Table of contents

Open.....................................................................................................................................3
I. Enron's case......................................................................................................................4
1.About Enron..................................................................................................................4
History...........................................................................................................................4
Culture...........................................................................................................................4
2. The problems around company’s accounting...............................................................5
a. How Enron works.....................................................................................................5
b. Enron’s finance.........................................................................................................6
c. Accounting problems................................................................................................7
d. Events........................................................................................................................8
e. Consequence...........................................................................................................10
3. Learning from Enron..................................................................................................10
II. Question surrounds the case..........................................................................................12
1. How did the corporate culture of Enron contribute to its bankruptcy?......................12
2. Did Enron’s bankers, auditors, and attorneys contribute to Enron’s demise? If so,
how?...............................................................................................................................12
3. What role did the company’s chief financial officer play in creating the problems
that led to Enron’s financial problems?..........................................................................13
References..........................................................................................................................14

I. Enron's case
1.About Enron

History

The predecessor of Enron Corporation was the merger of two gas pipeline
companies, Houston Natural Gas and InterNorth, led by Mr. Kenneth Lay. In 1985, the
business stayed solely a producer of natural gas, electricity, and communications for
wholesale and retail customers both locally and abroad. They are also engaged in the
creation of electricity plants and energy pipelines for all industries.
In 1990, the United States Congress passed legislation to de-regulate the selling of
natural gas, which, of course, benefited companies such as Enron. In 1992, Enron became
the biggest seller of natural gas in North America, trading its gas contracts for $122
million (before interest and taxes), the company's second greatest provider to net revenue.
As a result, Enron became the center of Wall Street at the moment.
Enron rose to the seventh-largest company in the Fortune 500, with sales
increasing from approximately $31 billion to more than $100 billion between 1998 and
2000. In 2000, wholesale energy purchases accounted for approximately 93% of Enron's
earnings, with natural gas and electricity accounting for the remaining 4%. The dot-com
boom crested in the late 1990s, when the Nasdaq hit 5,000. Because Internet firms were
trading at ridiculously soaring prices, most investors and authorities simply accepted
increasing share prices as the new standard.

Culture

The Enron Corporation, which once proudly declared, “We are a leading financial
company,” takes matters within the company very seriously.
Even though it was already a billion-dollar industry at that time, Ken Lay's vision
went even further, pushing the two investors with the largest shares, Irwin Jacobs, an
individual investor, and Leucadia National Corporation, out of major shareholders at a
price higher than the stock price at that time. The source of money to pay for that huge
amount of money is from the Employee stock Ownership Program (ESOP) project: The
company will pay employees with its own shares. In fact, when employees' salaries are
shares of the company, this will make employees stick with the company, they work
more, perform better to increase the company's share price, thereby, Your money will be
higher. This is beneficial to the company as it avoids the risk of being acquired by other
companies. However, if an employee of the company leaves, all shares will be taken, and
the employee will leave empty-handed.
Before the scandal happened, the head of Enron was confident when he said that
Enron was always upright, with integrity, with the slogan “Vision and Values”. Instead,
integrity was pushed aside at Enron, particularly by top managers. Some employees at the
company believed nearly anything could be turned into a financial prod- uct and, with the
aid of complex statistical modeling, traded for profit. Short on assets and heavily reliant
on intellectual capital, Enron's corporate culture rewarded innovation and punished
employees deemed weak.

2. The problems around company’s accounting

 With all of this, people used to believe that "Enron will be the leading American
company, well worth the investment." However, this is not the case in actuality. Enron
filed for bankruptcy in 2001 after the government found flaws in its audits and financial
accounts.

a. How Enron works.

