Enron scandal
In 1985, Kenneth Lay founded Enron with the merger of two natural gas pipeline companies called Houston Natural Gas and Internorth. In the early 1990s, he helped to start selling electricity on a market basis, and shortly after the American Congress passed legislation emanating from the sale of natural gas. As a result, it was possible for merchants like Enron to sell power at a higher price, which led to the development of energy companies. As a result of disinvestment of natural gas, the producers and local governments, who came to liquidity in price and condemned it to increase the controls, Enron and other companies were able to keep free market mechanism through strong grouping.
By 1992, Enron had become the largest company to sell North America's natural gas and became the second largest contributor to Enron's net income with a $ 122 million interest and tax revenues. In November 1999, the establishment of an online trading model EnronOnline increased the company's ability to further develop and negotiate and run a trading business.
As part of an increased effort, Enron has embarked on a strategy to move into other businesses. By the year 2001, Enron had become an industrial house which owned and operated internationally on gas pipelines, pulp and paper plants, broadband properties, power plants and water plants. The corporation also sold some products and services in the money market.
As a result, Enron's share has increased by 311% from the 1990s to the end of 1998, which was a significant increase in the growth rate of the Standard & Poor's 500 Index. The company's share increased by 56% in 1999 and 87% in 2000, compared to an increase of 20% and 10% respectively in the Index during these years. By December 31, 2000 Enron's stock price was $ 83.13 and its market capitalization was $ 60 billion, which was 70 times its revenue and six times more than its book value. Which was pointing to the highest expectations of the stock market about the future of the company. In addition, Enron was ranked as the largest company in America's most innovative research in Fortune's most prestigious company survey.
Causes of Fallout
Enron's opaque financial reports did not give explicit details of its operations and financial details to shareholders and analysts. In addition, its complex business model was beyond the limits of the account, making it necessary that the company could adjust the accounting limitations to manage its income and change the balance sheet to show the company's performance in its interest. According to MacLean and Elkid in his book The Smartest Guys in the Room, the Enron scandal came into existence due to the constant collection of the habits and values that were initiated years ago and the end of control in the end. It seems that from the end of 1997 to its end, Enron's primary objective was to put inferential revenue and inferred fund flow in accounting and financial transactions, showing properties of multiple values and accountability outside of accounting.
All these issues eventually led the company to bankruptcy and most of it took action, due to the indirect or direct directions of Jeffrey Skilling, Andrew Fastow and other officials. The company had been the Le Chairman in the past few years and had ratified it only after checking the steps taken by Skilling and Fastow. Skilling, which consistently focused on meeting the expectations of Wall Street, favored use of Mark-to-Market accounting and forced Enron executives to find new ways to cover their debts. Fastow and other officials, ... discovered off-balance-sheet vehicles, critical financial structures, and strange tricks that only few people can understand today.
Recognition of income
Enron and other traders involved in the sale of energy were profitable by providing services such as bulk sales and risk management in addition to the development of electricity production stations, natural gas pipelines, storage and processing facilities. When the purchasing and sales of the products were to be risked, merchants were allowed to sell the sale price as income and the value of the goods sold as the value of the goods sold. Conversely, the agent did not provide a customer service, but at the risk of a business dealer for buying and selling. When the broker was included in the service provider category, he could sell the sale price and the brokerage as the income, although he could not show the value of the whole transaction as income.
Commercial companies such as Goldman Sachs and Merrill Lynch used the orthodox agent model (which only showed sales or brokerage as income) to show an income, Enron chose to sell its entire sale price of each transaction as income. This merchant model was considered more aggressive in the accounting interpretation than the agent model. Enron's method of increasing sales revenue was later adopted by other companies operating in the field of energy sales as part of an effort to survive in competition with a large increase in the company's revenues. Other energy companies such as Duke Energy, Reliance Energy and Dynegy also joined the list of Fortune 500's top 50 companies with Enron, the main reason behind this was the revenue earned by the sales operations.
Enron's distorted, over-the-counter income was used to foster the company's innovative research rather than conceal the debt, to create a high growth rate, and to create an outstanding business exhibit company. Between 1996 and 2000, Enron's revenue rose more than 750 percent, from $ 13.3 billion in 1996 to $ 100.8 billion in 2000. The annual expansion of nearly 65 percent is unprecedented for the entire industry, including the energy industry, which also honors the 2-3 percent annual growth. In the first nine months of 2001, Enron saw its revenues at $ 138.7 billion, due to which the company took the sixth place on the Fortune Global 500 list.
Mark-to-market accounts
Accounting of Enron's natural gas business was very straightforward; In each period, the company showed the actual cost of gas supplied and actual revenue from the sale. However, when joining the skilling company, he sought to adopt a mark-to-market accounting method for the sale business, for which he gave the reason that ... it shows the true economic value. Enron became the first non-financial company to use this accounting method for long-term complex agreements. Once the long-term contract is signed in the mark-to-market accounting, then the current value for the future net cash flow is estimated by the revenue. Often, it becomes difficult to assess the eligibility of these types of contracts and its related costs. In an effort to overcome the major difference between profits and cash, false or misleading reports were given to investors. In this method, the income of the project was noted, which would increase the financial income. However, in future years, the profits could not be included, so the revenue of new and more projects was included to show an additional growth in order to please investors. According to an Enron rival, if you show an increase in your income, then you have to keep getting more deals in order to show as much or more income as possible. Despite the limitations of the mark-to-market accounting method and the concept of risks, the US The Securities and Exchange Commission (SEC) approved Enron's accounting mechanism for sale of natural gas future contracts on January 30, 1992. However, Enron began to use this method in other areas of the company to travel to Washington's assumptions.
In July 2000, Enron and Blockbuster videos signed a 20-year contract to provide entertainment to demand in various U.S. cities by the end of the year. After numerous experimental projects, Enron showed the expected profit of more than $ 110 million from the deal, although analysts raised questions about the technical competence of the service and market demand. When this network failed to work, Blockbuster withdrew from the contract. Although the deal resulted in a loss, Enron continued to show a profit for the future.
Special purpose company
To provide funding to specific assets or to manage the risks associated with it, Enron used a special purpose company to create a limited partnership or a temporary or special purpose. The company chose to provide at least or minor information about the use of a special purpose company. These shell companies were created by the sponsor but it was funded by independent equity investors or debt. A series of instructions have been issued about whether the special purpose company is different from the sponsor for the purpose of presenting a financial report. To hide Enron's debt, by 2001, it has used together a special purpose entities.
Special purpose entities were used solely for closing the accounting rules and for other purposes. As a result of a single regulation, the responsibilities in Enron's balance sheet have been lowered and its equity and its revenues were overstated. Enron told its shareholders that against the losses in its non-inflated investments, he has got protection using a special purpose company. However, investors were unaware that the use of special purpose companies was for the use of the company's own shares and financial guarantees for the hedging. Due to this structure, Enron was not protected against the risk of damage. Notable examples of special purpose entities used by Enron include JEDI and Chewco, Whitewing, and LJM.
==== JEDI and Chevco ====
In 1993, Enron established a joint venture called Joint Energy Development Investments (JEDI) with California State Pension Fund (CalPERS) with energy investment. While working as Chief Operating Officer (COO), Skilge told Kalper in 1997 to partner with Enron in a separate investment. CalPERS had an interest in this idea, but showed interest in investing only if his partnership was released from JEDI. However, Enron did not want to show any debt on the company's balance sheet after purchasing CalParce's stake in Jedi. Chief Financial Officer (CFO) Fastow Chevco Investments LP Named a special purpose company, which raised debt on Enron's assurance, which was used to buy CalPerce's stake in a joint venture for $ 383 million. Due to Fastow's creation of Chevaux, the loss of Jedi remains outside Enron's balance sheet.
The arrangement between CalPayers and Enron came out during the company's fall in 2001, due to which accounting treatment of both Enron's Chevco and JEid was disqualified. For this disqualification, Enron needed revenues of $ 405 million in revenue from 1997 to 2001. In addition, due to consolidation the company's total debt increased by $ 628 million.
Whitewing
White-winged pigeon is a hometown in Texas, and was also named by Enron, a special purpose company used as a financial vehicle. In December 1997, Whitewing Associates L.P. with $ 579 million provided by Enron and $ 500 million from an outside investor. Established. Two years later, the company's adjustment was changed so that it would not be affiliated with Enron and its debt would not be taken into account in the balance sheet of the company. Whitewing was used to purchase assets including Enron's power stations, pipelines, shares and other investments to buy shares. Between 1999 and 2001, Whitowing purchased Enron's share of $ 2 billion from Enron using collateral as a collateral. Even though the Enron Board approved the deal, the assets were not sold in the true sense and should be considered as loans.
Fastow created two limited partnerships in 1999: LJM Cayman LP (LJM1) and LJM 2 Co-Investment LP (LJM2), whose purpose was to share Enron's poor performance and buy a stake in improving financial reports. Each of these partnerships was meant to provide a special service to only external equity investors who needed a special purpose company that was used by Enron. Fastow was required to go before the company's board of directors to get rid of Enron's rules to run this company (as he was working as Enron's Chief Financial Officer-CFO). LJM 1 and 2 have been funded by outside JPMorgan Chase, Citigroup, Credit Suisse First Boston and Wakovia, about $ 390 million of out-of-equity funding. Merrill Lynch, who marketed this equity, also contributed $ 22 million.
Enron Releurs 1-4, JLM-named JLSL-named Jurassic Park, transferred four hundred million dollar payable notes to Enron's millions of common shares and $ 150 million in addition to the assets worth over $ 1.2 billion including rights to purchase millions of shares. Special purpose companies were used to pay all of these using the companies' debt tool. The total amount of these instruments was $ 1.5 billion in total and the companies were used for Eneron's $ 2.1 billion national derivatives contract.
Enron used the Repeaters heavily and in the same case, when the company issued a share for public offering, the Note Payable showed assets on the company's balance sheet and increased the shareholder's equity for the same amount. This type of transaction later proved to be problematic for Enron and its auditor Arthur Andersen as it eliminated the company's equity from $ 1.2 billion in shareholder's equity.
