• Enron Case Facts
• Enron Case Study Analysis

ENRON PPT. 1.

An ENRON Scandal Summary. Of events is considered by many historians and economists alike to have been an unofficial blueprint for a case. Enron: The Fall from Grace/ The World’s Biggest Fraud. Enron’s History B. Overview of Enron’s. Officials passionately argued their case for.

The Enron Scandal and Moral Hazard Prof. Leigh Tesfatsion Department of Economics Iowa State University Ames, IA Last Revised: 3 April 2011. The Enron Scandal and Moral Hazard. Enron, the 7th largest U.S. Company in 2001, filed for bankruptcy in December 2001. Enron investors and retirees were left with worthless stock.

Enron was charged with securities fraud (fraudulent manipulation of publicly reported financial results, lying to SEC,). QUESTION: In what ways are security market moral hazard problems at the heart of the Enron bankruptcy scandal?. Brief Time-Line of the Enron Scandal. Enron was a Houston-based natural gas pipeline company formed by merger in 1985. By early 2001, Enron had morphed into the 7th largest U.S.

Company, and the largest U.S. Buyer/seller of natural gas and electricity. Enron was heavily involved in energy brokering, electronic energy trading, global commodity and options trading, etc. Brief Time-Line of the Enron ScandalContinued. On October 16, 2001, in the first major public sign of trouble, Enron announces a huge third-quarter loss of $618 million. On October 22, 2001, the Securities and Exchange Commission (SEC) begins an inquiry into Enron’s accounting practices.

On December 2, 2001, Enron files for bankruptcy.

In the following lines, I will discuss the Enron scandal. I will start by an introductio n on “cooking the books” in order to give us an idea of why drove Enron and many other companies into fraudulent activities. I will then talk about Enron, I will start with an introduction of the company, I will then follow with a discussion of the fraudulent activities the company where involved in and I will finally present how the company got caught. To begin with, what does “cooking the books” mean?

Well, companies cook the books when they do not tell us their real earnings. Managers cook the books and present us fake earnings to improve their earnings per share (EPS) of stocks. But why do companies cook the books?

Companies cook the books because they have the pressure to deliver good earnings in order to attract investors to invest in them. And most importantly to keep current investors happy.

Let us note that public companies’ projects are mainly financed by public investors. Executive bonuses are also tied to the company’s earnings and managers are tempted to manipulate company’s earnings to receive these big checks (big earnings). Fu rthermore, let us discuss the history of Enron.

Enron Case Facts

Northern Natural Gas Company – the ancestor of Enron – was established in 1930. In 1979, InterNorth Inc bought Northern Natural Gas Company and placed it under a new management. In the 1980s, the United States Congress passed legislation deregulating the sale of natural gas. At the beginnin g of the 1990s, Congress pa ssed a similar legisla tion targeted at the sale of electricity. These steps launched a new era in the energy market, allowing companies like Enron to prosper. In 1985, Kenneth Lay, CEO of Houston Natural Gas devised a new company and changed InterNorth’s name to Enron Corporation.

This newly formed company was at first involved in distributing gas and electricity in the US and in selling power plants and pipelines worldwide. However, the company started to deviate into many non-energy-related fields – i.e. Non-core business es, such as weather derivatives – weather insurances for seasonal business, risk management, and internet bandwidth.

Enron Case Study Analysis

Even though Enron’s core business remain ed gas and electricity, most of the company growth came from those non-core businesses. How fraud happens at Enron? This is going to be the topic of this paragraph.

Let us start by saying that the Enron fraud case was extremely complex. Peopl e say that the roots for the Enron scandal date back to the beginning of the 1990s. In fact, in 1992, Jeff Skilling, who was the president of Enron’s trading operations, convinced federal regulators to allow Enron to use m ark to market accounting. Mark to market accounting is “a measure of fair value of accounts that can change over time, such.

As assets and liabilities. Mark to market aims to provide a realistic appraisal of the institution or company’s curr ent financial situa tion” (sour ce: investopedia). When market-base d measurement - mark to market accounting in our case - does not accurately reflect the underlying asset’s true value, problems can arise. This is what is happening in the economy with fair value FAS 157. With FAS 157, companies like private equities for instance are forced to calculate the selling price of their assets or liabilities during this unfavorable volatile time. Investors are fearful and thus liquidity is low and makes the selling price of the asset or liability very low, which brings the value of the asset or liability to an all time low level.

Conversely, companies can use mark to market accounting unethi cally, which is what Enron did. Enron used mark-to-market accounting for its energy segment in the 1990s and used it excessively for its trading transactions. Under this accounting rule, when companies have outstanding contracts, energy-related or derivatives ones, on their balance sheets at the end of a quarter, they must appraise them using fair value and record unrealized gains and losses to the quarterly income statement. The subtlety is that there are no quoted prices upon which to base valuations for long- term future contracts in commodities such as gas. Companies with these types of derivatives are free to value those assets or liabilities using their own models and based on their own assumptions and methods. Using mark-to-market accounting allowed Enron to count projected earnings from long-term energy contracts as current income. Those contracts represe nted money that might not be collected for many years.

Investigators found that this accounting method was used to overestimate reve nue by manipulation of fu ture revenue. For instance, unrealized gains accounted for a little more than of Enron’s $1.1 billion reported pretax profit for 2000.

The use of this accounting measure, as well as the use of other.