Enron

1
Enron

2
Enron

• 1. Revenue Recognition
• 2. Abuse of fair values -
• mark-to-model
• 3. SPEs
• 4. Auditors documentation retention

3
Cast

• Kenneth Lay, PhD in Economics, CEO
• Jeffrey Skilling, television weatherman, MBA
  Harvard, McKinsey, COO
• Andrew Fastow, degree in Economics Chinese, CFO
• Sherron Watkins, Masters degree in Accountancy,
  ex Andersen - whistleblower

4
Businesses

• Oil and Gas
• Electricity
• Tradable pollution rights
• Metals
• Pulp and paper
• Speciality chemicals
• Weather
• Band width

5
Business Model

• Investment grade
• Political favours
• Accounting profit
• Revenue
• Recognition
• SPEs

• Free markets
• Profit, profit,
• profit
• Asset lite
• Rank and yank
• Liquidity

6
Causes of the Enron failure?

• 1. Unfettered Management Greed
• 2. Weak auditing
• 3. Ineffective regulation
• 4. Dozy non-executive directors

7
Causes of the Enron failure? continued

• 5. Inattentive or poorly qualified Audit
• Committee
• 6. Failure of whistleblowers
• 7. Compliant lawyers
• 8. Dubious analysis
• 9. Rules-based environment

8
Not a lone example

• 1. Worldcom
• 2. Xerox
• 3. Waste Management
• 4. Non-US examples

9
Accounting Dodges

• 1. Bogus revenue
• 2. Book revenues early
• 3. One-time gains
• 4. Defer expenses
• 5. Ignore liabilities
• 6. Big bath provisions

10
Standard Setting to 2005

• 1. Improvements to IFRSs
• 2. Provide a sound base for 2005
• 3. Start the future programme
• Insurance
• Fair Values

11
Co-ordination between IASB FASB

• 1. Business Combinations
• 2. Financial performance reporting
• 3. Liabilities and revenue recognition
• 4. Pension accounting

12
Co-ordination between IASB FASB continued

• 5. Derecognition (other than IAS 39)
• 6. Impairment of assets
• 7. Intangible assets
• 8. MD A

13
2005