Dhaka.

.

Members of Group:

SL No. Name ID no

1 MD. Asif Ibne Ahsan M150203047

2 Alim Ehsan Dipon M150203056

3 Akib Hossain Chowdhury M150203066

4 MD. Tariqul Islam Mukith M150203075

5 Tanvir Mahmud M150203083

Now Presenting …MD. Asif Ibne Ahsan

Id: M150203047

ENRON• By early 2001, Enron had morphed into the 7th

largest U.S. company, and the largest U.S. buyer/seller of natural gas and electricity.

• For seven years in a row, Enron had been ranked as Fortune’s most innovative company.

• Enron was heavily involved in energy brokering, electronic energy trading, global commodity and options trading, etc.

• On December 2, 2001, Enron files for bankruptcy.

OECD Principles of Corporate Governance.

The 1999 OECD Principles cover five basic subjects:

• Section I: The Rights of Shareholders ( 6 )

• Section II: The Equitable Treatment of Shareholders (3 )

• Section III: Role of Stakeholders in Corporate Governance( 4 )

• Section IV: Disclosure and Transparency ( 4 )

• Section V: The Responsibility of the Board ( 6 )

ENRON

• Formed in 1985 by Kenneth Lay from a merger of Houston Natural Gas and Internorth . The first nationwide natural gas pipeline network in Houston, Texas

• Started trading futures in Gas Contracts.

• Soon got the control of over 25% of the all Gas business.• Entered into the derivatives business.

• Began trading in commodities like steel, coal, weather risk etc.

• By 2000, even stepped into the dot.com business.

1990

• stock price was rising steadily.

1999

• stock price increased dramatically

2000

• Price stood at over $70 at beginning of the year

• price peaked at just over $90 by the end of the year

End of 2000

• stood at just over $80

2001

• stock price declined sharply

• beginning of December 2001 the stock stood at less than $1.

Enron’s Accounting Fraud Diagram

Now Presenting …Alim Ehsan Dipon

Id: M150203056

EXECUTIVE REMUNERATION

• Apart from their salaries, Enron executives received substantial benefits. In 2001 the compensation committee gave approval to plans to award 65 executives a total of $750 million for their work in 2000, which compared with Enron’s net income in that year of $975 million.

• It was also alleged that executives may have benefited from insider trading, that is, dealing in Enron’s shares using privileged information.

• In October 2001 the law firm of Milberg Weiss Bershad Hynes and Lerach filed a class action law suit against Enron, alleging insider trading.

• Enron employees (many of whom were also Enron shareholders) were invited to join the class action which accused 29 officers and directors of insider trading.

THE BOARD AND THE AUDIT COMMITTEE

Enron’s audit committee appeared to be ineffective inpreventing Enron’s collapse.

• Of the six people on the audit committee, the independence of two members was questionable. Three members of the audit committee were located outside the United States, Finally, the chair of the audit committee had held the position since 1985 and in October 2001.

• It could be argued that employees as a group were more seriously affected by the fall of Enron than were shareholders, since the employees not only lost their jobs, but found their pension entitlements were also seriously affected.

• ‘Enron’s workers have lost not just their jobs, but their pensions and savings too.

Now Presenting …Tanvir Mahmud

Id:M150203083

SHERRON WATKINS –WHISTLEBLOWER

• In mid-2001, Sherron Watkins, an accountant at Enron, was becoming increasingly alarmed about the use of off-balance sheet financing schemes.

• In June 2001 Watkins was working for Andrew Fastow and came across a number of entities (known by Enron staff as ‘Raptors’) that were hiding losses amounting to hundreds of millions of dollars.

• The Raptors were capitalized by Enron stock, and as Enron’s stock price fell during 2001, Enron had to add more stock.

• Skilling abruptly resigned on 14 August 2001 and the following day Watkins decided to send an anonymous memo to Kenneth Lay, outlining her concerns.

• Watkins revealed in the memo that she had worked at Enron for eight years. Months later, following Enron’s bankruptcy, the memo was revealed in the media and Watkins became widely regarded as a

whistleblower.

Extracts from Sherron Watkins’ anonymous memo to Enron CEO Ken Lay• Enron has been very aggressive in its accounting –

most notably the Raptor transactions and the Condor vehicle.

• According Watkins statement, the valuation issues can be fixed and reported with other goodwill write-downs to occur in 2002.

• Condor and Raptor deals in 1999 and 2000, enjoyed a wonderfully high stock price, many executives sold stock, then tried and reversed or fixed the deals in 2001 and it was a bit like robbing the bank in one year and trying to pay it back 2years later.

• Watkins did manage to arrange a meeting with Lay on 22 August 2001 and subsequently wrote a number of further memos to him.

• Watkins advised that a law firm should be hired to investigate the Condor and Raptor transactions.

• By 29 August 2001, Fastow had discovered that Sherron Watkins was the author of the anonymous memo wanted her fired.

Now Presenting …Akib Hossain Chowdhury

Id:M150203066

ENRON’S CASH CRISIS

• Enron’s cash crisis mainly started in Aug 14, 2001.

• When Jeff Skilling resigned and Kenneth Lay became CEO once again.

• Stock prices began to fall, as investors were uncertain about the company’s stability.

• This started a chain reaction: Enron had hedged against its own stock, so as long as the stock price was declining, it could not recover its losses.

• In September 2001, when Enron was desperately seeking sources of cash, it was thought that a wealthy equity investor might be able to help save the company.

• Three Enron executives flew to Omaha to see, if Warren Buffet, the head of Berkshire Hathaway, would be prepared to invest in Enron.

• Buffet’s apparent response was that he was not interested and would only invest in businesses that he could understand.

• During October 2001 Enron was becoming desperate to negotiate additional credit.

• Although the company was trying to maintain in public that its trading was strong.

• Credit agencies such as Moody’s Investors Service began to downgrade Enron’s debt.

• As a result of the lower credit ratings, Enron’s financing costs increased and lenders demanded early repayment.

December 2001,

Enron finally filed

for bankruptcy.

It’s share price

had collapsed from

about $95 to under

$1.

Now Presenting …MD. Tariqul Islam Mukith

Id:M150203075

CONSEQUENCES OF ENRON’S COLLAPSE• The remnants of Enron were due to be restructured as Prisma

Energy International Inc.

• The major audit firm Arthur Andersen became one of the casualties of the Enron collapse

• Other casualties of the Enron saga included JP Morgan Chase and Citigroup, which were each fined nearly $300m for deals with Enron

• Merrill Lynch, which was fined $80m for a transaction on which it made a profit of only $500,000

DISCUSSION

• Deakin and Konzelmann (2004: 136) argue that part of Enron’s problems could be attributed to its decision to become involved in derivatives trades, particularly in markets such as broadband.

• Enron was known as a very competitive company, which rewarded its staff with high salaries and large bonuses, but at the same time used aggressive job evaluation and firing policies.

• As regards the auditors, Arthur Andersen had carried out both audit and non-audit services, giving rise to a potential conflict of interest.

• The firm of Arthur Andersen had received from Enron $25m for audit services and $27m for non-audit services. Arthur Andersen also acted illegally by shredding and deleting documents.

• Ben Glisan, former Treasurer at Enron, became the first executive to be sentenced to prison after pleading guilty to criminal fraud and admitting to manipulating Enron’s financial statements.

• In July 2004, Lay was indicted on eleven criminal counts of securities and bank fraud.

• Apart from the court trials which involved Lay, Skilling, Fastow and others, the US authorities began to take action against Enron’s bankers.

Thank You!!!