Group Members: Ikram Qamar M. Jawad Hashmi M. Arslan Mirza Wasiq Kaleem Raja

Farwa Nazar Asma Mehmood

Presentation On:

The Enron Collapse

Mission Statement:

TO BECOME THE JACK OF ALL TRADES AND TO BECOME A GLOBAL PLAYER

What You Learn From The Enron Collapse?

Importance of cash flow. Importance of Accounting rules. Special purpose entity {SPE,s} Importance of Culture. Management effects. Can business succeed without Ethics?

Well come To

Asma Mehmood(Introduction of ENRON)

Introduction:

Houston natural gas merge with Omaha based Internor ( large traditional gas pipeline) forming Enron corporation in 1985.

Enron was seventh largest company by revenue in US and it employed 25000 people worldwide.

Started trading in gas contracts and with the passage of time started dealing as diversified business.

Overseas Expansion

In 1992 Enron signed a contract for the Dabhol power project in India and investment was around $3 billion.

Enron bought energy plants in Brazil and Bolivia. In 1993 it build a gas turbine plant in England.

In July 1998 Enron purchased $2.2 billion Wessex water in UK.

The trading Operations:

In 1989 the company entered into a joint venture with Bankers Trust to set up a financial trading desk.

The major innovation was the development of VPP’s in 1990, the first VPP deal was with forest oil.

In 1994 Enron began buying and selling of electricity after obtaining exemption from regulation as a utility company.

ENRON TRAING (1996-2000)

Enron started dealing in weather derivatives to capture the market.

In late 1999 Enron-online was launched creating an electronic floor for oil and gas in US and Canada and quickly decided to expand to other countries.

In September 2001 Enron issued commercial papers for liquidity purpose.

Pitfalls of Enron Strategies:

At the end of 1987 Enron debt was 75% of market capitalization.

Projects started by Enron soon ends as the joint venture with Bank Trust ends on 1991.

Enron’s strategies focus on high value of activities and less focus on capital and internal affairs.

Well Come To

Farwa Nazar(Accounting schandles)

Accounting Scandals

From 1990 to 2001 Enron using irregular Accounting methods

Enron share price down from 90.56 during 2000.

Enron demise accrued after the revaluation that much of this profit was the result of special purpose entity.

Accounting scandals

Enron filed for bank ruptancy on December 2,2001.

The scandal is caused by ARTHUR ANDERSON which at the time was world main accounting company.

The company was found guilty during 2002 for destroying documents related to the Enron Audit.

Since SEC not allowed to accept audit from Anderson.

Accounting scandalsEnron used a very deceptive and fraudulent

Accounting practices.

Special purpose entity were created to mask significant liability from Enron financial statement.

These entities made Enron seem more profitable but actually losing money.

Accounting scandals

At this time Enron share price increased.

Chief financial officer lead the team which created the off book companies.

Mislead the investors by showing profitable growth to increase investment but not put it in to business and personally use this.

Well Come

ToMuhammad Arslan Mirza

(Audit role of Enron)

Audit Role in Enron

Regarding auditing good corporate governance requires high- quality standards for preparation and disclosure, and independence for the external auditor.

Enron’s external auditor was Arthur Andersen, which also provided the firm with extensive internal auditing and consulting services.

Audit role in Enron In the period leading up to Enron’s insolvency is

indicated by the fact that in 2000 consultancy fees(at $27 million) accounted for more than 50% of the approximately $52 million earned by Andersen for work on Enron.

The history of relations between Enron and Arthur Andersen suggests that they were frequently characterized by tensions due to the latter’s misgivings concerning several features of Enron’s accounting.

Audit Role in Enron

Both the Powers Committee and bodies of the United States Senate which have investigated Enron’s collapse have taken the view that lack of independence linked to its multiple consultancy roles was a crucial factor in Andersen’s failure to fulfill its obligations as Enron’s external auditor.

Andersen did not fulfill its professional responsibilities in connection with its audits of Enron’s financial statements.

Audit Role in Enron:

its obligation to bring to the attention of Enron’s Board (or the Audit and Compliance Committee) concerns about Enron’s internal contracts over the related party transactions

Well Come To

Muhammad Jawad Hashmi

(Ethical Problems In Enron)

Ethical problemsThe source of Enron’s Problems

Enron started to collapse at June 2001Used poor accounting procedures

Failed to record all assets and balance sheet

This problem was compounded thousands of time.

Ethical dilemmaStockholder reports inform public about financial information and business transaction.

Enron official did not notify public about accounting practices.

Should Enron have informed the public\stockholders?

Banking issues:Banking companies notably Citi group and J P Morgan Chase were involved in investment banking.

The commercial banking business with Enron The companies also go down when Enron bankruptcy

COPERATE ISSUESThe Enron description was practicing the accounting fraud by :

Creating the SPS(special purpose entity

Which exchange the debt the failing investment into sale revenue in financial statement

RECOMMENDATION:1) Examine Ethical climate2) Train the employees 3)Understand and practice company values

Well Come To

Wasiq kaleem Raja(Internal Conflicts)

Strategic conflicts

Enron’s strategies focus on high value of activities and less focus on capital and internal affairs.

Strategic Directions

In Enron their had been conflict over Strategic directions.

New business started but not control it and its fail.

Internal conflictDispute among employees for higher post.

Because promotion is not linked with the hard working and capabilities.

Every employee want to shortcut for promotion.

Higher management conflict

Due to higher management conflict the trading activities do not expand and it lower

the investment rating

Well Come To

Ikram Qamar(Conclusion)

Importance of Cash flows

Cash InflowInvestorsRevenuesDebts

Cash Out FlowExpensesDrawingsNew businesses

Importance of Accounting rules:

Financial Statements Accuracy Audit Reports Accounting rules and regulations Published statements.

Special purpose Entities

Definition: is a legal entity (usually a limited company of some type or, sometimes, a limited partnership) created to fulfill narrow, specific or temporary objectives.

Proper record maintain to check out the Outflows and inflows from specific purpose entity.

Importance of Culture

Ethical behavior Corrupt environment misleading Supportive mind Directors Global Business Culture

Management Effects:

Confusion among employees. Efficiency and cost. Business performance dependent. Operating activities.

Business Ethics:

Proper Accurate Statement Social responsibilities of business Corporate governance Stake holders.