The Business Issues And Sudden Closure Of Enron Accounting Essay

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December 2, 2001, the world largest wholesale trading of natural gas and energy business assets reached 49.8 billion U.S dollars of Enron Corporation has suddenly filed for bankruptcy protection to United States Bankruptcy Court in New York. The case has became biggest bankruptcy in the history of U.S. Enron was very familiar to the U.S nation. In year 2000, its total income was 100.8 billion, listed in No.7 of "U.S 500", No.16 of "World 500" of Forbes magazine, and was titled as "America's Most Innovative Company" for four years by Fortune magazine. This is surprising for such energy giant to collapse overnight. It caused great shock in U.S government. The causes and the impacts are more we have to think from it.





Enron purchased the stock of its partner and was sold to Chewco which owns by Enron itself which execute by Enron personnel. As a result, Enron began a complex series of secret transaction to conceal the huge debt.


February 20

Fortune magazine has reported that Enron was "a huge airtight" company. Its corporate debt was accumulated, and Wall Street still being kept in dark. The closing price of Enron on that day was 75.09 U.S dollars per share.

April 17

Enron's chairman, Kenneth Lay visits vice president of United States and others officer of energy policy frequently.

August 14

CEO of Enron, Jeffrey Skilling resigned. Enron still insist to explore its financial situation to the public. While, the closing price of Enron stock on this day has fall to 39.55 U.S dollars per share.

August 22

Enron vice president, Sherron Watkins brings up the issues on looming accounting problem of company.

October 12

Legal counsel of Arthur Anderson, one of the top 5 accounting firm in U.S has instructed their employees to destroy Enron audit files.

October 16

Enron announced third-quarter loss of 618 million U.S. dollars. Moody's to consider lowering the credit rating of Enron bonds. Enron's stock fell to 33.84 U.S. dollars per share on that day.

October 22

U.S. Securities and Exchange Commission began investigating Enron.

October 24

Enron ousts CFO, Andrew Fastow.

October 26

Enron notified its company problem to the chairman of Federal Reserve, Alan Greenspan. The day, the stock fell to 15.40 U.S dollars per share.

November 8

Enron admitted making a false report since 1997 about 600 million U.S. dollars profit.

November 29

U.S. Securities and Exchange Commission investigation of Enron will be extended to the audit of the accounting firms - Arthur Andersen.

December 2

Enron filed for bankruptcy, the company stock down 26 cents per share.


January 9

U.S. Justice Department began the "Enron" criminal investigation.

January 23

Chairman and CEO of Enron resigned. Rescue specialist, Stephen Cooper replaced him.

February 2

A 218 pages of summary on the investigation of collapse of Enron by The Power Reports was published to the public and the blaming has come harshly.

February 12

Kenneth Lay refuses to testify before Congress.

April 9

Anderson former's Enron auditor admitted that they have destroyed the audit files of Enron which contribute to obstruction of justice.

June 15

Federal grand jury of Houston ruled that due to prejudice to judicial investigation of Enron by Arthur Anderson. Not over few hours, the U.S. Securities and Exchange Commission announced Anderson will come to end in the end of August and stop its audit services to listed companies.

October 2

Boss of LJM and CFO of Enron arrested on charges of fraud and money laundering from the project he ran. He will eventually have to face at least 98 counts.

October 16

Anderson sentenced to probation and 500,000 U.S dollars fines. This audit company is no longer in the audit field.


March 19

Enron announced it will keep its North America pipelines and international pipelines and other power assets to emerge from bankruptcy as two separate companies with different names.

May 1

LJM is named on Fastow's wife and two of his son. L, Lea Fastow was arrested as well due to her involvement in several frauds.

July 11

Enron to pay creditors estimated 67 billion dollars that owed through filing for bankruptcy reorganization plan.

November 24

Court-appointed bankruptcy examiner releases Batson Report which

stated that Lay and Skilling did not take their roles by protecting the benefits of company shareholders by oversee their subordinates which toying with the accounting tricks and leads to all these massive.


January 14

Andrew admits on his guilty. He agrees to serve 10 years in prison; confiscate $23.8 million, including homes in Galveston and Vermont; and forfeit claims on another $6 million held by third parties. Well, his wife, Lea pleads on one felony count of filing a false tax report for failing to report $47,800 in income. She agrees to serve five months in prison and five months under house confinement, but her judge suggests she might not accept the plea bargain and she later withdraws her guilty plea [1] .

February 19

Skilling pleads not guilty of all 35 counts.


January 30

Trial begins on conspiracy and fraud on Jeff Skilling and Kenneth. Lay.

July 5

Enron founder Kenneth Lay founds that due to sudden heart attack. But that is also rumour says that he is alive.

September 26

Unavoidable, Andrew Fastow was sentenced to serve in prison about 6 years due to his conspiracy and fraud on accounting.

2.2 People

2.2.1 Founder of Enron-Kenneth Lay


Enron's Chairman and CEO.

He formed the company by merging Houston Natural Gas and InterNorth in 1985.

The company adopted the name Enron in 1986.

A hands-off [2] manager and a business visionary, he saw opportunity in the rapid deregulation of energy markets in the United States and around the world.

