ASSIGNMENT

ENRON-THE BIGGEST FRAUD IN HISTORY

CASE
1. Briefly describe the Vahalla Scandal.
Ans: Vahalla Scandal of 1987 came to light when Kenneth lay found that something wrong is
going on. And when they found out that 2 of the oil traders who were gambling huge amount of
money on companies behalf to different fake accounts. But Kenneth did not fire them rather he
did not bother that much what they were doing as long as they were making money. And he also
requested them to make more money for them. But few days later one of the them were
convicted of fraud & gambling and was sent to sent to jail for 1 year.

2. Why did Kenneth Lay hire a new CEO?

Ans: Kenneth lay hired a new CEO because the two people who gambled money on companies
behalf to another fake account & one of them were caught. And ultimately when Kenneth found
about this incidence he did not take any action but he told them to make more money for the
company. But eventually after they were convicted of fraud. And eventually one of them was
sentenced for 1 year. In this situation Kenneth had to hire someone to make money. So he hired
Jeffery Skilling as the new CEO.

3. Describe Mark to Market Accounting as described in the video.

Ans: Mark to Market Accounting this idea was given by Jeffery Skilling the new CEO. He
introduced it to the company and by following this method they would be able reap of billions.
Mark to Market Accounting allows the company to write down the profit in their books on the
day the deal was signed. Which means if they signed a deal of 50 million US dollar for next 10
years they could write it down even without earning a single penny. And it wouldn’t matter if the
deal failed.

4. Ruthless Mind of Skilling identifies his nature for running the business.
Identify 2-3 characteristics as described in the video.
Ans: Some of the characteristics of Skilling are given below :
1. He was a massive risk taker & often went on wild adventures with other executives.
2. Was known for his Darwinian Philosophy.
3. He knew that only one thing which motivated employees were money.
5. Dot com and boom section of the video identifies the first fraud committed by Enron under
skilling. Describe the fraud that was happening.
Ans: In this Dot com & Boom Section we found out that in the convention he kept telling his
staff to put their more of 401k Us dollars in Enron because he knew they were not earning any
profit rather going the opposite way. And they were loosing billions of dollars on natural gas.
Enron had poured billions of Dollars into appliances in India and he new that India couldn’t buy
electricity but that didn’t matter to them because the Enron’s Executives wrote down the future
profits in their books and handing them massive amount of bonuses. They soon began trading
bandwidth & after sometime they made a deal with blockbusters to provide streaming services
but technology simply didn’t work. Still Enron wrote down 53 millions in their books and this
was the first fraud committed by Enron under skilling.

6. Why do you think what the CFO told the journalist was wrong in the world of Accounting?
What is not right to show companies are doing good when they are actually not?
Ans: The CFO Andy Foster he was a character described having no moral compass. He made
Enron’s debts disappear and showed on paper that Enron was profitable. It is not right to show
that companies are doing good when they are actually not because if a company who is facing
loss but showing profit in the public. Then the people will invest more because the company is
profitable but in reality it is not. So these were the Unethical Activities done by him.

7. What was the LJM Scam?

Ans: The LJM scam which was set up by Andy the CFO and it was basically a fraudulent firm
so that he could buy Enron Assets. He also insisted 96 Bankers to invest in his firm. By this it
made him 45 million dollars. But the bankers were also in a deal. Merril Lynch bought 3
Nigerian barges from Enron and sold them back 5 months later and this lead several bankers to
jail.

8. The video identifies that Enron Owns California. But what was Enron actually doing?
Describe the electricity scam in brief.
Ans: The electricity scam was to own California because it was one of the gold mine for them.
And since the LJM scam they lost many things. So they had chosen their next target California.
They merged with Pacific Gas & Electric which gave them access to the Californian grid & then
all the mysteries things started to happen. Blackout was a common thing at that time although the
state had double capacity than the demand . It was the Enron traders who were manipulating the
market and they moved electricity from the state to increase in demand. And when the demand
increased they moved it back. They even requested the powerplants to shut down for few hours.
They had all the maps of electricity & knew how to squeeze the last dollar from the people.
9. Enron shredded Accounting Documents. Do you think they had the right approach? Why do
you think it is unethical to do so?
Ans: No I believe they didn’t have the right approach because if you are a company who is
working ethically why would you shred tons of papers . When Sharon who worked under Andy
she wrote a letter to Kenneth mentioning the corruptions which were going on. And then the
dealings of Andy were published by The wall journal. And when Kenneth was giving speech to
his employees at that time few blocks from there the firms were shredding tons of documents. It
is unethical to do because from the starting Enron showed that the company was in profitable but
in reality they were not. And it was a fraudulent activity done with the public without telling
them the reality.

10. How can we prevent accounting fraud as described in the video?

Ans: Enron Scandal as we know one of the biggest fraud examples in the history. If Employees
at Enron would have understood the importance of diversification and would have prudently
restricted the amount of company stock held in their corporate retirement plans if they had gotten
the right financial literacy training. Many workers had up to 80–90% of their retirement savings
invested in Enron stock.

11. Briefly describe the main fraud committed by Enron?

Ans: The main fraud committed by Enron was that Kenneth lay allowed the oil traders to gamble
money from the companies account to different fake accounts & this lead one of the oil traders
sent to jail. And then came Skilling. He introduced mark to market accounting & this was the 2 nd
biggest fraud which gave the company to earn more money just by showing it in the newspaper
that the company is profitable & people invested huge amount of money. But In reality the
company was facing loss.