$ 2.1 billion worth of derivatives contracts resulted in erosion. Enron swaps installed with the stock prices up to its highest value. In the five quarters of the fiscal, the value of the portfolio under swaps decreased by $ 1.1 billion as the stock prices had gone down (under the contract, Enron now had a $ 1.1 billion debt of special purpose companies). Enron, using the proper value accounting, was able to show a profit of $ 500 million from swap contracts in the 2000 annual report, which compensated the losses made in the stock portfolio. This benefit (before it was re-announced in 2001) had a third part of Enron's 2000 earnings.
Corporate governance
Hilli and Pelépu write that the well-paying money market establishes a proper connection between information and incentives and governance between managers and investors. This process should be done by the network of intermediaries including the guaranteed professionals like the external auditors and the internal governance agents, such as corporate boards. On paper, Enron's Board of Directors was the ideal, which included external directors and talented audit committees owned by important stakeholders. In the 2000 Corporate Review Review of the Best Executive Board, Enron was included in the top five boards. Despite the complex corporate governance and intruders network, Enron succeeded in attracting large amounts of money to fund its questionable business model, hiding true performance through a series of accounting and financing exercises, and moving its shares to a sustainable level.
Compensation to officials
While Enron's compensation and performance management system was designed to sustain and reward its most valuable employees, this system contributed to the degrading corporate culture, allowing employees to stay focused on short-term income to earn maximum bonuses. Employees have been paying attention to continuous large-scale transactions, regardless of the quality or profits of the flow of funds to get a higher rating in their performance review. In addition, the company's accounting results were taken to the record as soon as possible to match up with the company's stock price. This system assures large cash bonuses and shares to the employees of the company dealing with the deal and the deal.
Like other American companies, Enron's management used to be widely used by stock options to compensate. Perhaps the management side has given birth to a very rapid growth expectation as the management of the company's employees as a prize, so that revenue revenues can be fulfilled on Wall Street expectations. On December 31, 2000, Enron was left to pay approximately 96 million shares (about 13 percent of the company's general stock) under the stock option scheme. Enron's Proxy statement said that the allocation was expected to be used in three years. Using the shares held by Enron's January 2001 stock price of $ 83.13 and the directors declared in the 2011 procecic statement, Lea's share price was $ 659 million in shares of directors and $ 174 million in Skilling's shares.
The company was consistently focused on its share price. Stock tickers showing company's stock price were included in lobby, lift and company computers. At the budget meeting, Skilling decides the income targets by asking how much money you need to raise the share price? And these figures were shown even though income was not possible.
Skilling believed that if Enron's employees are constantly cost-oriented, their basic thinking will be disturbed. As a result, the company was used to spend very extravagantly in all departments and especially for the officer class. Employees' expenditure accounts were very large, and many executives were paid double the compensation compared to the competitors. In 1998, salaries, bonuses and shares were paid $ 193 million to the company's top 200 highest-paid employees. Two years later, the figure reached $ 1.4 billion.
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Risk management
Prior to the fall, Enron was praised for its sophisticated financial risk management. Risk management was very important for Enron, not only for its regulatory environment, but also for its professional planning. Enron had made long-term contracts in response to the cost and supply-side risks in the energy industry, against which the hedging system was necessary. An acute and decisive use of derivatives and special purpose companies can be considered as the rapid decline of Enron's bankruptcy. Enron retains the risk element in the deal by taking a risk shield by its own special purpose entities. In such a way, Enron has got a hedge from itself.
Enron's high-risk accounting system was not hidden from the board of directors. The board knew this type of system and did not take any action to stop Enron's use. The board was told about the purpose and nature of Whitewing, JLM and Raptor deals, these proposals were agreed and information about its operation was also obtained. The board of administration was informed of the debt to keep Enron's balance sheet out, but it was possible only by the resolution of the board. Despite having Enron derivatives business, it seems that in the financial committee or in general, people in the board did not have enough knowledge of derivatives so that they can understand and interpret what is being told to you.
Financial account
Enron's auditor company Arthur Andersen was accused of applying a breach of standards in his audit, arising out of friction in the interests of significant consulting fee arising from Enron. In 2000, Arthur Anders earned $ 2.5 million from the edit fee and $ 2.7 million from consulting fees (this amount was 27 percent of Audit fees for Arthur Andersen's public client's public client.) In contrast, due to the lack of expertise to assess the financial implications of compensation or Enron raised, the auditor's methods The question was raised against me.
Enron employed people with experience in formulating accounting rules with the Financial Accounting Standards Board (FASB), besides a number of Certified Public Accountants (CPA). Accountants used to search for new ways to save the company's money, which included the use of the defects in accounting industry standards General Accepted Accounting Principles (GAAP). An Enron accountant said that we used to publish literature (GAAP) aggressively for our benefit. All the rules have created these opportunities. We could drive wherever we wanted, because we used those vulnerabilities very much.
Andersen's auditors are delayed by Enron's management to tell the charges of special purpose companies, so that their credit risk is over. Because these companies can not afford to pay in return, Enron should take a write-off according to the accounting guidelines, which will remove the value of these companies by showing it as a loss from Enron's balance sheet. To force Anderson to earn Enron's earnings expectations, Enron should be responsible for completing the accounting tasks of the occasional accounting companies Ernst & Young or PricewaterhouseCoopers so that the company wants to hire a new accounting firm instead of Anderson. Despite Anderson's internal regulation to protect against the conflicts of local partners, he failed to avoid the conflict of interest. In one case, Andersen's Houston office, which audited Enron, was successful in overcoming critical reviews of Enron's accounting decision by Andersen's Chicago partner. In addition, when Enron's SEC investigation was announced, Anderson made attempts to cover the irregularities in the audit by providing supporting documents and ending nearly 30,000 e-mails and computer files.
The company's partnership collapsed after information about Anderson's overall performance broke out and the Powers Committee (nominated by the Enron Board in October 2001 for verification of the company's accounting) expressed that the available evidence suggests that Anderson's internal statements against Enron's internal statements or related party contracts Objections Enron's Board (or Audit and Compliance's Committee) Ii) could not fulfill its professional responsibilities to bring it.
Audit Committee
Generally, the Corporate Audit Committee only gets a few times a year, and its members usually have a very small background in accounting and finance. Enron's audit committee had many expertise in comparison to other companies. It included the following:
Robert Jedic of Stanford University, a very respected accounting professor and former dean of Standford Business School; John Mendelson, MD of the University of Texas Anderson Cancer Center President; Paulo Pereira, former President and CEO of Brazilian State Bank of Rio de Janeiro; John Wakeham, former British Secretary of State Energy Department Ronnie Chen, Hong Kong trader and Wendy Gram, former chairman of the American Commodity Futures Trading Commission
Usually the Enron audit committee's meeting time was very short, in which the audit of large amount of transactions was reviewed. On February 12, 2001, the committee was completed in just one hour and 25 minutes. Enron's audit committee did not have enough technical knowledge so that they could ask the auditors to account related questions related to the company's special purpose entities. Due to pressure on the committee, the committee was also unable to ask a question to the company's management. In the report of The Permanent Submittee on Investigation of the Committee on Government Affairs, the Board of Directors were found guilty of allowing the accounting mechanism to interfere due to the conflict of interest in their duty. When Enron's fall, the audit committee's conflict of interest was seen as suspicious.
Other Accounting Issues
Based on not having any official letter showing that the project was canceled, Enron made a habit of displaying project cost expenditure as assets. This method was called the Snowball and was initially ordered to keep snowballs under $ 90 million, but it was carried out to $ 200 million.
In 1998, when analysts were taken to the Enron Energy Services office, they were very impressed with the employees who worked diligently. In fact, Skilling (instructing to pretend to be working hard) sent other employees from the other department to the office so that this section looks much larger than the actual size. This technique has been used repeatedly to fool analysts about the progress of various departments to help Enron's stock price improve.
Fall timeline
In February 2001, Chief Accounting Officer Reich Kauza told the budget managers: "Accounting will be the easiest year for us." We have taken possession of the year 2001. On March 5th, Bethanie Miquelin's Fortune article, Is Enron Overpriced? In that time, a question was raised about how Enron's shares, which sold at 55 grams of its earnings, could maintain such a high value. He also pointed out in detail how the analysts and investors could not know the exact details of Enron's method of showing revenue. Miquelin was attracted to the company due to an adviser's suggestion to look at the company's 10-in report, in which he found strange deals, fixed-money flows and a budget budget. Before publishing this article, he approached Skilling to discuss his findings, but Schille avoided talking to him for being unethical for not researching the company in sufficient detail. Fastow told the journalist of Fortune that Enron could not disclose the company's information because the company has more than 1,200 trading books for mixed commodities and ... no one wants to know what this book is about. We do not want to tell anyone where we are earning.
In a conference spoken on April 17, 2001, Skilling, now chief executive officer (CEO), literally struck the Wall Street analyst Richard Grubman, who questioned Enron's unusual accounting method during a recorded conference call. When Grubman complained that Enron is the only company that does not publish its earnings report with the balance sheet, Skilg replied that, we thank you, we appreciate that ... the anus. This incident became an internal joke among many employees of Enron, who, instead of the lack of skill of skilling, started joking with Groubman's alleged interference estimation such as Ask Why, Ashole. However, the skilling note made press and people disappointed and surprised because they gave the answer to the criticism of Enron quietly and lightly, and many people began to believe that the company's fall has started, which would expose the company's delicate methods.
In the last decade of the 1990s, Enron's shares were sold for $ 80-90 a share, and some were concerned about the ambiguity in the financial announcements of the company. In mid-July 2001, Enroon reported $ 50.1 billion in revenues, almost three times as compared to the previous year, and analysts estimated an increase of three cents per share. However, Enron's profit margin was 2.1 percent as usual, and its share price had dropped by more than 30 percent compared to the same quarter in 2000.
