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    Enron Scam Analysis

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    Rohan Raj Mishra
    Enron Scam The document summarizes the Enron scandal that led to the bankruptcy of the American energy company Enron in 2001. Enron grew rapidly in the 1990s by trading natural gas and electricity but hid billions in debt through off-balance sheet entities. Questionable accounting practices including mark-to-market accounting and the use of special purpose entities inflated Enron's revenues and hid losses. When Enron's stock price declined in late 2001, its hidden debts were revealed, destroying investor confidence and ultimately causing Enron to file for bankruptcy in December 2001.

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    Enron Scam Analysis

    Uploaded by

    Rohan Raj Mishra
    216 views16 pages
    Enron Scam The document summarizes the Enron scandal that led to the bankruptcy of the American energy company Enron in 2001. Enron grew rapidly in the 1990s by trading natural gas and electricity but hid billions in debt through off-balance sheet entities. Questionable accounting practices including mark-to-market accounting and the use of special purpose entities inflated Enron's revenues and hid losses. When Enron's stock price declined in late 2001, its hidden debts were revealed, destroying investor confidence and ultimately causing Enron to file for bankruptcy in December 2001.

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    The Rise and Fall of Enron. What led to the downfall? The Accounting Shenanigans

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    Enron Scam The document summarizes the Enron scandal that led to the bankruptcy of the American energy company Enron in 2001. Enron grew rapidly in the 1990s by trading natural gas and electricity but hid billions in debt through off-balance sheet entities. Questionable accounting practices including mark-to-market accounting and the use of special purpose entities inflated Enron's revenues and hid losses. When Enron's stock price declined in late 2001, its hidden debts were revealed, destroying investor confidence and ultimately causing Enron to file for bankruptcy in December 2001.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    216 views16 pages

    Enron Scam Analysis

    Uploaded by

    Rohan Raj Mishra
    Enron Scam The document summarizes the Enron scandal that led to the bankruptcy of the American energy company Enron in 2001. Enron grew rapidly in the 1990s by trading natural gas and electricity but hid billions in debt through off-balance sheet entities. Questionable accounting practices including mark-to-market accounting and the use of special purpose entities inflated Enron's revenues and hid losses. When Enron's stock price declined in late 2001, its hidden debts were revealed, destroying investor confidence and ultimately causing Enron to file for bankruptcy in December 2001.

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    Enron Scam

    ROHAN RAJ MISHRA

    IIFM

    PFM 09-11
    Synopsis

    Overview
    Timeline of events
    Reasons for the Debacle
    Modus Operandi
    Cases
     JEDI and Chewco
     Whitewing
     LJM and Raptors
    The Downfall
    Overview

    American energy company based in Houston – Texas

    Main Business area : Transmission and Distribution


    of Electricity and Natural Gas throughout U.S.

    Later on it was in trading of 30 different products


    Timeline of Events

    Till 2000-2001:
     Enron is performing well
    Early 2001:
     Speculations start – company is keeping Wall Street in dark
    Mid 2001:
     Irregularities in investments come to light
     Overstated revenues and understated liabilities
     Sudden change in management
    Late 2001:
     Investor’s confidence declines and stocks starts falling
     Company admitted accounting errors
     Filed for chapter 11 bankruptcy protection
    Jan 2002
     U.S. Justice department launches criminal investigation
    Reasons for the Debacle

    Poor Accounting Practices


     Mark-to-Market Accounting
     Extensive reliance on SPEs
    Focus of CEO Jeff Skilling towards meeting Wall
    Street Expectations
    Poor performance in low margin high risk diversified
    businesses
    Poor Accounting Practices

    Mark-to-Market Accounting
     It requires that a long-term contract once signed,
     Income would be recorded at
     the present value of net future cash flows
    Special Purpose Entities(SPEs)
     Shell companies with distinct legal identity
     Created to fulfill narrow, specific or temporary objectives.
     SPE's are typically used by companies to isolate the firm from
    financial risk.
    Modus Operandi

    Enron registered huge revenues with the help


    of Mark-to-market accounting
    It used off-balance sheet entities to hide
    debts/liabilities
    It inflated revenues using SPEs by showing
    loans as sales
    Booked costs of cancelled projects as assets
    Stretched accounting practices by complex
    business models
    JEDI and Chewco

    Jt. Energy Devp Inv. A JV of Enron &


    CalPERS(Pension fund)
    In order to encourage CalPERS to divest its stake,
    Enron needed to purchase JEDIs Equity.
    To avoid Debt Financing of the deal, Enron
    guaranteed Chewco LPs Debt and Chewco bought
    stake in JEDI on behalf of Enron
    Whitewing

    SPE used as financing vehicle by Enron


    Bought assets from Enron using Enron Stock as
    collateral
    Transactions were approved by Enron
    Assets transferred were treated as sales but those
    were loans given
    LJM and Raptors

    Enron organized two LPs to participate as an outside


    equity investors in SPEs
     LJM Cayman. L.P. (LJM1)
     LJM2 Co-Investment L.P. (LJM2)
    LJM Related SPEs – Raptor I - IV
    Transferred more than $1.2bn assets to these SPEs
    Simplified View: An Irony
    The Downfall

    With help of SPEs, company raised debt finance for


    its non-core businesses

    It reported some of its debts and hid the others

    This situation was good until the Stock Price


    remained high.
    The Downfall

    When the Stock Prices fell, the off-balance-sheet


    liabilities put pressure on debt agreements

    Causing downgrade of credit ratings

    With businesses with thin margins, a lower credit


    rating increased the cost of borrowings to the point
    that the company fell in a liquidity trap.
    Rise & Fall of Enron

    Movement of Enron’s share price (USD)


    And that is how you can bring
    a company claiming
    assets worth almost £62bn
    to
    bankruptcy

    In a matter of months
    Thank You

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