In 1989, Enron hired McKinsey, the leader in the management consulting industry
at the time, to help the company generate more revenue. And they have learned that in
times of economic hardship, gas and electricity costs will fluctuate and change
continually. They made the choice, communicating to the customer a set price and a
specified delivery period, or "Forward" contract. Customers can then plan their spending
instead of waiting for the market price. Example: A customer pays Enron to purchase one
gallon of petroleum, which Enron must deliver to the customer one month later. If the
price of gas rose by the time of delivery, Enron would be forced to endure the deficit.
Enron expanded rapidly because of this contract strategy. When drafting a
contract, Enron could receive the money first and offer it later as a time advance. The
business has evolved from an energy company to a highly innovative finance
organization. Enron then established the Gas Bank, which acts as a middleman between
energy deals, assuring supply and pricing stability. Enron will benefit from the contracts
with each transaction. Enron business has become a recognized energy banking business.
Enron also sticks out for creating contracts with non-traditional elements such as wood.
The weather derivative contract is the most unique: an insurance policy for companies
impacted by weather.
Telecommunications technology businesses grew rapidly during the 1990s. Enron
saw a chance and built an underground fiber optic cable network linking Poland to Las
Vegas. At the same time, Enron declared its intention to deliver Internet access to all
Americans. As a result, Enron's stock was the trendiest at the time. Enron's shares rose
from $40 in January 1988 to $90 that summer, making it essential for Internet bandwidth
derivatives contracts.
At the beginning of 1991, Enron invested in electric energy companies and
projects, all over the country, from the US, UK, France, etc. And it accounted for 25% of
Enron's revenue that year.

b. Enron’s finance

Enron's financial statements show Enron's remarkable growth during this period.
Especially from 1991 to 2000, that is, after 10 years, the company increased its revenue
by 18 times, reaching 100 million USD.

Chart 1: Enron’s Revenue from 1987 to 2000

Not only revenue, but Enron's net income also grew steadily, except for only one year in
1997 when they had to revise their reports. And in 2000, their net income reached 979
million dollars.
Chart 2: Enron’s stock price from Dec 1991 to Dec 2001.
As the chart above shows, Enron's stock was bought dramatically at the end of
1999, and reached 90.75 dollars. The stock price doubled to triple that of its peers,
leading both the energy industry and the financial industry at the time.

c. accounting problems

However, all of the above achievements are tricks created by the leaders. Here is a
summary of how they do it.
First, they falsified financial statements.
During its life, Enron recorded zero revenue for the entire contract value. When
acting as an intermediary to create a derivative contract between the two companies,
Enron, instead of recording the commission received, recorded the amount received by
the supplier in the financial statements. Enron's revenue, even though it was just an
electric company, was supposed to grow only about 2% like other companies at the time,
skyrocketing to more than 700% in two years.
Second, Enron uses Mark-to-market accounting.
This method has been in operation in Enron since 1991, by Jeffrey Killing. Instead
of recording the actual value of the orders they supply to a debit account, they credit it
directly to the revenue section. That is, the company's accountants have recognized future
revenue, discounting the present, even though the goods have not been made, they will
default on the amount of that contract even if the future price changes.
Because of this, Enron had to constantly falsify financial statements, overstating
the amount of revenue he had annually. Thousands of contracts were forged to cover up
the overstated entries, causing Enron's fake earnings to skyrocket.
Thirdly, using SPVs.
When the fake financial statements were made in large numbers, Jeff produced a
way to securitize. Andrew Fastow is someone hired as CFO to turn fake contracts into
valuable securities (SPVs or SPEs), or backyard companies. These companies were
created to create off-balance sheet transactions and hide sky-high debts and fake contracts
from investors, thereby reducing the debt portion of the financial statements and
overstating the equity of the revenue. Simply understanding this, Enron sold short bad
assets to SPVs, then sold them to investors to attract money to Enron. As a result, Enron
had no more bad assets or unrealized contracts. In addition, they will record cash flow
from SPV as revenue and stock to record in financial statements.
Enron's projects, though difficult to execute, were lauded for selling shares of the
company. Not only that, SPV is also "insured" by Enron's own stock, so investors are
more invested. And by the time they were arrested, the government had found more than
3,000 Enron SPV companies.
d. Events