However, the worries were rising. Enron recently faced numerous operational challenges, including the difficulties related to transporting the new Broadband Communications Business Unit and the damage done to the construction of a large power station Dabhol power plant set up in India. The company's criticisms for the role of its subsidiary Enron Energy Services in the 2000-2001 California power crisis were also increasing.
On August 14, Skilge announced that he would resign from his CEO post just six months later. Before promoting Skilling, he served as a President and COO long before he was made CEO. Skilling said to leave the company for personal reasons. Inspectors noted that by the time of exit, Skil sold at least 450,000 shares of Enron, which was valued at about $ 33 million (though the company owned millions of shares on its date of departure). However, Enron chairman Lea confirms market observers that the departure of Skilling will not make any difference in the company's performance or company's progress goals. Lay announced the re-adoption of the position as Chief Executive Officer.
However, on the next day, Skilge admitted that the most important reason for leaving the company was the uncertain value of Enron in the stock market. The columnist Paul Krugman, writing in The New York Times, asserted that Enron's example of how things like energy can be emancipated and what the consequences can be as a commodity. A few days later, Kenneth Lay defended Enron and the company's philosophy in a letter to the editor.
On August 15, Vice President of Corporate Development, Sharon Watkins wrote an anonymous letter warning of the company's accounting practices. There was a statement in this letter that I am very worried that we are going to blast the scandal of accounting scandal. Watkins approached a friend working for Arthur Andersen and prepared a memo for the audit partners he had raised. On 22 August, Watkins personally visited Lane and gave a six-page letter explaining Enron's accounting problems. Lay asked him whether he had done this to anyone outside the company, and later the company's legal advisory body Vincent and Elkins would be reviewing these issues, however Atkins argued that the use of the company would result in a conflict of interest. Lay consulted with other officials and they wanted to remove Watkins from the job (because Texas laws did not protect the winner of alleged mismanagement in the company), but they deferred this decision for the purpose of not having a legal case. On 15 October, Winson and Elkins announced that Enron's accounting method was nothing wrong, because Anderson made every issue proven.
Investors' confidence in decline
As of August 2001, its company's share price was still declining, while Leigh Gregg Whaley named Enron Wholesale Services President and COO and Mark Frevert as the Chairman. Some observers suggested that Enron's investors had a lot of need for reconciliation, not just because the business of the company was difficult to understand (almost untrue) but because of financial statements, it was also difficult to correctly describe the company. An analyst said that it is very difficult for analysts to decide where Enron is earning and doing some damage in the specified quarter. Lay acknowledged that Enron's business was very complex, but asserted that analysts would never get all the information needed to satisfy their curiosity. He also explained that the complexity of the business was largely due to the tactics and positioning of the tax - hedging. Len's attempts seemed to have been a limited success; By September 9, a major hedge fund manager noted that the sale of (Enron) shares is under suspicion. Together with the sudden departure of Skilling, the ambiguity of Enron's accounting boards made it difficult for Wall Street to get the right assessment. In addition, the company acknowledged that relatated party transactions have been used repeatedly, which some people have feared to use easily to change the losses they otherwise show on Enron's own balance sheet. The troubled aspect of this technique was controlled by many released-party companies CFO Fastow.
After the September 11, 2001 attacks, the media's focus shifted from the company and its troubles; Less than a month later, Enron announced the start of the process of removing low-margin assets with the intention of paying more attention to the sale of its main business gas and electricity. In this step, Portland General Electric was involved in selling other Oregon company Northwest Natural Gas at about $ 1.9 billion at the cost of cash and shares and possibly selling 65 percent stake in the Dabhol project in India.
Restructuring of losses and SEC investigation
On October 16, Enron announced that it was necessary to re-publish financial statements from 1997 to 2000 to correct the violation of the rules in accounting. In the redemption, the reduction in earnings of $ 613 million (or 23% of profits shown during this period) increased by 628 million dollars (6% of the liabilities shown and 5.5% of the equity shown) by the end of 2000, and by the end of 2000, in equity Reduced $ 1.2 billion (10 percent of the equity shown) showed. In addition, Enron said that the broadband unit has the same value of $ 35 billion, which is seen as a no-confidence motion. An analyst at Standard & Poores said that I do not think anyone knows the value of this broadband operation.
Enron's managing team claimed that most of the damage was due to losses in the investment, as well as due to around 180 million dollars spent on the company's troubled broadband sales unit. In a statement, Lay said that after an inspection of our businesses, we have decided to take up this position to remove the blur on the performance and earning capacity of our core business energy business. Some analysts were shocked by this. Earlier, David Fleischer, an analyst at Goldman Sachs, believed to be the staunch supporter of the company, said that Enron's management had lost its credibility and now they have to prove themselves again. They have to trust investors They have to explain to investors that this income is real and that the company is for real and that growth can be achieved.
Fastow disclosed to Enron's board of directors on October 22 that he had earned $ 30 million from the compensation system while managing the JLM limited partnerships. On that day, the company's share price fell by $ 5.40 to $ 20.65 a day after the disclosure of numerous shady deals made by Enron of SEC and the announcement that some of the biggest transactions have not been seen so far. In an attempt to expose millions of dollars of allegations and to calm investors, Enron's disclosure showed that stock deals were made according to a restricted arrangement except for any price, derivatives instruments eliminated the emergent form of strategies designed for hedging of currently controlled futures and some commercial investments and other assets. Were there B. Using such phrases in the form of such conflicts, many analysts kept anonymity about how Enron ran its business. About the SEC investigation, Chairman and CEO Lay said that we will fully cooperate with the SEC and are waiting for an opportunity to calm any concerns about these deals.
Liquidity concerns
Concerned about Enron's liquidity problem, Lay tried to convince investors at a conference convened on October 23 that the cash source of the company was strong and would not be charged once in a single charge. Secondly, Le asserted that there is no inaccuracy in connection with Enron's transactions with Fastow's partnerships, and the company's CFO declares them to have strong support. Goldman analyst David Fleischer became skeptical again and told Fast and said, it seems that you have something to hide. However, Flasher continued to recommend the purchase of shares of the company, arguing that he did not feel that the accountants and auditors would allow any kind of misery. Asserting that Enron's all accounting exercises were reviewed by his auditor Arthur Andersen, Lay tried to convince those participating in the conference. Many people asked pressure on this issue, asking them to ask questions that Enron's management would consider providing a more informed statement to better understand the company's dealings with special purpose entities, including Fastow.
Two days later, on 25 October, before confirming it, he removed Fastow from his position and gave the reason that in my constant debate with the financial community, I clearly found that in order to regain the confidence of investors, we need to place a new CFO in place of Ende. However, with the departure of both Skilling and Fastow, some analysts feared that lighting over the company's transactions would now be more difficult. Enron's stock was trading at $ 16.41 after losing half the value in a little over a week.
In an effort to calm investors' fears about Enron's money supply, on 27 October the company began to buy back business letters worth $ 3.3 billion. Enron funded this purchase by reducing its line of credit in a number of banks. When the company's debt rating was still considered in the investment category, the bonds were being sold under a little lower rate, which can cause problems with future sales.
As the month approached, concerns were made by some observers about the possibility of disrupting Enron's accepted accounting rules, however, some claimed that analysis could not be done until Enron provided enough information.
Some people now openly fear that Enron was the new long-term capital management, as the hedge fund, which in 1998 caused fear of the systematic failure of the international financial markets. The large presence of Enron's various businesses has made some people anxious about the consequences of Enron's proposed dropout. The Enron officials' lips were stitched and they only accepted the questions asked in written form.
Decrease in reputation level
At the end of October 2001, the central short-term risk for Enron's survival was seen in its decline. At the time it was noted, Moody's and Fitch, two of the top three credit rating agencies, sought to review Enron's rating potentially to reduce. With such downgrade, Enron had to issue millions of shares in stock to cover the guaranteed loan. This step could reduce the value of Enron's current stock further. In addition, all types of companies began reviewing their contracts with Enron. If Enron's rating goes down from the investment grade in the long run, it could have an adverse effect on future transactions.
Analysts and observers continued to complain about Enron's difficulty or inability to correctly assess the company with suspicious financial reports. Some expressed fear that anyone except Skilling and Fastow in Enron could fully explain the company's mysterious deal of years. In response to a question asked about the business of Enron in August 2001, Lea said, "You are climbing on my head. Such an answer caused anxiety among analysts.
Responding to Enron's ever increasing concern that there may be insufficient cash on hand for short-term news on October 29, news spread that Enron wants to get $ 1-2 billion in funding from banks. The next day Moody's lowered the Enron's negative number or senior uncertified spending-term data reductions to BA 2, according to which the mood was considered to be just above two levels from BA1. Standard & Poor's also lowered the number to BBB +, which was equivalent to Moody's rating. Moody's also warned that he could still reduce the number of Enron's professional letters, which would result in a company blocking more funding to sustain financial security.
An announcement from November was that the SEC had to conduct a formal investigation because of questions raised against Enron's affiliates and transactions with O. Enron's board also announced that it would form a special committee led by William C. Powers, a law school of the University of Texas law school to investigate these transactions. The next day, an editorial in The New York Times called for an aggressive investigation into the matter. Enron succeeded on November 2 to get additional funding of $ 1 billion from its cross-town rival Dynegy, but this news was not universally welcomed as the debt was taken against the guarantee of the company's valuable Northern Natural Gas and Trancewestern pipeline.
Proposal to buy by Dynegy
Sources claim that Enron was planning to explain its business systems in the near future as part of Enron's efforts to boost confidence. Enron's shares were now being sold for $ 7 because investors believed that the company would not have a buyer.
After receiving adverse response from many places, Enron's management apparently got a buyer when the Houston-based energy sales company Dianegi voted in favor of buying enough money for an eight-billion dollar fire-sale price on the night of November 7. At that time, Chevron Texaco, owned by a fourth of Dynegy, agreed to give Enron $ 2.5 billion in cash, especially $ 1 billion before the deal and the remaining amount after the deal was over. In addition, Dynegy also had the responsibility to oblige nearly $ 10 billion as much as $ 13 billion in addition to the secret of Enron's management's mysterious professional systems. Dynegy and Enron confirmed this deal on November 8, 2001.
