ENRON

CORPORATION
PRESENTED BY:
MANTOJAC-SARMIENTO-SULIT
 01 Arthur Andersen & Company

02 Enron Corporation

OVERVIEW 03 Timeline - Summary of Events

04 Key Highlights

05 Audit Report Overview

 ARTHUR
01 ANDERSEN & CO.
“Think straight, talk straight”

(1918 - 1947)
ABOUT OUR FOUNDER OUR COMPANY HISTORY
Founded by Arthur Andersen in the Known for its honesty, integrity, and
early 20th century, the firm grew into rigorous standards, Arthur Andersen
the world’s largest professional insisted on full financial disclosure
services organization by the mid- and proper accounting.
20th century.
 ARTHUR
01 ANDERSEN & CO.
“Think straight, talk straight”

(1918 - 1947)

Andersen realized that the nation’s economy of the 1920s

depended heavily on companies in the production and distribution
of energy. Andersen knew there would be a steadily increasing
need for electricity, oil and gas, and other energy resources. So he
focused his practice development efforts on obtaining clients
involved in the various energy industries
01 Arthur Andersen & Company

SIGNIFICANT MATTERS
(1926 - 1973)
Under Leonard Spacek, Andersen’s successor, the firm
continued its push for rigorous accounting standards.

Spacek criticized the lack of uniformity in accounting rules,

leading to the establishment of bodies like the Accounting
Principles Board (APB) and later the Financial Accounting
Standards Board (FASB).
01 Arthur Andersen & Company
SIGNIFICANT MATTERS

Under Joseph Bernardino's leadership in 2001, Andersen's reputation for

integrity eroded as it became deeply involved in the aggressive accounting
practices of clients like Enron.

Despite its legacy of ethical rigor, Andersen approved questionable

financial reporting and engaged in document shredding amid the Enron
scandal.

The firm's association with major scandals, including Enron’s collapse, led
to its downfall in 2002.
02 ENRON CORP.
A FOUNDING AND EARLY HISTORY

1930: Enron originated as Northern Natural Gas Company,

based in Omaha, Nebraska, during the Great Depression.

The company initially struggled to gain consumer trust due to safety

concerns over natural gas but eventually expanded as the cost-
effectiveness of natural gas gained popularity.

By leveraging cheap labor and expanding its pipeline network,

Northern Natural Gas grew through acquisitions.
02 ENRON CORP.

B BUSINESS MODEL

Enron’s “New Economy” strategy emphasized energy trading

and e-commerce through platforms like EnronOnline, processing
$335 billion in transactions by 2000.

Its core business areas included wholesale energy services,

retail energy, pipeline operations, and broadband services.
 02 ENRON CORP.
C LEADERSHIP & RECOGNITION
Enron achieved massive growth and became the 7th largest company in
the U.S. by revenue.

Celebrated for its innovation, it was repeatedly named “America’s Most

Innovative Company” by Fortune magazine.

Jeffrey Skilling became CEO in 2001, while CFO Andrew Fastow created
innovative but controversial financial structures.

Enron’s executives were celebrated as entrepreneurial pioneers in the

business world.
 02

Enron’s rapid rise and dramatic fall

epitomized corporate greed and
unethical practices, leading to
sweeping reforms like the Sarbanes-
Oxley Act of 2002.
 Arthur Andersen and Enron began their professional relationship in the
02 1980s when Enron was formed while looking for a reputable accounting firm
to audit its financial statements.
Timeline of Their Relationship:

1985: Enron is founded, and Arthur Andersen becomes its auditor.

Initially, the relationship focused on auditing Enron’s natural gas and
energy operations.
Late 1980s - 1990s: As Enron expanded into energy trading, broadband,
and other sectors, its operations became more complex. Arthur
Andersen provided both auditing and consulting services, earning
substantial fees from Enron.
03
 ANDERSEN’S REPUTATION AND
PAST ISSUES

Former SEC Chief Accountant Lynn Turner criticized Andersen’s

extensive involvement in Enron’s accounting decisions.

Turner compared Andersen’s problems to Coopers & Lybrand’s

past audit failures, attributing these to a “business judgment”
mindset, which is inappropriate for independent auditors.

Andersen faced scrutiny for its prior audits of Waste Management, Sunbeam,
and other clients, resulting in restatements, sanctions, and settlements.
 DOCUMENT SHREDDING
INCIDENT

Andersen’s Houston office shredded significant Enron-related

documents between September and November 2001,
coinciding with the SEC’s formal investigation into Enron.

Critics, including Senator Joseph Lieberman, suggested the

shredding aimed to obstruct justice.

This led to a federal investigation and accusations of

obstruction against Andersen.
 TERMINATION BY ENRON

In January 2002, Enron dismissed

Andersen, citing document destruction and
disciplinary actions against Andersen
partners involved in the audits.
 COLLAPSE OF ANDERSEN

Andersen’s CEO, Joseph Berardino, resigned in March 2002 after

failing to negotiate a merger.

Following a federal criminal indictment, many clients

dropped Andersen, resulting in mass layoffs.

In June 2002, Andersen was convicted of obstruction of

justice, leading to its effective closure.

