ENRON Thomas Clarke

“The company that once held the admiration of the business world, promised the future and envisioned itself to be the world’s leading energy company, soon became the company whose past successes were nothing but an elaborate hoax.”

ENRON’S ORIGINS Due to the Deregulation Policy by the government (Thatcherism; Reaganism) Due to the Deregulation Policy by the government (Thatcherism; Reaganism) Acquisition of Houston Natural Gas by InterNorth. Acquisition of Houston Natural Gas by InterNorth. Moved to other endeavors (Gas Bank, foreign investments) Moved to other endeavors (Gas Bank, foreign investments) Not only supplying, but transmission and distribution as well Not only supplying, but transmission and distribution as well

ENRON’S COMPANY CULTURE Bright, Young and Fiscally Ambitious Bright, Young and Fiscally Ambitious “Company of Winners” “Company of Winners” Flattening the Management Organization Flattening the Management Organization Performance Review Committee Performance Review Committee

KEY PLAYERS Kenneth Lay- Enron Chair and CEO for sometime (Known as the face of ENRON) Kenneth Lay- Enron Chair and CEO for sometime (Known as the face of ENRON) Jeffrey Skilling- CEO after Lay Jeffrey Skilling- CEO after Lay Andrew Fastow- Chief Finance Officer (Was the person in charge of the projects that made ENRON books seemed like it was a very profitable company) Andrew Fastow- Chief Finance Officer (Was the person in charge of the projects that made ENRON books seemed like it was a very profitable company) Rebecca Mark- Head of Enron International (Voice of Ethical Considerations; she said that they hope to be caught someday) Rebecca Mark- Head of Enron International (Voice of Ethical Considerations; she said that they hope to be caught someday) Sherron Watkins- Vice President and SPE overseer. Sherron Watkins- Vice President and SPE overseer.

INTERMEDIARIES Accountants- Andersen Accountants- Andersen Were the people who “doctored” or made fraud entries in the books of Enron” Were the people who “doctored” or made fraud entries in the books of Enron” Lawyers- Vinson and Elkins Lawyers- Vinson and Elkins Was the firm that gave opinions to the BoD of ENRON. Technically, they just adhered to the every wish of the BoD and made opinions that mostly focused on loopholes of existing laws. Was the firm that gave opinions to the BoD of ENRON. Technically, they just adhered to the every wish of the BoD and made opinions that mostly focused on loopholes of existing laws. Consultants- McKinsey & Co. Consultants- McKinsey & Co. Company which Lay worked before becoming a CEO Company which Lay worked before becoming a CEO Banks- JP Morgan Chase, Citigroup Banks- JP Morgan Chase, Citigroup Sued due to lending money to ENRON without really meticulously checking the books of the said company. Sued due to lending money to ENRON without really meticulously checking the books of the said company.

Trade Practices KEEP PRICES HIGH IN THE MARKET AT ALL COSTS!!! KEEP PRICES HIGH IN THE MARKET AT ALL COSTS!!! By using accounting frauds and all type false marketing strategies By using accounting frauds and all type false marketing strategies Buying Political Power Buying Political Power By donating to BOTH political parties By donating to BOTH political parties But it was said that they gave highly in the Republican campaign But it was said that they gave highly in the Republican campaign Kenneth Lay was said to be in the inner circle of then VP Cheney Kenneth Lay was said to be in the inner circle of then VP Cheney Short and Long dated gas and power deals Short and Long dated gas and power deals They made contracts that did not depend on the price of future markets, instead they fixed the prices no matter what the price in the future it will be They made contracts that did not depend on the price of future markets, instead they fixed the prices no matter what the price in the future it will be Ex. Made contract A at $1 per kilowatt hour for the next 4 years, and it will be still be the same even say in the 2 nd year, the cost of electricity falls down to 50 cents per kilowatt hour. Ex. Made contract A at $1 per kilowatt hour for the next 4 years, and it will be still be the same even say in the 2 nd year, the cost of electricity falls down to 50 cents per kilowatt hour. Asset Light Strategy Asset Light Strategy Trading Energies and Commodities the way Wall street trades Capital Trading Energies and Commodities the way Wall street trades Capital Accounting Frauds (JEDI, SPE) thus paving the way to the manipulation of the books Accounting Frauds (JEDI, SPE) thus paving the way to the manipulation of the books Using partnerships with other entities and placing much capital in the said partnerships. The debts/ expenses DID NOT appear on the books of ENRON for it was a different entity but the proceeds and gains will be placed in ENRON’s books (JEDI). Using partnerships with other entities and placing much capital in the said partnerships. The debts/ expenses DID NOT appear on the books of ENRON for it was a different entity but the proceeds and gains will be placed in ENRON’s books (JEDI). SPE (Special Purpose Entity) acts in a way that a sponsor (usually an officer of ENRON) having a special project will come up with this SPE from ENRON funds. ENRON will set this Asset to this SPE and ENRON will lease it back from it usually at high costs, thus giving the SPE a notion that it is making money out of that asset. More people then will invest in this SPE and this will be reflected in ENRON’s books. SPE (Special Purpose Entity) acts in a way that a sponsor (usually an officer of ENRON) having a special project will come up with this SPE from ENRON funds. ENRON will set this Asset to this SPE and ENRON will lease it back from it usually at high costs, thus giving the SPE a notion that it is making money out of that asset. More people then will invest in this SPE and this will be reflected in ENRON’s books. Donations et. al. Donations et. al. Board: Very charming in paper Board: Very charming in paper LIES LIES AND LIES! LIES LIES AND LIES!

What went wrong? Trusted the consultants without question Trusted the consultants without question The Law firm’s legal opinions which usually focused on loopholes rather than the correct interpretations The Law firm’s legal opinions which usually focused on loopholes rather than the correct interpretations Too much leeway for CFO Too much leeway for CFO The CFO even “milked” ENRON by making an SPE The CFO even “milked” ENRON by making an SPE Short term results and no question how this is achieved Short term results and no question how this is achieved Cut throat mentality for their brokers. Cut throat mentality for their brokers. IN SUM: PROFIT ORIENTED ONLY IN SUM: PROFIT ORIENTED ONLY

Answers to problems Due to this case, laws were passed (Public Company Accounting Reform and Investor Protection Act) Due to this case, laws were passed (Public Company Accounting Reform and Investor Protection Act) Problem: Does not address other governance failures of other professionals (lawyers, consultants, fund managers) Problem: Does not address other governance failures of other professionals (lawyers, consultants, fund managers)

CONCLUSION Accounting Firm: lost license Accounting Firm: lost license Law firm: Civil cases and lost clients Law firm: Civil cases and lost clients Prison Sentence for the Key Players: Prison Sentence for the Key Players: Lay- 45 years Lay- 45 years Skilling- 185 years Skilling- 185 years Fastow (Pleaded guilty)- 10 years Fastow (Pleaded guilty)- 10 years