Commentators commented on the difference between corporate culture between Diangy and Enron and the genius of directly talking to Dionie's CEO Charles Watson. Some people even wondered whether Enron's troubles were not the result of just accounting innocents. By November, Enron had asserted that the one-billion-dollar charge mentioned in October should in fact be worth only $ 200 million, while the remaining amount can only be corrected for a number of errors in accounting. Many people feared that other mistakes and re-statements were still to be told.
On November 9, an additional improvement in Enron's earnings was announced, according to which the revenues announced for 1997-2000 were reduced by $ 591 million. This decline was believed to have been mostly due to two special purpose partnerships (JEDI and Chevco). As a result of this reform, the profits of the fiscal year 1997 were wasted and significant losses in each year's profits. After this announcement, Diange also announced that he still intends to buy Enron. Both the companies were considered to be pleased to get the Moody's and S & P official evaluation report on how to deal with the purchase of any company to understand the impact on the credit rating of both Dynegy and Enron companies. In addition, unreliable control difficulties led to a perceived barrier that led to potential sales, as well as concerns about the difference between Enron and Dynegy corporate culture, according to some observers.
Both companies were aggressively heading for the deal and some observers were hopeful; Watson was praised for the vision of attempts to create the biggest presence in the energy market. At the time, Watson said that we think that Enron is a very strong company with plenty of potential to come out in the coming months. An analyst has called the deal as a giant deal [...] financially very good deal, likewise a strategically well-negotiated deal, and how much immediate balance-sheet support it provides for Enron.
However, problems related to debt were becoming serious. By the time the deal was announced, both Moody's and S & P both took up Enron's rating until junk status was only slightly raised. With the company's rating coming down from investment-grade, its ability to trade on its credit lines with limited limits on or after the removal of credit lines becomes very limited. S & P in the conference asserted that if Enron was not to be bought, S & P would give it a lower BB or higher B rating, which could not be considered even higher in Junk. In addition, many merchants limited or completely closed the business with Enron due to fear of bad news. But in an effort to reassure Watson, during a presentation to investors in New York, he said that there was nothing wrong in Enron's business. He also said that after Le and other top executives learned to sell the company's stock worth hundreds of millions of dollars in the months leading up to the crisis, after relinquishing compensation for the problem of many employees of Enron, which has a hostile attitude toward company management (in the form of giving more stock options) The steps will be completed. Watson's statement did not help in improving the situation, due to the reputation of the paper due to the management change due to Dynegy's deal, Lay was required to pay $ 60 million, while the retirement of the company's employees was mostly based on Enron's share in the company's shares Due to the 90% reduction in value in a year, only the nominal amount will come The fact was revealed. An Enron company official said that there were many couples in our company, who both worked and lost nearly $ 800,000 or $ 900,000. This event washed out the savings plans of almost every employee.
Watson assured investors that the true nature of Enron's business was made clear to them: we are satisfied that there is no possibility of any further losses. If there is no harm then it can be considered a very good deal. Watson also said that the value of Enron's energy sales part is the exact price paid by Dynegy for the entire company.
By mid-November, Enron announced that it plans to sell assets worth about $ 8 billion, which is poor performance, and also reduce its scope for financial stability. On November 19, Enron announced more evidence of the situation being serious. The most important thing was that the company was facing liability for paying about 9 billion dollars by the end of 2002. This debt was much more than its available cash. In addition, there was no guarantee of success of measures to save its financial well-being especially for the sale of assets and redemption of debt. Enron announced in a statement that any adverse effect on these issues could have an adverse effect on the ability to continue the operation of the company.
Two days later on November 21, a serious doubt was made whether the Dow Dynasty would proceed in the deal on November 21, or whether it would be reducing the price significantly by reducing the price. In addition, Enron said in a 10-kg filing that it had been borrowed recently for the purpose of buying commercial letters, or about 5 billion dollars in just 50 days. Analysts were worried about this announcement, especially Dynegy was also not aware of the speed of Enron's cash usage. To get out of this proposed purchase, Dynegy had to prove that there was a fundamental change in the deal situation, by November 22, sources close to Dyne were apprehensive that strong evidence was found in the last advertisement.
SEC announces Civil Fraud Complaint against Anderson. A few days later, sources claimed that Enron and Dynegy were actively negotiating again with regard to their arrangements. Dynegy now demands that Enron agree to purchase for $ 4 billion instead of $ 8 billion now. Observers were facing difficulties in telling Enron about which company or any company was making profits. There were reports of enormous changes being made in Enron's rival business to reduce the risk. Ultimately, Moody's new report has raised concerns about the Wall Street Journal.
Bankruptcy Enron's stock price was 23 August 2000 ($ 90) to 11 January 2002 ($ 0.12). As part of the decline in stock price (East New York Stock Exchange Ticker: ENE), shareholders lost about $ 11 billion.
On November 28, 2001, the two worst voiceless about Enron came true. Dynegy ankka withdrew from the company's buying deal after the consent of both sides and Enron's credit rating dropped below the Junk State. Watson later said that eventually you could not give it to me (Enron). The company collapsed due to very little capital remaining to run a business and the sole responsibility to repay debt was huge. When the trading ended on that day, the share price of the company fell to $ 0.61. An editorial observer wrote that Enron is now facing a complete financial storm.
The systemic results seemed to be felt because Enron's borrowers and other energy sales companies had suffered a considerable percentage loss. Some analysts have found that Enron's failure has highlighted the risks of the economy after September 11, and encouraged traders to get profits where they get profits. This question has now become the determinant of the total risk of market and other traders due to Enron's failure. According to preliminary figures, it was $ 18.7 billion. One adviser said that we do not really know who is at risk of Enron's credit. I'm telling my clients to be prepared for the worst.
Enron's debt related liabilities amounted to nearly $ 23 billion, including outstanding debt and guaranteed loans. Especially due to the downfall of Enron, the CT Group and JP Morgan Chase seemed to lose a substantial amount. In addition, since Enron's main assets are pledged to take a secured loan, serious threats to what the unsafe debtors and late shareholders will get in the bankruptcy process.
Enron's European operations applied for bankruptcy on November 30, 2001, and two days later on December 2, there was a demand for Chapter 11 protection in the United States. This was the largest bankruptcy in American history (the next year's bankruptcy before WorldCom) and about 4,000 employees had to lose their jobs. On the day Enron filed for bankruptcy, employees were asked to pack their belongings and given 30 minutes to vacate the building. 62% of the workforce of nearly 15,000 employees was held in Enron's stock, which was bought at $ 83.13 in early 2001, when Enron's share price fell below $ 1 in October 2001.
On January 17, 2002, Enron sorted Arthur Andersen as its auditor, giving reasons for accounting advice and destruction of documents. Anderson argued back that when the company filed bankruptcy, it ended the connection with Enron.
Legal Procedure Enron
Both Fastow and his wife Lee proved guilty in the charges put on them. Fastow was accused of 98 offenses, money laundering, insider trading, and conspiracy and other offenses of primary fraud. Fastow was convicted of two charges of conspiracy, and he was sentenced to ten years in prison without parole in a bribe to prove against Le, Skilling and Cozy. Lee was convicted of six serious criminal offenses, but the prosecutors later dropped him into a single charge of tax evasion. Lee was sentenced to one year in prison for helping her husband conceal government's income.
By 1992, Enron had become the largest company to sell North America's natural gas and became the second largest contributor to Enron's net income with a $ 122 million interest and tax revenues. In November 1999, the establishment of an online trading model EnronOnline increased the company's ability to further develop and negotiate and run a trading business.
As part of an increased effort, Enron has embarked on a strategy to move into other businesses. By the year 2001, Enron had become an industrial house which owned and operated internationally on gas pipelines, pulp and paper plants, broadband properties, power plants and water plants. The corporation also sold some products and services in the money market.
As a result, Enron's share has increased by 311% from the 1990s to the end of 1998, which was a significant increase in the growth rate of the Standard & Poor's 500 Index. The company's share increased by 56% in 1999 and 87% in 2000, compared to an increase of 20% and 10% respectively in the Index during these years. By December 31, 2000 Enron's stock price was $ 83.13 and its market capitalization was $ 60 billion, which was 70 times its revenue and six times more than its book value. Which was pointing to the highest expectations of the stock market about the future of the company. In addition, Enron was ranked as the largest company in America's most innovative research in Fortune's most prestigious company survey.
Causes of Fallout
Enron's opaque financial reports did not give explicit details of its operations and financial details to shareholders and analysts. In addition, its complex business model was beyond the limits of the account, making it necessary that the company could adjust the accounting limitations to manage its income and change the balance sheet to show the company's performance in its interest. According to MacLean and Elkid in his book The Smartest Guys in the Room, the Enron scandal came into existence due to the constant collection of the habits and values that were initiated years ago and the end of control in the end. It seems that from the end of 1997 to its end, Enron's primary objective was to put inferential revenue and inferred fund flow in accounting and financial transactions, showing properties of multiple values and accountability outside of accounting.
All these issues eventually led the company to bankruptcy and most of it took action, due to the indirect or direct directions of Jeffrey Skilling, Andrew Fastow and other officials. The company had been the Le Chairman in the past few years and had ratified it only after checking the steps taken by Skilling and Fastow. Skilling, which consistently focused on meeting the expectations of Wall Street, favored use of Mark-to-Market accounting and forced Enron executives to find new ways to cover their debts. Fastow and other officials, ... discovered off-balance-sheet vehicles, critical financial structures, and strange tricks that only few people can understand today.
Recognition of income
Enron and other traders involved in the sale of energy were profitable by providing services such as bulk sales and risk management in addition to the development of electricity production stations, natural gas pipelines, storage and processing facilities. When the purchasing and sales of the products were to be risked, merchants were allowed to sell the sale price as income and the value of the goods sold as the value of the goods sold. Conversely, the agent did not provide a customer service, but at the risk of a business dealer for buying and selling. When the broker was included in the service provider category, he could sell the sale price and the brokerage as the income, although he could not show the value of the whole transaction as income.