The U.S. Supreme Court later overturned the conviction in 2005, but the
damage to Andersen’s reputation and operations was irreversible.
 IMPACT ON PUBLIC ACCOUNTING

Enron’s collapse and Andersen’s role led to ridicule of the

accounting profession and a public demand for reform.

Congress passed the Sarbanes–Oxley Act (2002)

The FASB introduced stricter guidelines for reporting

special-purpose entities (SPEs).
 ENRON EXECUTIVES’ LEGAL
CONSEQUENCES

CFO Andrew Fastow pleaded guilty and served six years

in prison.

CEO Jeffrey Skilling was sentenced to 24 years (later

reduced to 14 years).

Chairman Kenneth Lay was convicted but died of a heart

attack before sentencing, leading to his conviction being
vacated.
03

Andersen’s failure to uphold its integrity, coupled with its

inability to resist client pressure, marked a dramatic fall
from being a trusted audit firm.

The Enron scandal highlighted the need for auditors

to provide an objective and independent check on
financial reporting, reflecting reality over client
preferences.
04
OCTOBER Stock Decline:
2001

OCTOBER 16, $1.2 billion equity reduction due to

flawed accounting for transactions
2001 with related parties.

NOVEMBER 8, Enron erasing $600 million in profits,

2001 triggering panic among investors.

DECEMBER 2, Enron filed for bankruptcy with over

$60 billion in stockholder losses.
2001
 04

Special Purpose Entities (SPEs)

and Accounting Gimmicks
Enron heavily relied on SPEs to move debts and losses off its balance sheet.

• Many SPEs were funded using Enron’s stock, which created instability when the stock price dropped.

• Andrew Fastow, Enron’s CFO, personally profited ($30 million) from managing these SPEs, often
through questionable practices.

• SPEs failed to meet the required 3% external equity funding rule, making them ineligible for off-
balance-sheet treatment.
 04

Mark-to-Market Accounting
Abuse
• Enron inflated profits from long-term energy contracts by making
overly optimistic assumptions.

• Unrealistic price forecasts on these contracts enabled the

company to book profits upfront, despite their speculative nature.
 04

Corporate Culture Issues

• Enron’s corporate culture, described as “arrogant” and “intimidating,”

discouraged employees from reporting ethical violations.

• Executives Kenneth Lay, Jeffrey Skilling, and Andrew Fastow were accused of
fostering a rule-breaking environment.
 04

Andersen’s Role
Andersen was deeply involved in advising and approving Enron’s accounting
treatments for its SPEs.

• The Powers Report criticized Andersen for failing to fulfill its professional
responsibilities and for enabling Enron’s aggressive accounting practices.

• Andersen earned significant fees from Enron ($52 million in 2000), raising concerns
about conflicts of interest.
 04

Legal and Ethical Ramifications

• Key executives (Lay and Fastow) invoked their Fifth Amendment rights;
Skilling denied responsibility, claiming he was “not an accountant.”

• Andersen destroyed Enron-related documents, exacerbating

allegations of misconduct.
 04

Consequences
• Enron’s collapse led to Congressional investigations, significant public outrage, and
reforms in corporate governance and auditing standards.

• Andersen’s reputation suffered irreparable damage, and it ceased operations as a major

accounting firm.

This case is a landmark example of corporate fraud, audit failures, and the need for stronger
internal controls and regulatory oversight.
 04

Consequences
Congress passed the Sarbanes–Oxley Act (2002), which:

1. Strengthened audit independence by limiting non-audit services.

2. Required internal control reports.
3. Established the Public Company Accounting Oversight Board (PCAOB)
to oversee auditors of public companies.
05
05

APPROVAL OF AGGRESSIVE ACCOUNTING

PRACTICES
Andersen consistently provided unqualified
audit opinions on Enron’s financial
statements despite the company’s use of
questionable accounting methods, such as
mark-to-market accounting and inadequate
disclosures regarding SPE transactions.
05

INVOLVEMENT IN STRUCTURING
TRANSACTIONS

Andersen was directly involved in the creation and

accounting treatment of Enron’s Special Purpose
Entities (SPEs). For instance, the firm participated in
structuring the Raptors, a series of SPEs, and approved
their accounting treatment despite concerns about
compliance with accounting standards.
05

FAILURE TO IDENTIFY AND REPORT

IRREGULARITIES

In multiple instances, Andersen auditors

either overlooked or failed to act on clear red
flags, including noncompliance with the "3%
rule" for SPEs and the lack of transparency in
financial disclosures.
05

OBSTRUCTION OF JUSTICE
ALLEGATIONS

Andersen employees were implicated in

shredding documents related to the
Enron audits during the SEC
investigation, undermining the integrity
of the auditing process.
05

RELIANCE ON ANDERSEN’S EXPERTISE

Enron’s board and audit committee placed significant

trust in Andersen’s judgments. However, Andersen
failed to bring critical concerns to their attention,
including material weaknesses in internal controls
and related-party transactions.
05

IMPACT OF CONSULTING
SERVICES

The dual role of providing audit and

consulting services created conflicts of
interest, which compromised Andersen's
independence and objectivity in
assessing Enron’s financial practices.
 09 OUR TEAM

REQMAN CHARLES LYNDON

MANTOJAC SARMIENTO SULIT
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