In June 2001, Enron Vice President Sherron Watkins, who had worked at
Enron for eight years, discovered errors in Enron's books. She sent a letter of complaint
to the heads but received no reply. Until a private appointment with Lay, she said: "Enron
would implode in a wave of accounting scandals". Enron hired a law firm to review
suspicious transactions, and that year, Enron reported a third-quarter loss of $618 million
and a $1.2 billion write-off tied to partnerships. She was transferred to a low position and
quit to take over the company in November of that year.
The same year, Enron's CFO was indicted on multiple counts of fraud, money
laundering, conspiracy and one count of obstruction of justice. The government claimed
that it was the company's chief financial officer who was behind all of Enron's fraud and
theft. These included: using a partnership to conceal Enron's debt of more than $1 billion;
defrauding shareholders through off-balance sheet partnerships for profit; disguise the
profits, which the fake contract brings, through gift giving to family members. Initially,
he did not admit to the above charges, however, after witnessing the collapse of the
company, he confessed and listed Enron's numerous schemes to hide bad debts and
inflated revenue. The evidence he provided was used against the leaders of Enron. Along
with her husband, the former assistant treasurer also left Enron and pleaded guilty to
felony taxes, admitting illicit revenues. He also helps the government by confessing
everything he knows, besides teaching at universities to learn about what happened at
Enron.
The lawsuit against Enron's chief financial officer is based on testimony provided
by the company's chief executive officer. He himself pleaded guilty to money laundering
and wire fraud, presenting evidence to prosecutors to sue Enron. Also included was
Enron's top energy trader, Timothy Belden, who pleaded guilty to wire fraud; British
bankers in Houston for contract fraud; employees of the financial group Greenwich
National Westminster Bank; ...the people mentioned above were sentenced to prison and
ordered to refund the entire fraudulent amount.
In particular, Enron's chief executive officer, former CEO Jeffrey Skilling, was
the most difficult person to prosecute in the case. He confidently relinquished his right to
incriminate himself and testified before Congress that he had no knowledge of any
financial wrongdoing. However, all of his lies were exposed by Enron's chairman and
chief executive officer in February 2002, that he himself had used off-balance sheet
partnerships to commit fraud and that Jeff himself had been Enron's fund manager. Jeff
was found guilty of knowingly avoiding responsibility for corporate misconduct and
sentenced to 24 years in prison. He filed an appeal the following years, and in June 2010
the U.S. Supreme Court ruled that he had not breached his duty of truthfulness, however,
by contributing to the fraud of Enron, you are still in jail.
The chairman of Enron, Ken Lay, the man behind it all, seems to have foreseen
the revelation, after 10 years of developing a new form of finance, he ceded the
chairmanship to Jeff, and became the chairman of the board of directors. When he was
arrested, he said that he knew almost nothing about what was going on in the company,
even though he attended board meetings. He also said it was legal to believe in Enron's
trading contracts. Before Enron went bankrupt, he confidently reassured employees and
investors that they would continue to invest in Enron, based on growing sales and
growing supplies. He began selling $80 million of his own stock in late 2000, though he
continued to encourage employees to buy more shares in the company. Lay was
investigated, he has withdrawn more than $4 million worth of Enron line of credit several
times and repaid in stock, and as a shareholder he does not need to report. According to
his testimony, he did not know about the financial accounting and ethics in the company,
and he heard back only through lawyers and executives. He said that the company's
financial transaction decisions are approved by the company's attorneys and directors. In
the end, Lay was convicted of 19 counts of fraud, conspiracy and insider trading.
As for the law firm that worked for Enron, Houston Vinson & Elkins Law Firm,
during Enron's time in business, brought in $450 million or 7% of the company's revenue.
Not only that, the general counsel and some members of Enron's legal department are
also from this company. When questioned, the company denied allegations of accounting
fraud, using partnerships to cheat. The company did not admit liability and agreed to pay
$30 million to Enron to settle the claim.
As for the audit firm that worked for Enron, Arthur Andersen LLP, who was
responsible for ensuring the authenticity of all of Enron's financial statements and books,
was subject to scrutiny throughout the auditing industry. During the time of Enron's
operation, under the audit of AA, investors always considered that the company had
healthy, developed, worth investing in finance, and the accounting procedures were
always fair and honest. And finally, AA was suspected of being one of Enron's fraudulent
partners. The government discovered more than $50 million was earned through the sale
of consulting services to Enron; AA destroyed Enron's SEC audit documents. To date,
Anderson is no longer active.