Commercial companies such as Goldman Sachs and Merrill Lynch used the orthodox agent model (which only showed sales or brokerage as income) to show an income, Enron chose to sell its entire sale price of each transaction as income. This merchant model was considered more aggressive in the accounting interpretation than the agent model. Enron's method of increasing sales revenue was later adopted by other companies operating in the field of energy sales as part of an effort to survive in competition with a large increase in the company's revenues. Other energy companies such as Duke Energy, Reliance Energy and Dynegy also joined the list of Fortune 500's top 50 companies with Enron, the main reason behind this was the revenue earned by the sales operations.
Enron's distorted, over-the-counter income was used to foster the company's innovative research rather than conceal the debt, to create a high growth rate, and to create an outstanding business exhibit company. Between 1996 and 2000, Enron's revenue rose more than 750 percent, from $ 13.3 billion in 1996 to $ 100.8 billion in 2000. The annual expansion of nearly 65 percent is unprecedented for the entire industry, including the energy industry, which also honors the 2-3 percent annual growth. In the first nine months of 2001, Enron saw its revenues at $ 138.7 billion, due to which the company took the sixth place on the Fortune Global 500 list.
Mark-to-market accounts
Accounting of Enron's natural gas business was very straightforward; In each period, the company showed the actual cost of gas supplied and actual revenue from the sale. However, when joining the skilling company, he sought to adopt a mark-to-market accounting method for the sale business, for which he gave the reason that ... it shows the true economic value. Enron became the first non-financial company to use this accounting method for long-term complex agreements. Once the long-term contract is signed in the mark-to-market accounting, then the current value for the future net cash flow is estimated by the revenue. Often, it becomes difficult to assess the eligibility of these types of contracts and its related costs. In an effort to overcome the major difference between profits and cash, false or misleading reports were given to investors. In this method, the income of the project was noted, which would increase the financial income. However, in future years, the profits could not be included, so the revenue of new and more projects was included to show an additional growth in order to please investors. According to an Enron rival, if you show an increase in your income, then you have to keep getting more deals in order to show as much or more income as possible. Despite the limitations of the mark-to-market accounting method and the concept of risks, the US The Securities and Exchange Commission (SEC) approved Enron's accounting mechanism for sale of natural gas future contracts on January 30, 1992. However, Enron began to use this method in other areas of the company to travel to Washington's assumptions.
In July 2000, Enron and Blockbuster videos signed a 20-year contract to provide entertainment to demand in various U.S. cities by the end of the year. After numerous experimental projects, Enron showed the expected profit of more than $ 110 million from the deal, although analysts raised questions about the technical competence of the service and market demand. When this network failed to work, Blockbuster withdrew from the contract. Although the deal resulted in a loss, Enron continued to show a profit for the future.
Special purpose company
To provide funding to specific assets or to manage the risks associated with it, Enron used a special purpose company to create a limited partnership or a temporary or special purpose. The company chose to provide at least or minor information about the use of a special purpose company. These shell companies were created by the sponsor but it was funded by independent equity investors or debt. A series of instructions have been issued about whether the special purpose company is different from the sponsor for the purpose of presenting a financial report. To hide Enron's debt, by 2001, it has used together a special purpose entities.
Special purpose entities were used solely for closing the accounting rules and for other purposes. As a result of a single regulation, the responsibilities in Enron's balance sheet have been lowered and its equity and its revenues were overstated. Enron told its shareholders that against the losses in its non-inflated investments, he has got protection using a special purpose company. However, investors were unaware that the use of special purpose companies was for the use of the company's own shares and financial guarantees for the hedging. Due to this structure, Enron was not protected against the risk of damage. Notable examples of special purpose entities used by Enron include JEDI and Chewco, Whitewing, and LJM.
==== JEDI and Chevco ====
In 1993, Enron established a joint venture called Joint Energy Development Investments (JEDI) with California State Pension Fund (CalPERS) with energy investment. While working as Chief Operating Officer (COO), Skilge told Kalper in 1997 to partner with Enron in a separate investment. CalPERS had an interest in this idea, but showed interest in investing only if his partnership was released from JEDI. However, Enron did not want to show any debt on the company's balance sheet after purchasing CalParce's stake in Jedi. Chief Financial Officer (CFO) Fastow Chevco Investments LP Named a special purpose company, which raised debt on Enron's assurance, which was used to buy CalPerce's stake in a joint venture for $ 383 million. Due to Fastow's creation of Chevaux, the loss of Jedi remains outside Enron's balance sheet.
The arrangement between CalPayers and Enron came out during the company's fall in 2001, due to which accounting treatment of both Enron's Chevco and JEid was disqualified. For this disqualification, Enron needed revenues of $ 405 million in revenue from 1997 to 2001. In addition, due to consolidation the company's total debt increased by $ 628 million.
Whitewing
White-winged pigeon is a hometown in Texas, and was also named by Enron, a special purpose company used as a financial vehicle. In December 1997, Whitewing Associates L.P. with $ 579 million provided by Enron and $ 500 million from an outside investor. Established. Two years later, the company's adjustment was changed so that it would not be affiliated with Enron and its debt would not be taken into account in the balance sheet of the company. Whitewing was used to purchase assets including Enron's power stations, pipelines, shares and other investments to buy shares. Between 1999 and 2001, Whitowing purchased Enron's share of $ 2 billion from Enron using collateral as a collateral. Even though the Enron Board approved the deal, the assets were not sold in the true sense and should be considered as loans.
Fastow created two limited partnerships in 1999: LJM Cayman LP (LJM1) and LJM 2 Co-Investment LP (LJM2), whose purpose was to share Enron's poor performance and buy a stake in improving financial reports. Each of these partnerships was meant to provide a special service to only external equity investors who needed a special purpose company that was used by Enron. Fastow was required to go before the company's board of directors to get rid of Enron's rules to run this company (as he was working as Enron's Chief Financial Officer-CFO). LJM 1 and 2 have been funded by outside JPMorgan Chase, Citigroup, Credit Suisse First Boston and Wakovia, about $ 390 million of out-of-equity funding. Merrill Lynch, who marketed this equity, also contributed $ 22 million.
Enron Releurs 1-4, JLM-named JLSL-named Jurassic Park, transferred four hundred million dollar payable notes to Enron's millions of common shares and $ 150 million in addition to the assets worth over $ 1.2 billion including rights to purchase millions of shares. Special purpose companies were used to pay all of these using the companies' debt tool. The total amount of these instruments was $ 1.5 billion in total and the companies were used for Eneron's $ 2.1 billion national derivatives contract.
Enron used the Repeaters heavily and in the same case, when the company issued a share for public offering, the Note Payable showed assets on the company's balance sheet and increased the shareholder's equity for the same amount. This type of transaction later proved to be problematic for Enron and its auditor Arthur Andersen as it eliminated the company's equity from $ 1.2 billion in shareholder's equity.
$ 2.1 billion worth of derivatives contracts resulted in erosion. Enron swaps installed with the stock prices up to its highest value. In the five quarters of the fiscal, the value of the portfolio under swaps decreased by $ 1.1 billion as the stock prices had gone down (under the contract, Enron now had a $ 1.1 billion debt of special purpose companies). Enron, using the proper value accounting, was able to show a profit of $ 500 million from swap contracts in the 2000 annual report, which compensated the losses made in the stock portfolio. This benefit (before it was re-announced in 2001) had a third part of Enron's 2000 earnings.
Corporate governance
Hilli and Pelépu write that the well-paying money market establishes a proper connection between information and incentives and governance between managers and investors. This process should be done by the network of intermediaries including the guaranteed professionals like the external auditors and the internal governance agents, such as corporate boards. On paper, Enron's Board of Directors was the ideal, which included external directors and talented audit committees owned by important stakeholders. In the 2000 Corporate Review Review of the Best Executive Board, Enron was included in the top five boards. Despite the complex corporate governance and intruders network, Enron succeeded in attracting large amounts of money to fund its questionable business model, hiding true performance through a series of accounting and financing exercises, and moving its shares to a sustainable level.
Compensation to officials
While Enron's compensation and performance management system was designed to sustain and reward its most valuable employees, this system contributed to the degrading corporate culture, allowing employees to stay focused on short-term income to earn maximum bonuses. Employees have been paying attention to continuous large-scale transactions, regardless of the quality or profits of the flow of funds to get a higher rating in their performance review. In addition, the company's accounting results were taken to the record as soon as possible to match up with the company's stock price. This system assures large cash bonuses and shares to the employees of the company dealing with the deal and the deal.
Like other American companies, Enron's management used to be widely used by stock options to compensate. Perhaps the management side has given birth to a very rapid growth expectation as the management of the company's employees as a prize, so that revenue revenues can be fulfilled on Wall Street expectations. On December 31, 2000, Enron was left to pay approximately 96 million shares (about 13 percent of the company's general stock) under the stock option scheme. Enron's Proxy statement said that the allocation was expected to be used in three years. Using the shares held by Enron's January 2001 stock price of $ 83.13 and the directors declared in the 2011 procecic statement, Lea's share price was $ 659 million in shares of directors and $ 174 million in Skilling's shares.
The company was consistently focused on its share price. Stock tickers showing company's stock price were included in lobby, lift and company computers. At the budget meeting, Skilling decides the income targets by asking how much money you need to raise the share price? And these figures were shown even though income was not possible.
Skilling believed that if Enron's employees are constantly cost-oriented, their basic thinking will be disturbed. As a result, the company was used to spend very extravagantly in all departments and especially for the officer class. Employees' expenditure accounts were very large, and many executives were paid double the compensation compared to the competitors. In 1998, salaries, bonuses and shares were paid $ 193 million to the company's top 200 highest-paid employees. Two years later, the figure reached $ 1.4 billion.
