Enron Flashcards
In Enron’s 2000 annual report, how many principal lines of business did Enron have? What line was the company’s largest revenue producer?
4 principal lines of business
Energy Wholesale Services ranked the company’s largest
Revenue producer in 2000
During the 1990s, Jeffrey Skilling developed and implemented a plan to transform Enron from a conventional natural gas supplier into…
An energy trading company that served as an intermediary
between producers of energy products And end users of those commodities
What fueled the Energy Whole Sale Service division’s 60% increase in transaction volume in 2000?
Fueled by rapid development of EnronOnline, electronic
Marketplace for energy industries
Enron’s 4 principal lines of business
1 Enron Energy Wholesale Services
2 Enron Energy Services
3 Enron Transportation Services
4 Enron Broadband Services
Enron Energy Services, function
Company’s retail operating unit
Enron Transportation Services, function
Responsible for company’s pipeline operations
Enron Broadband Services, function
New operating unit intended to be an intermediary between
Users and suppliers of broadband internet access services
How were Enron’s executives viewed in 2001?
How large was Enron?
As executive superstars who had access to key political
Figures
7th largest firm in USA
Why was Enron criticized during California’s electric utility crisis in 2001?
Profiteering by selling electricity at inflicted prices in California
When Enron’s stock price was collapsing, what did it’s executives blame the dropping share price on?
Falling natural gas prices
Enron’s Q3 earnings issued in October of 2001
Firm suffered a huge loss with a mysterious $1.2 billion reduction
In Enron’s owner’s equity and assets
In Enron’s Q3 earnings in 2001, what caused the $1.2 billion reduction in owners equity and assets? 3 things
1 Reversal of previously recorded transactions involving swap of
Enron stock for notes receivable
2 Enron had acquired notes receivable from related third parties
Who had invested in limited partnerships organized/sponsored by
Enron
3 accounting error: notes receivable should not have been
recorded in assets section but reduction in owners equity
Enron’s restatement of reported earnings on November 8th 2001
Wiped out $600 million in profits the company had reported over
Previous 5 years
On December 2nd, what did the restatement of earnings cause Enron to do?
What was the loss to stockholders?
File for bankruptcy
$60 billion loss to stockholders, largest corporate bankruptcy in
History after Worldcom ($100 billion)
What were the partnerships Enron made transactions with?
Special purpose entities (SPEs) AKA SPVs (special purpose vehicles)
Special purpose vehicles (SPVs)
Can take several legal forms but are commonly organized as
Limited partnerships
Aggressive accounting: Raptor transactions and Condor Vehicle
Enron recognized over $550 million of FMV gains on stocks
Via swaps with Raptor, in which much of the stock declined
significantly
The value of the swaps weren’t there for Raptor, so Enron issued
Stock to offset the losses, Enron hiding losses in related company
Related party footnote
Does not adequately explain that entities described are thinly
Capitalized and all the value of the entities comes from underlying
Value of derivatives, Enron stock and N/P
Enron stock, derivatives and N/P are all at big losses and are
What capitalize the related party
What is the underlying motivation for creating an SPE?
Debt avoidance
SPEs provide large companies with a mechanism to raise needed
Financing for various purposes without reporting debt on balance
Sheet
SEC and FASB implemented rule for SPEs: 3 percent rule
Rule allows company to omit an SPEs assets and liabilities from
It’s consolidated financial statements
As long as parties independent of company provide minimum
Of 3 percent of SPE’s capital
3 percent rule: how large companies use the SPE structure
Arrange external parties to provide exactly 3 percent of SPE’s
Total capital
97% was loans of company that created the SPE
Critics charged 3 percent rule undercut the fundamental principle
Within the accounting profession that consolidated financial
Statements should be prepared for…
Entities controlled by common ownership group
In the 90s Companies such as Enron took advantage of minimal legal and accounting guidelines for SPE’s to…
Divert huge amounts of liabilities to off balance sheet entities
How did Enron use SPE’s other than in financing activities?
Unique because not many companies did this
Used SPEs for sole purpose of downloading underperforming
Assets from it’s financial statements to financial statements of
Related but unconsolidated entities
How did Enron manufacture paper gains in transactions with SPEs?
Enron sold assets at grossly inflated prices to their SPEs
Allowing company to manufacture large paper gains
Enron’s disclosures about SPE transactions
Nominal, confusing, in cryptic language
How were Enron’s profits inflated from SPEs?
Profits were inflated by unrealized gains of Enron’s common stock
In SPE transactions
What was the primary motivation for Enron’s extensive use of SPEs and related accounting machinations in the 90s?
The company’s growing need for capital
Enron’s management required reporting impressive financial results to achieve what for the firm? 2 reasons
Maintain a high credit rating to convince lenders to keep lending
Maintain a high stock price
Loan agreement price triggers (negotiated by Enron)
3 possibilities required when trigger was reached?
If stock dropped below designated level (trigger)
Enron was required to provide additional stock to collateralize the
Given loan, make significant payments to the SPE, or restructure
Prior transactions with SPE
Worst case scenario for falling below a trigger
Enron might be forced to dissolve an SPE and merge its assets
And liabilities into company’s consolidated financial statements
If stock price fell to far, what would happen?
Losses hidden in SPEs would show up on financial statements
Self dealing Windfall profits in SPEs
Company officers and friends made as much as $1 million in 60
From investing $5,800
CFO made $30 million
Aside from SPEs what other accounting gimmick did Enron use?
Abused mark to market accounting method for its Longterm
Contracts involving energy commodities
inflated profits booked on long term contracts by using unrealistic
Price forecasts
What did Enron’s corporate culture foster?
Rule breaking
Through its 15 year tenure what was Anderson’s audit opinion of Enron?
Unqualified audit opinion
In 2001 what did Anderson’s audit team do to help Enron?
Help restructure the company’s SPEs so they could continue to
Qualify as unconsolidated entities
What amount and percentage of earnings were restated in 2001, due to Anderson’s 1999 error on a large SPE transaction?
$600 million or 20% of prior earnings
Violation of 3 percent rule, how did Enron violate this rule?
How should it have been reported due to the violation?
1/2 of the SPE’s 3% of equity had been contributed by Enron
Should have been reported on Enron’s consolidated financial
Statements
For every $1 of audit fees paid to Anderson, what was paid for consulting fees?
$2.69 was paid
For nonaudit consulting fees
In 2000, how much did Anderson earn in fees from Enron? How much was from audit?
Earned $52 million in fees and $25 million from audit
Loss leader
Use of independent auditing to get in the door for company to
Sell more profitable consulting contracts
Anderson was criticized with helping Enron in its…
SPE transactions
2 major ways Anderson failed to fulfill its professional responsibilities in connection with its audits of Enron’s financial statements
1 bring attention to Enron’s Board or Audit and compliance
committee
2 address concerns about Enron’s internal controls over
Party related SPE transactions
SEC fines and Anderson
Anderson paid $75 million in fines to the SEC in the 90s
For shoddy auditing work
The role of independent auditors, what it isn’t
Does not include making business judgements for clients
The role of independent auditors, what it is
Auditors have responsibility to provide an objective point of view
Regarding proper accounting and financial reporting decisions
For those judgements
In January 2002, Anderson’s Houston office commit obstruction of justice?
They were caught shredding a number of significant documents
FASB imposed stricter accounting and financial reporting guidelines on SPEs
Companies must include financial data for SPEs in consolidated financial statements
New agency created after Enron fiasco, their function?
Public Company Accounting Oversight Board
Oversee rule making process of independent audit function
An audit firm cannot force a client to adhere to…
A higher standard
