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FIN 370 ENRON: The Smartest Guys in the Room INCOMPLETE 25:10
Terms in this set (32)
What company resulted in the largest corporate bankruptcy in the history of the United States?
-7th largest corporation valued at almost $70 billion
6 Main Reasons to study ENRON
1.) Deregulation and free market capitalism
2.) The role of accounting (consolidation)
-Special purpose entities to hide debt
3.) MNC strategies
5.) Deregulation malfunctions (ENRON's role in the CA electrical crisis of 2001)
6.) Ethical considerations in FIN
How long did it take ENRON to go from about $10B in assets to $65B? How long did it take for them to go bankrupt?
a.) 16 years
b.) 24 days
What was ENRON's fatal flaw?
-arrogance, intolerance, greed
Who were the "Smartest Guys in the Room?"
1.) Jeffrey Skilling (President/CEO)
2.) Kenneth Lay (CEO/chairman)
What company was the largest corporate contributor to the campaign of George W. Bush?
-PhD economist who was active in promoting free markets and deregulation
Who was the attorney for the ENRON shareholders?
Who was ENRON's CFO?
When did Ken Lay found ENRON?
-driven by deregulation
-wanted to take advantage of the government's decision to let gas prices float with the currents of the market
What happened to the natural gas industry during the 1980s?
the government allowed gas prices to float with the currents of the market
What roles did ENRON and Ken Lay play in the deregulation movement?
President George H.W. Bush promoted Ken Lay to Deregulations Ambassador at Large
What was the Valhalla Scandal in 1987?
ENRON oil scandal
-misappropriation of moneys by 2 traders
-made bets with ENRON on whether oil prices would rise or fall
-ENRON kept on winning, but their luck ran out when the traders gambled all of the reserves ($90M)
-Ken Lay claimed that he didn't know about it
Who were Louis Borget and Mike Muckleroy? What was their role in the Valhalla Scandal?
-President of ENRON
-transferred $3M of corporate funds to his personal account
-used off-shore accounts to the name M. Yass
-Enron executive who had experience in gambling on oil prices
-Able to maintain Enron's image even after the traders gambled all of the reserves
How did believers in the role of free market capitalism affect the industry?
People like Ken Lay started businesses relying on the exit of government from the energy industry. He was an advocate for deregulation.
What was important about Jeff Skilling's background when he joined Enron?
He was a consultant for McKinsey and Company
-Suggested that Enron become a stock market for natural gas
-The Selfish Gene (i.e. survival of the fittest, money is the motivation for how people work)
Who is McKinsey and Company and what role did they play in Skilling's approach to business?
a global management consulting firm that serves leading businesses, governments, non governmental organizations, and not-for-profits
-shaped Skilling's consultant mindset in changing Enron "for the better"-a different way to sell energy
What parts of mark to market accounting were critical to Enron?
HFV (hypothetical future value)-being able to show whatever profits they wanted allowed Enron to look financially well-off in the public's eyes
How did Enron's accountants' abuse mark to market accounting?
Arthur Anderson allowed Enron to book future profits (i.e. profits could be whatever they wanted)
HFV (hypothetical future value)
How do corporate leaders affect the corporate culture? The atmosphere working with others?
Jeff Skilling re-invented himself and got involved with extreme sports like ATV riding with other executives. (macho)
-high school clique dynamic
-cutthroat among traders
-"Guys with Spikes"-having a dangerous, extreme quality
Who were some of Jeff Skilling's "Guys with Spikes?"
Ken Rice-salesman, man's man
-Company's chief deal maker
-Smart, blunt (close to Skilling)
-Help build the trading business in the early years
-Enron Energy Services (EES)
-Motivated by money and strippers
When an MNC consolidates, what impact does it have on the firm's value?
-investment in India (failed because India could not pay for the energy that Enron was producing)
-merger with Portland General Electric
Why was there so much importance placed on the market price of Enron's stock?
"pump and dump"-executives would help raise the stock price and then cash in their options
o Match the quarterly projections for EPS->↑ in stock $
What is the role of an auditor?
to provide assurance that a company is utilizing proper business practices and that the financial statements are accurate
-promote a positive picture to help raise a company's stock price
When should the auditor raise questions about accounting transactions he or she suspects may be bogus?
as soon as he or she notices that something may be bogus
Who was John Olson?
One of the only analysts who were keen to Enron's suspicious behavior (fired by Merrill Lynch)
What happened to Enron's broadbank deal with Blockbuster?
deal collapsed because the technology didn't work
-executives sold millions of their stock
How did the management at ENRON help to keep its stock price rising even though the bull market had come to an end?
Manipulated the company's cash flows
-Hid the fact that the company was $30B in debt
Who was Bethany McLean?
a reporter from a lage magazine who wrote a critical article concerning Enron after doing research on the company's odd cash flows
How did Andrew Fastow, the CFO, use structured finance to conceal ENRON debt?
Special purpose entities to move losses from the parent company's balance sheet
$25M each from several major banks
How were those that investors rely on to monitor managerial actions going along with the ENRON fraud?
e.g., Arthur Anderson received $1M a week
What groups profited the most from this passive behavior?
Enron and the firms (win-win)
Investors are the ones who lose
Why was Jeff Skilling so upset at the phone press conference with the simple question from the investor?
Jeff knew that Enron was in a massive hole (worried about keeping the stock price up)
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