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Risk management
Prior to the fall, Enron was praised for its sophisticated financial risk management. Risk management was very important for Enron, not only for its regulatory environment, but also for its professional planning. Enron had made long-term contracts in response to the cost and supply-side risks in the energy industry, against which the hedging system was necessary. An acute and decisive use of derivatives and special purpose companies can be considered as the rapid decline of Enron's bankruptcy. Enron retains the risk element in the deal by taking a risk shield by its own special purpose entities. In such a way, Enron has got a hedge from itself.
Enron's high-risk accounting system was not hidden from the board of directors. The board knew this type of system and did not take any action to stop Enron's use. The board was told about the purpose and nature of Whitewing, JLM and Raptor deals, these proposals were agreed and information about its operation was also obtained. The board of administration was informed of the debt to keep Enron's balance sheet out, but it was possible only by the resolution of the board. Despite having Enron derivatives business, it seems that in the financial committee or in general, people in the board did not have enough knowledge of derivatives so that they can understand and interpret what is being told to you.
Financial account
Enron's auditor company Arthur Andersen was accused of applying a breach of standards in his audit, arising out of friction in the interests of significant consulting fee arising from Enron. In 2000, Arthur Anders earned $ 2.5 million from the edit fee and $ 2.7 million from consulting fees (this amount was 27 percent of Audit fees for Arthur Andersen's public client's public client.) In contrast, due to the lack of expertise to assess the financial implications of compensation or Enron raised, the auditor's methods The question was raised against me.
Enron employed people with experience in formulating accounting rules with the Financial Accounting Standards Board (FASB), besides a number of Certified Public Accountants (CPA). Accountants used to search for new ways to save the company's money, which included the use of the defects in accounting industry standards General Accepted Accounting Principles (GAAP). An Enron accountant said that we used to publish literature (GAAP) aggressively for our benefit. All the rules have created these opportunities. We could drive wherever we wanted, because we used those vulnerabilities very much.
Andersen's auditors are delayed by Enron's management to tell the charges of special purpose companies, so that their credit risk is over. Because these companies can not afford to pay in return, Enron should take a write-off according to the accounting guidelines, which will remove the value of these companies by showing it as a loss from Enron's balance sheet. To force Anderson to earn Enron's earnings expectations, Enron should be responsible for completing the accounting tasks of the occasional accounting companies Ernst & Young or PricewaterhouseCoopers so that the company wants to hire a new accounting firm instead of Anderson. Despite Anderson's internal regulation to protect against the conflicts of local partners, he failed to avoid the conflict of interest. In one case, Andersen's Houston office, which audited Enron, was successful in overcoming critical reviews of Enron's accounting decision by Andersen's Chicago partner. In addition, when Enron's SEC investigation was announced, Anderson made attempts to cover the irregularities in the audit by providing supporting documents and ending nearly 30,000 e-mails and computer files.
The company's partnership collapsed after information about Anderson's overall performance broke out and the Powers Committee (nominated by the Enron Board in October 2001 for verification of the company's accounting) expressed that the available evidence suggests that Anderson's internal statements against Enron's internal statements or related party contracts Objections Enron's Board (or Audit and Compliance's Committee) Ii) could not fulfill its professional responsibilities to bring it.
Audit Committee
Generally, the Corporate Audit Committee only gets a few times a year, and its members usually have a very small background in accounting and finance. Enron's audit committee had many expertise in comparison to other companies. It included the following:
Robert Jedic of Stanford University, a very respected accounting professor and former dean of Standford Business School; John Mendelson, MD of the University of Texas Anderson Cancer Center President; Paulo Pereira, former President and CEO of Brazilian State Bank of Rio de Janeiro; John Wakeham, former British Secretary of State Energy Department Ronnie Chen, Hong Kong trader and Wendy Gram, former chairman of the American Commodity Futures Trading Commission
Usually the Enron audit committee's meeting time was very short, in which the audit of large amount of transactions was reviewed. On February 12, 2001, the committee was completed in just one hour and 25 minutes. Enron's audit committee did not have enough technical knowledge so that they could ask the auditors to account related questions related to the company's special purpose entities. Due to pressure on the committee, the committee was also unable to ask a question to the company's management. In the report of The Permanent Submittee on Investigation of the Committee on Government Affairs, the Board of Directors were found guilty of allowing the accounting mechanism to interfere due to the conflict of interest in their duty. When Enron's fall, the audit committee's conflict of interest was seen as suspicious.
Other Accounting Issues
Based on not having any official letter showing that the project was canceled, Enron made a habit of displaying project cost expenditure as assets. This method was called the Snowball and was initially ordered to keep snowballs under $ 90 million, but it was carried out to $ 200 million.
In 1998, when analysts were taken to the Enron Energy Services office, they were very impressed with the employees who worked diligently. In fact, Skilling (instructing to pretend to be working hard) sent other employees from the other department to the office so that this section looks much larger than the actual size. This technique has been used repeatedly to fool analysts about the progress of various departments to help Enron's stock price improve.
Fall timeline
In February 2001, Chief Accounting Officer Reich Kauza told the budget managers: "Accounting will be the easiest year for us." We have taken possession of the year 2001. On March 5th, Bethanie Miquelin's Fortune article, Is Enron Overpriced? In that time, a question was raised about how Enron's shares, which sold at 55 grams of its earnings, could maintain such a high value. He also pointed out in detail how the analysts and investors could not know the exact details of Enron's method of showing revenue. Miquelin was attracted to the company due to an adviser's suggestion to look at the company's 10-in report, in which he found strange deals, fixed-money flows and a budget budget. Before publishing this article, he approached Skilling to discuss his findings, but Schille avoided talking to him for being unethical for not researching the company in sufficient detail. Fastow told the journalist of Fortune that Enron could not disclose the company's information because the company has more than 1,200 trading books for mixed commodities and ... no one wants to know what this book is about. We do not want to tell anyone where we are earning.
In a conference spoken on April 17, 2001, Skilling, now chief executive officer (CEO), literally struck the Wall Street analyst Richard Grubman, who questioned Enron's unusual accounting method during a recorded conference call. When Grubman complained that Enron is the only company that does not publish its earnings report with the balance sheet, Skilg replied that, we thank you, we appreciate that ... the anus. This incident became an internal joke among many employees of Enron, who, instead of the lack of skill of skilling, started joking with Groubman's alleged interference estimation such as Ask Why, Ashole. However, the skilling note made press and people disappointed and surprised because they gave the answer to the criticism of Enron quietly and lightly, and many people began to believe that the company's fall has started, which would expose the company's delicate methods.
In the last decade of the 1990s, Enron's shares were sold for $ 80-90 a share, and some were concerned about the ambiguity in the financial announcements of the company. In mid-July 2001, Enroon reported $ 50.1 billion in revenues, almost three times as compared to the previous year, and analysts estimated an increase of three cents per share. However, Enron's profit margin was 2.1 percent as usual, and its share price had dropped by more than 30 percent compared to the same quarter in 2000.
However, the worries were rising. Enron recently faced numerous operational challenges, including the difficulties related to transporting the new Broadband Communications Business Unit and the damage done to the construction of a large power station Dabhol power plant set up in India. The company's criticisms for the role of its subsidiary Enron Energy Services in the 2000-2001 California power crisis were also increasing.
On August 14, Skilge announced that he would resign from his CEO post just six months later. Before promoting Skilling, he served as a President and COO long before he was made CEO. Skilling said to leave the company for personal reasons. Inspectors noted that by the time of exit, Skil sold at least 450,000 shares of Enron, which was valued at about $ 33 million (though the company owned millions of shares on its date of departure). However, Enron chairman Lea confirms market observers that the departure of Skilling will not make any difference in the company's performance or company's progress goals. Lay announced the re-adoption of the position as Chief Executive Officer.
However, on the next day, Skilge admitted that the most important reason for leaving the company was the uncertain value of Enron in the stock market. The columnist Paul Krugman, writing in The New York Times, asserted that Enron's example of how things like energy can be emancipated and what the consequences can be as a commodity. A few days later, Kenneth Lay defended Enron and the company's philosophy in a letter to the editor.
On August 15, Vice President of Corporate Development, Sharon Watkins wrote an anonymous letter warning of the company's accounting practices. There was a statement in this letter that I am very worried that we are going to blast the scandal of accounting scandal. Watkins approached a friend working for Arthur Andersen and prepared a memo for the audit partners he had raised. On 22 August, Watkins personally visited Lane and gave a six-page letter explaining Enron's accounting problems. Lay asked him whether he had done this to anyone outside the company, and later the company's legal advisory body Vincent and Elkins would be reviewing these issues, however Atkins argued that the use of the company would result in a conflict of interest. Lay consulted with other officials and they wanted to remove Watkins from the job (because Texas laws did not protect the winner of alleged mismanagement in the company), but they deferred this decision for the purpose of not having a legal case. On 15 October, Winson and Elkins announced that Enron's accounting method was nothing wrong, because Anderson made every issue proven.
Investors' confidence in decline
As of August 2001, its company's share price was still declining, while Leigh Gregg Whaley named Enron Wholesale Services President and COO and Mark Frevert as the Chairman. Some observers suggested that Enron's investors had a lot of need for reconciliation, not just because the business of the company was difficult to understand (almost untrue) but because of financial statements, it was also difficult to correctly describe the company. An analyst said that it is very difficult for analysts to decide where Enron is earning and doing some damage in the specified quarter. Lay acknowledged that Enron's business was very complex, but asserted that analysts would never get all the information needed to satisfy their curiosity. He also explained that the complexity of the business was largely due to the tactics and positioning of the tax - hedging. Len's attempts seemed to have been a limited success; By September 9, a major hedge fund manager noted that the sale of (Enron) shares is under suspicion. Together with the sudden departure of Skilling, the ambiguity of Enron's accounting boards made it difficult for Wall Street to get the right assessment. In addition, the company acknowledged that relatated party transactions have been used repeatedly, which some people have feared to use easily to change the losses they otherwise show on Enron's own balance sheet. The troubled aspect of this technique was controlled by many released-party companies CFO Fastow.