e. Consequence

Enron's cash flow from activities changed from being positive in 2000 to being
negative in 2001 after restating its financial records for the fiscal year 2000 and the first
month of 2001. Enron's stock price decline caused it to experience a severe liquidity
deficit. Investor trust collapsed in October 2001, bringing down Enron's stock price as
well, as it was compelled to cover some significant shortfalls for its partnerships, Enron's
financial statements, and allegations that officials profited directly from the partnership
transactions.
For a while, it seemed like Dynegy could save the day by giving Enron $1,5
billion in cash, which was guaranteed by Northern Natural Gas, the company's most
important conduit, and then buying Enron for about $10 billion. However, $4 billion in
off-balance-sheet debt became owed when Standard & Poor's reduced Enron's debt to
below investment grade on November 28, 2001, and Enron lacked the funds to pay it.
The agreement was canceled by Dynegy. Enron declared insolvency on December 2nd,
2001.
 The collapse of Enron entailed an extremely damaged American economy.
Investors, who had invested tens of billions of dollars, lost everything. People no longer
trust the integrity of companies' accounting. Thousands of Enron employees not only lost
their jobs, couldn't find jobs, but also lost their life insurance premiums. Not only that,
but some people also committed suicide because they could not stand the pressure of
public opinion.
In 2003, Enron announced the restructuring of the company and the repayment of
creditors. Three companies set up to pay off debt: Cross Country Energy Corporation,
Prisma Energy International and Portland General Electric. Creditors will receive ⅔ of
the amount and be equity in the three new companies. CCEC inherited the North
American natural gas pipeline and was sold to CCE Holding for $2.45 billion to repay the
debt. PEI took over 19 of Enron's energy companies and sold them to creditors. PGE is
Oregon's largest electricity company that has rid itself of Enron's shadow and grown
independently. All assets not related to the above three companies are liquidated.
A company called Enron Creditors Recovery Corporation was created to assist
Enron's creditors, "to reorganize and liquidate the remaining operations and assets of
Enron following one of the largest and most complex collapsecies in US history".
According to ECRC, the total amount to be paid is $21.738 billion. In addition to the
above, Enron also has to pay the government for wrongdoing in its business, along with
at least two other electricity sellers. In 2005, Enron paid California $47 million for taking
advantage of consumers during an energy shortage.

3. Learning from Enron

The Enron scandal was the biggest financial event of the 1990s and 2000s. Human
greed is endless, for money, it will use all means to get it. During that time, corporations
praised the performance of their employees instead of thinking about their ethics; lending
companies they know to contain fake information for a quick profit; Other companies are
willing to place risky financial instruments when buyers do not understand the risks of
those instruments. As a result of the recession, the worldwide economy shrank, and many
old companies went bankrupt. The economic crisis has inspired a new wave of legislation
designed to prevent misconduct by companies.
After the Enron scandal, the economy received many lessons. First, regulators
must be improved to detect corporate misconduct. Second, companies and background
regulators heed the warnings of those concerned. Third, executives should understand the
risks and benefits of the financial instruments their companies use and maintain a
thorough knowledge of the inner workings of their companies.

