THE ENRON SCANDAL

THE ENRON SCANDALJing Li

Chrissie Parsons

Holy MoyeCharles Rollins

BACKGROUND

• Texas-based pipeline company formed in 1985.

• One of America’s largest energy companies

• From 1996 and 2000, revenues increased by more than 750%.

• Scandal revealed in 2001.• Stock price fell from $90 per share to

less than $1

KEY PLAYERS

• Kenneth Lay – Chairman and CEO• Jeffrey Skilling – COO, then CEO• Andrew Fastow - CFO • Rick Causey - CAO• Other Executives

HOW WAS THE FRAUD PERPETRATED?• Poor corporate governance• Fraudulent accounting and unethical behavior

Inflated assets and profits Understated liabilities and losses

• Audit failure

HOW WAS THE FRAUD CONCEALED?• Arthur Andersen• Deceptive transactions• Creative accounting

HOW WAS THE FRAUD DETECTED?• Sherron Watkins• Raptor losses• spotty cash flow

HOW WAS THE FRAUD DETECTED?• Revenue growth report• Stock prices

FRAUD PREVENTION

• Code of Ethics• Ethical Environment• Ethical Management

FRAUD PREVENTION

• Conflict of Interest• Acted as “Auditor & Consulant”• Mark to Market Accounting

THE IMPACT

• Bankruptcy of Enron• Dissolution of the Arthur Andersen accounting

firm • Employees and shareholders lost billions in

pensions and stock prices• 20,000 employees lost their jobs and health

insurance• Changes in corporate governance• Sarbanes-Oxley legislation

SARBANES-OXLEY ACT

• Passed in response to recent accounting scandals

• Anti-fraud legislation• Aimed to protect investors• Corporate accountability• New financial reporting responsibilities

QUESTIONS?