After the September 11, 2001 attacks, the media's focus shifted from the company and its troubles; Less than a month later, Enron announced the start of the process of removing low-margin assets with the intention of paying more attention to the sale of its main business gas and electricity. In this step, Portland General Electric was involved in selling other Oregon company Northwest Natural Gas at about $ 1.9 billion at the cost of cash and shares and possibly selling 65 percent stake in the Dabhol project in India.
Restructuring of losses and SEC investigation
On October 16, Enron announced that it was necessary to re-publish financial statements from 1997 to 2000 to correct the violation of the rules in accounting. In the redemption, the reduction in earnings of $ 613 million (or 23% of profits shown during this period) increased by 628 million dollars (6% of the liabilities shown and 5.5% of the equity shown) by the end of 2000, and by the end of 2000, in equity Reduced $ 1.2 billion (10 percent of the equity shown) showed. In addition, Enron said that the broadband unit has the same value of $ 35 billion, which is seen as a no-confidence motion. An analyst at Standard & Poores said that I do not think anyone knows the value of this broadband operation.
Enron's managing team claimed that most of the damage was due to losses in the investment, as well as due to around 180 million dollars spent on the company's troubled broadband sales unit. In a statement, Lay said that after an inspection of our businesses, we have decided to take up this position to remove the blur on the performance and earning capacity of our core business energy business. Some analysts were shocked by this. Earlier, David Fleischer, an analyst at Goldman Sachs, believed to be the staunch supporter of the company, said that Enron's management had lost its credibility and now they have to prove themselves again. They have to trust investors They have to explain to investors that this income is real and that the company is for real and that growth can be achieved.
Fastow disclosed to Enron's board of directors on October 22 that he had earned $ 30 million from the compensation system while managing the JLM limited partnerships. On that day, the company's share price fell by $ 5.40 to $ 20.65 a day after the disclosure of numerous shady deals made by Enron of SEC and the announcement that some of the biggest transactions have not been seen so far. In an attempt to expose millions of dollars of allegations and to calm investors, Enron's disclosure showed that stock deals were made according to a restricted arrangement except for any price, derivatives instruments eliminated the emergent form of strategies designed for hedging of currently controlled futures and some commercial investments and other assets. Were there B. Using such phrases in the form of such conflicts, many analysts kept anonymity about how Enron ran its business. About the SEC investigation, Chairman and CEO Lay said that we will fully cooperate with the SEC and are waiting for an opportunity to calm any concerns about these deals.
Liquidity concerns
Concerned about Enron's liquidity problem, Lay tried to convince investors at a conference convened on October 23 that the cash source of the company was strong and would not be charged once in a single charge. Secondly, Le asserted that there is no inaccuracy in connection with Enron's transactions with Fastow's partnerships, and the company's CFO declares them to have strong support. Goldman analyst David Fleischer became skeptical again and told Fast and said, it seems that you have something to hide. However, Flasher continued to recommend the purchase of shares of the company, arguing that he did not feel that the accountants and auditors would allow any kind of misery. Asserting that Enron's all accounting exercises were reviewed by his auditor Arthur Andersen, Lay tried to convince those participating in the conference. Many people asked pressure on this issue, asking them to ask questions that Enron's management would consider providing a more informed statement to better understand the company's dealings with special purpose entities, including Fastow.
Two days later, on 25 October, before confirming it, he removed Fastow from his position and gave the reason that in my constant debate with the financial community, I clearly found that in order to regain the confidence of investors, we need to place a new CFO in place of Ende. However, with the departure of both Skilling and Fastow, some analysts feared that lighting over the company's transactions would now be more difficult. Enron's stock was trading at $ 16.41 after losing half the value in a little over a week.
In an effort to calm investors' fears about Enron's money supply, on 27 October the company began to buy back business letters worth $ 3.3 billion. Enron funded this purchase by reducing its line of credit in a number of banks. When the company's debt rating was still considered in the investment category, the bonds were being sold under a little lower rate, which can cause problems with future sales.
As the month approached, concerns were made by some observers about the possibility of disrupting Enron's accepted accounting rules, however, some claimed that analysis could not be done until Enron provided enough information.
Some people now openly fear that Enron was the new long-term capital management, as the hedge fund, which in 1998 caused fear of the systematic failure of the international financial markets. The large presence of Enron's various businesses has made some people anxious about the consequences of Enron's proposed dropout. The Enron officials' lips were stitched and they only accepted the questions asked in written form.
Decrease in reputation level
At the end of October 2001, the central short-term risk for Enron's survival was seen in its decline. At the time it was noted, Moody's and Fitch, two of the top three credit rating agencies, sought to review Enron's rating potentially to reduce. With such downgrade, Enron had to issue millions of shares in stock to cover the guaranteed loan. This step could reduce the value of Enron's current stock further. In addition, all types of companies began reviewing their contracts with Enron. If Enron's rating goes down from the investment grade in the long run, it could have an adverse effect on future transactions.
Analysts and observers continued to complain about Enron's difficulty or inability to correctly assess the company with suspicious financial reports. Some expressed fear that anyone except Skilling and Fastow in Enron could fully explain the company's mysterious deal of years. In response to a question asked about the business of Enron in August 2001, Lea said, "You are climbing on my head. Such an answer caused anxiety among analysts.
Responding to Enron's ever increasing concern that there may be insufficient cash on hand for short-term news on October 29, news spread that Enron wants to get $ 1-2 billion in funding from banks. The next day Moody's lowered the Enron's negative number or senior uncertified spending-term data reductions to BA 2, according to which the mood was considered to be just above two levels from BA1. Standard & Poor's also lowered the number to BBB +, which was equivalent to Moody's rating. Moody's also warned that he could still reduce the number of Enron's professional letters, which would result in a company blocking more funding to sustain financial security.
An announcement from November was that the SEC had to conduct a formal investigation because of questions raised against Enron's affiliates and transactions with O. Enron's board also announced that it would form a special committee led by William C. Powers, a law school of the University of Texas law school to investigate these transactions. The next day, an editorial in The New York Times called for an aggressive investigation into the matter. Enron succeeded on November 2 to get additional funding of $ 1 billion from its cross-town rival Dynegy, but this news was not universally welcomed as the debt was taken against the guarantee of the company's valuable Northern Natural Gas and Trancewestern pipeline.
Proposal to buy by Dynegy
Sources claim that Enron was planning to explain its business systems in the near future as part of Enron's efforts to boost confidence. Enron's shares were now being sold for $ 7 because investors believed that the company would not have a buyer.
After receiving adverse response from many places, Enron's management apparently got a buyer when the Houston-based energy sales company Dianegi voted in favor of buying enough money for an eight-billion dollar fire-sale price on the night of November 7. At that time, Chevron Texaco, owned by a fourth of Dynegy, agreed to give Enron $ 2.5 billion in cash, especially $ 1 billion before the deal and the remaining amount after the deal was over. In addition, Dynegy also had the responsibility to oblige nearly $ 10 billion as much as $ 13 billion in addition to the secret of Enron's management's mysterious professional systems. Dynegy and Enron confirmed this deal on November 8, 2001.
Commentators commented on the difference between corporate culture between Diangy and Enron and the genius of directly talking to Dionie's CEO Charles Watson. Some people even wondered whether Enron's troubles were not the result of just accounting innocents. By November, Enron had asserted that the one-billion-dollar charge mentioned in October should in fact be worth only $ 200 million, while the remaining amount can only be corrected for a number of errors in accounting. Many people feared that other mistakes and re-statements were still to be told.
On November 9, an additional improvement in Enron's earnings was announced, according to which the revenues announced for 1997-2000 were reduced by $ 591 million. This decline was believed to have been mostly due to two special purpose partnerships (JEDI and Chevco). As a result of this reform, the profits of the fiscal year 1997 were wasted and significant losses in each year's profits. After this announcement, Diange also announced that he still intends to buy Enron. Both the companies were considered to be pleased to get the Moody's and S & P official evaluation report on how to deal with the purchase of any company to understand the impact on the credit rating of both Dynegy and Enron companies. In addition, unreliable control difficulties led to a perceived barrier that led to potential sales, as well as concerns about the difference between Enron and Dynegy corporate culture, according to some observers.
Both companies were aggressively heading for the deal and some observers were hopeful; Watson was praised for the vision of attempts to create the biggest presence in the energy market. At the time, Watson said that we think that Enron is a very strong company with plenty of potential to come out in the coming months. An analyst has called the deal as a giant deal [...] financially very good deal, likewise a strategically well-negotiated deal, and how much immediate balance-sheet support it provides for Enron.
However, problems related to debt were becoming serious. By the time the deal was announced, both Moody's and S & P both took up Enron's rating until junk status was only slightly raised. With the company's rating coming down from investment-grade, its ability to trade on its credit lines with limited limits on or after the removal of credit lines becomes very limited. S & P in the conference asserted that if Enron was not to be bought, S & P would give it a lower BB or higher B rating, which could not be considered even higher in Junk. In addition, many merchants limited or completely closed the business with Enron due to fear of bad news. But in an effort to reassure Watson, during a presentation to investors in New York, he said that there was nothing wrong in Enron's business. He also said that after Le and other top executives learned to sell the company's stock worth hundreds of millions of dollars in the months leading up to the crisis, after relinquishing compensation for the problem of many employees of Enron, which has a hostile attitude toward company management (in the form of giving more stock options) The steps will be completed. Watson's statement did not help in improving the situation, due to the reputation of the paper due to the management change due to Dynegy's deal, Lay was required to pay $ 60 million, while the retirement of the company's employees was mostly based on Enron's share in the company's shares Due to the 90% reduction in value in a year, only the nominal amount will come The fact was revealed. An Enron company official said that there were many couples in our company, who both worked and lost nearly $ 800,000 or $ 900,000. This event washed out the savings plans of almost every employee.
Watson assured investors that the true nature of Enron's business was made clear to them: we are satisfied that there is no possibility of any further losses. If there is no harm then it can be considered a very good deal. Watson also said that the value of Enron's energy sales part is the exact price paid by Dynegy for the entire company.