II. Question surrounds the case.

1. How did the corporate culture of Enron contribute to its bankruptcy?
Enron's corrupt employees were more responsible for its bankruptcy than its company
ethos. Enron's corporate culture is characterized as haughty, and the business proclaimed
itself to be the best in the world. Although this may be the case, it is insufficient for a
company to declare insolvency. We can observe the same phenomenon if we look at
present-day businesses. Steve Jobs and Apple, as an illustration. Apple is undoubtedly the
most successful business in the world, but Steve Jobs was also haughty. These, however,
do not indicate that Apple will go insolvent. This has pros and cons. The employee does
not feel secure, but on the plus side, they can make more money. The same applies to
trading businesses when discussing the dangers that the company attempted to manage.
This is how selling businesses operate. They make more money when there is greater
danger. These traits did not contribute to Enron's collapse. When the executives began to
cheat, Enron made errors. When there is a weak auditing mechanism, individuals may
attempt some fraudulent methods. The chairman, CEO, and CFO of Enron—the
company's senior executives—are liars in this instance. They established a structure,
showed no interest in resolving issues, and were only concerned with the additional
money they could make. They did not want to receive terrible news, which is why. We
are discussing the purchases of natural gas or the trading of energy. These processes have
significant turnover. Every procedure could cost millions of euros. The top executives
would have wanted to know every stage of these operations if they had been engaged in
good operations. Because the business could lose millions of dollars if something goes
awry. Although I can accept that Enron's business culture was cruel, this did not lead to
the company's collapse. Enron's bankruptcy was largely caused by avaricious senior
leaders.

2. Did Enron’s bankers, auditors, and attorneys contribute to Enron’s

demise? If so, how?

Certainly, Enron's financiers, accountants, and lawyers played a role in the company's
failure. Ken Lay, the head of Enron, defended himself by saying that he thought all the
transactions were legitimate because lawyers and accountants had given their blessing.
Although he may be dishonest, the CPAs and attorneys played a crucial part in this case.
Even if the leaders persisted in doing those unlawful activities, they were supposed to tell
them if there was something amiss and not give their approval. Vinson & Elkins, the
company's legal agency, provided guidance to Enron prior to establishing the special
purpose partnerships. The validity of the transactions was not mentioned in the Vinson
and Elkins opinion papers. The law company, however, advocated for the transactions'
legality. Despite an internal caution that stated that manipulation could be construed as
aiding and abetting, Merrill Lynch, an investment bank, assisted Enron in manipulating
its income statement. The auditor for Enron, Arthur Andersen LLP, was in charge of
making sure that internal accounting and financial accounts were accurate. In their
assessments, Arthur Andersen omitted vital details and approved of Enron's deceptions.
3. What role did the company’s chief financial officer play in creating the
problems that led to Enron’s financial problems?

The actions taken by Enron's CFO, Andrew Fastow, in an effort to exaggerate the
company's profit led to accusations against him of fraud, money laundering, conspiracy,
and one count of obstructing the judicial system. Fastow used special purpose companies
(SPEs) to hide Enron's losses while inflating Enron's earnings. Fastow invented SPEs,
according to former CEO Jeffrey Skilling. Federal authorities claimed that Fastow was
the mastermind behind the partnerships and that he succeeded in concealing about $1
billion in Enron debt, which was solely responsible for Enron's bankruptcy, after the
inquiry. Pastow defrauded Enron's stockholders by making the company look more
lucrative than it actually was by manipulating off-balance accounts. Federal authorities
also asserted that Fastow earned about $30 million through these alliances, which he used
to purchase kickbacks as presents from family members.
References
1. https://vi.wikipedia.org/wiki/V%E1%BB%A5_b%C3%AA_b%E1%BB
%91i_Enron
2. https://www.youtube.com/watch?v=2R_53TK_YpY
3. https://www.investopedia.com/updates/enron-scandal-summary/