By mid-November, Enron announced that it plans to sell assets worth about $ 8 billion, which is poor performance, and also reduce its scope for financial stability. On November 19, Enron announced more evidence of the situation being serious. The most important thing was that the company was facing liability for paying about 9 billion dollars by the end of 2002. This debt was much more than its available cash. In addition, there was no guarantee of success of measures to save its financial well-being especially for the sale of assets and redemption of debt. Enron announced in a statement that any adverse effect on these issues could have an adverse effect on the ability to continue the operation of the company.
Two days later on November 21, a serious doubt was made whether the Dow Dynasty would proceed in the deal on November 21, or whether it would be reducing the price significantly by reducing the price. In addition, Enron said in a 10-kg filing that it had been borrowed recently for the purpose of buying commercial letters, or about 5 billion dollars in just 50 days. Analysts were worried about this announcement, especially Dynegy was also not aware of the speed of Enron's cash usage. To get out of this proposed purchase, Dynegy had to prove that there was a fundamental change in the deal situation, by November 22, sources close to Dyne were apprehensive that strong evidence was found in the last advertisement.
SEC announces Civil Fraud Complaint against Anderson. A few days later, sources claimed that Enron and Dynegy were actively negotiating again with regard to their arrangements. Dynegy now demands that Enron agree to purchase for $ 4 billion instead of $ 8 billion now. Observers were facing difficulties in telling Enron about which company or any company was making profits. There were reports of enormous changes being made in Enron's rival business to reduce the risk. Ultimately, Moody's new report has raised concerns about the Wall Street Journal.
Bankruptcy Enron's stock price was 23 August 2000 ($ 90) to 11 January 2002 ($ 0.12). As part of the decline in stock price (East New York Stock Exchange Ticker: ENE), shareholders lost about $ 11 billion.
On November 28, 2001, the two worst voiceless about Enron came true. Dynegy ankka withdrew from the company's buying deal after the consent of both sides and Enron's credit rating dropped below the Junk State. Watson later said that eventually you could not give it to me (Enron). The company collapsed due to very little capital remaining to run a business and the sole responsibility to repay debt was huge. When the trading ended on that day, the share price of the company fell to $ 0.61. An editorial observer wrote that Enron is now facing a complete financial storm.
The systemic results seemed to be felt because Enron's borrowers and other energy sales companies had suffered a considerable percentage loss. Some analysts have found that Enron's failure has highlighted the risks of the economy after September 11, and encouraged traders to get profits where they get profits. This question has now become the determinant of the total risk of market and other traders due to Enron's failure. According to preliminary figures, it was $ 18.7 billion. One adviser said that we do not really know who is at risk of Enron's credit. I'm telling my clients to be prepared for the worst.
Enron's debt related liabilities amounted to nearly $ 23 billion, including outstanding debt and guaranteed loans. Especially due to the downfall of Enron, the CT Group and JP Morgan Chase seemed to lose a substantial amount. In addition, since Enron's main assets are pledged to take a secured loan, serious threats to what the unsafe debtors and late shareholders will get in the bankruptcy process.
Enron's European operations applied for bankruptcy on November 30, 2001, and two days later on December 2, there was a demand for Chapter 11 protection in the United States. This was the largest bankruptcy in American history (the next year's bankruptcy before WorldCom) and about 4,000 employees had to lose their jobs. On the day Enron filed for bankruptcy, employees were asked to pack their belongings and given 30 minutes to vacate the building. 62% of the workforce of nearly 15,000 employees was held in Enron's stock, which was bought at $ 83.13 in early 2001, when Enron's share price fell below $ 1 in October 2001.
On January 17, 2002, Enron sorted Arthur Andersen as its auditor, giving reasons for accounting advice and destruction of documents. Anderson argued back that when the company filed bankruptcy, it ended the connection with Enron.
Legal Procedure Enron
Both Fastow and his wife Lee proved guilty in the charges put on them. Fastow was accused of 98 offenses, money laundering, insider trading, and conspiracy and other offenses of primary fraud. Fastow was convicted of two charges of conspiracy, and he was sentenced to ten years in prison without parole in a bribe to prove against Le, Skilling and Cozy. Lee was convicted of six serious criminal offenses, but the prosecutors later dropped him into a single charge of tax evasion. Lee was sentenced to one year in prison for helping her husband conceal government's income.
In January 2006, Lee and Skilling proceeded from them in the Enron scandal trial. 53 offenses, 65-page charges include bank fraud, banks and auditors involved in providing false surveys, fraud fraud, wire fraud, money laundering, conspiracy and insider trading, including financial fraud. US District Judge Sim Lake rejected a defense plea and the proposal to run the case outside of Houston. In this proposal, he had requested that the negative publicity surrounding the end of Enron would make it impossible to get a judicial hearing. On May 25, 2006, the jury withdrew its verdict in the case of Le and Skilling. Skilling was convicted of 19 out of 28 frauds and fraud in wire fraud and innocent in remaining nine offenses including insider trading crimes were acquitted. He was sentenced to 24 years and 4 months in prison.
Lea was not found guilty in criminal charges and claimed that she was misled by people around her. He described Fastow as responsible for the company's fall. All six offenses of lease and wire fraud were found guilty and he was sentenced to 45 years in prison. However, Len died on July 5, 2006 even before the commencement of the sentence. At the time of his death, the SEC had to pay more than $ 9 million in addition to a civil penalty from Lea. The case against Leanne's wife Linda is difficult. On November 28, 2001, Enron was selling nearly 500,000 shares of Enron during the ten to thirty minutes before the information was disclosed. Linda did not even have one charge related to Enron.
Michael Copper was working for Enron for seven years, although he did not know Le Copper after the company's bankruptcy. Copper could keep its name secret in the whole case as the whole focus was focused on Fastow. Copper was Enron's first executive to prove guilty. Chief Accounting Officer Rick Cozy filed six serious charges for concealing Enron's financial affairs during his tenure. After being convicted, he was transferred to a convict and sentenced to seven years in jail.
Sixteen people were found guilty in the crime committed in the company. In addition to this legal trial, five convicts, including four former Merrill Lynch employees, were declared released. Eight former Enron executives testified against Lay and his former boss Skilling, in which the main witness was Fastow. Kenneth Rice, the former head of the high-speed internet unit of another executive, Enron Corp, had cooperated in the trial and his testimony helped Skilling and Len prove to be guilty. He was sentenced to 27 months in June 2007.
Arthur Andersen
Arthur Andersen was accused of attempting to create a barrier to destruction of thousands of documents and to delete files of a company linked to an e-mail and Enron audit and proved guilty in it. Later, the US Supreme Court canceled the verdict because the jury was not properly instructed in the crimes filed against Anders. Despite the cancellation of Anderson's conviction, he lost most of his clients and was kept away from the audit of public companies. Even though this very scandal involved a very small number of Arthur Andersen employees, the company had to shut down and 85,000 people became unemployed.
NatWest Three
Giles Darby, David Birmingham and Gary Mulgrew were working for Greenwich NatWest. Fasta worked with Fastow on these three British companies named Swap Sub for a special purpose. When Fastow was being investigated by the SEC, these three persons contacted the British Financial Services Authority (FSA) in November 2001 to discuss their conversation with Fastow. In June 2002, the United States had issued arrest warrant against them for seven wire fraud cases and they were extradited in the United States. Enron's main witness was to bring Neil Kulback to the United States but on July 12, he was found dead in a garden in North East London. The United States alleged that Cuckbeck and other accused had conspired together with Fastow. In November 2007, the trio was declared guilty of one of the wire fraud fraud and the remaining six were dropped. Darby, Birmingham and Mulgru were each sentenced to 37 months.
The results were bought by employees and shareholders Enron's headquarters in downtown Houston, the property banks' consortium for $ 285 million in the 1990s, and rented Enron. Shortly before the exit of the property in Enron 2004, it sold for $ 5.55 million.
Before the company became bankrupt, Enron's shareholders lost $ 74 billion in four years. (The scandal was from $ 40 to $ 45 billion). Enron had about $ 67 billion of debtors, employees and shareholders, and it was limited to the support of Enron's breakdown. To pay lenders, Enron also auctioned its assets including art, photograph, logo mark and its pipeline.
In May 2004, more than 20,000 Enron employees had won $ 85 million in compensation against the $ 2 billion lost in pensions. According to the agreement, each employee received $ 3,100. In the following year, investors got $ 4.2 billion from some banks for settlement. In September 2008, a settlement of $ 40 billion was settled for $ 7.2-billion on behalf of shareholders. The settlement was divided between the main prosecutors University of California (UC), and 1.5 million people and the community. UC law firm Cufflin Stoya gal Rudman and Robinson received $ 688 million in fees, which was the highest fee paid in American bailout fraud case. At the time of delivery, UC announced that we are delighted to return these funds to the members. There has to be a long and challenging effort to reach here, but the results for Enron's investors are unpredictable.
Sarbanes-Oxley Act
Between December 2001 and April 2002, the Senate Committee on Banking, Housing and Urban Affairs and the House Committee on Financial Services conducted numerous hearings on issues related to Enron's fallout and its related accounts and the protection of investors' interests. Following the hearings and the corporate scandal that followed Enron, the road to the Sarbanes-Oxley Act was set on 20 July 2002. This law is about Enron's almost Arisa's impression. Each issue of Enron, where corporate governance failures has been included as a main provision in this law.
In the main provisions of the Sarbanes-Oxley Act, establishing Public Company Accounting Oversight Board to prepare the audit report for preparing audit reports, when the public accounting company bans any non-auditing service when auditing it, in case of financial balance sheets again, the audit committee Members' independence, executives prevent financial reports
Following the incidents of corporate irregularities and violations of accounting rules, the SEC had sought to amend the share market rules on 13 February 2002. In June 2002, the New York Stock Exchange announced a new administrative proposal, which was approved by the SEC in November 2003. The main provisions of the final proposal for the New York Stock Exchange are as follows:
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