He attracted subordinates who wanted to seize these opportunities, the two most influential were Rebecca Mark and Jeff Skilling.

The Founder and Gravedigger of Enron Empire

As a co-defendant, 64-year-old former chairman of Enron Kenneth Lay and 52-year-old former CEO Jeff Skilling to absolve the responsibilities that they should in bear in the case of financial fraud of Enron. However, the U.S media generally think that Kenneth Lay which has close relationship to President Bush could not escape from it.

In the Houston district court, prosecution and defence were arguing surrounding on two major themes which are the crime and moral. Federal prosecutors found that Ken Lay conduct unethical conspiracy in the Enron financial fraud, and try to lay all the blame to his subordinates. Defence lawyers of Ken claimed that Lay did not know the illegal acts of his subordinates, therefore, does not need to take any responsibility.

In order to permit that Ken Lay is innocent, defence lawyers has organized a large group of witnesses which close to 30 people and 4 of them are as character witnesses for Ken. Edward Young, a local pastor, said that Lay's character is "quite to trust". Kenneth Lay's defence lawyers have repeatedly stressed on, until Enron filed for bankruptcy protection at the previous month, "the company's operating condition is health", while chief financial officer Andrew Fastow was apparently rigged [3] all of this while Ken was unaware on it. Although Ken is also one of the gain profit from it, but does not need to take responsibilities again.

Analysts believed that delusion of Kenneth Lay to Fastow as fall guy is not a smartest way; in contrast, it will cause antipathy of juries. During the court session, one of the federal prosecutors, John Houston has question on the luxury lifestyle of Ken. He has asked that "have you ever considered to reduce personal expenses, in order to reduce the burden of Enron?"But some of the analysts think that it was out of range.

Of course, John did not forget to remind the jury of Ken Lay was a huge "house mouse" in Enron. Even in the most difficult time of Enron, Lay has not forgotten take out 4 millions from company account to invest in stocks. Houston also accused that Lay has played that trick in front thousands of employees during continuous fall of Enron's stock price. He said that the shares has been absorbed by him, in fact the numbers of shares that he sold was greater than he had repurchased.

In addition, prosecutor has offered a special tainted witness to permit Lay is bad faith. A former Enron officer, Michael Kopper told the juries that in the past his office was close to Lay's, he is quite clearly on what had done by Kenneth Lay when Enron is in difficulties. "Lay did not tell the truth in front of juries," said by him. After the Enron scandal exploded, Ken has his own blaming list which excludes him, and to defence himself again he was telling the juries that he has done all his best to making decision by what the information he got. Ken and Skilling are viewing it positively that they will get rid from this.

Unfortunately, local judge, the attitude Simone Lake will definitely make the Ken and Skilling disappointed and suffer. He prompted the juries on paying attention on the fraud "don't know with conscious" cannot be legitimate defence. Some analysts believe that, this means that federal prosecutors has "strategic" on victory, it has increased the possibility of two felons. Simone also announced a temporary recess; members of the jury go home rest, when comeback again the case will enter into end stage. Lake warned juries do not discuss the case with anyone during and do not read the media reports or comments which related to this case during their rest.

But Lay never enter into jail because of he is found that due to heart attack while waiting for his sentences on his fraud. His brother, Jeff was sentenced to serve over 24 years in prison.

Richard Kinder


President of Enron.

He had worked under Lay at Houston Natural Gas.

He kept tight on expenses.

The perfect person to oversee the operation and to pay down the firm's debt gradually.

He left the company in the middle and was very lucky escape from the fraud.

Since he does not involve in Enron debacle we will not discuss further on him.

2.2.2Mark VS Skilling

Mark was travelling around the world, acquiring or building power plants and others energy related projects. Skilling was channelling Enron Capital and Trade Resources (ECT) same sort as investment bank to energy industries. Mark promoted the "asset heavy" which is acquisition of physical assets. Well, Skilling promoted "asset light" which is to use of Enron's balance sheet for intermediating deals.

Rebecca Mark [4] 


Previously from Houston Natural Gas.

During the late 1980s, she worked in the electric power division, learning how to negotiate international power generation projects in a market that was just beginning to attract investors.

After taking two years off to earn a Harvard MBA, Mark persuaded Lay to let her structure an international division that would chase more energy projects around the world.

Enron Development Corporation was formed in 1991 with Mark as CEO. In 1993, later on become Enron International.

Bits and pieces of Mark:

For several years, Rebecca seems to be one of the most successful women in business area. She and her team which has name themselves as "missionaries of privatization". They were doing closing deals which means the actual profit gain of those deals would not be known by public for several years. Mark is stood on making huge wealth through closing deals. Many of those deals would later to haunt back Enron.

So far from now, Mark's biggest deal was a two-stage power project that she built in Dabhol, India. The first stage is burn oil. Next, a larger stage on burning liquefied natural gas (LNG). LNG is a costly fuel, so output from the plant would be bring large profit to them. India had nation with widespread of poverty. The local government never resolve it on stolen electricity. The World Bank rejects to stand for this project, claiming that it has no benefits to economic. There was widespread of opposition to the project, so Mark with her political team work out to her. The project "stillborn" during 1996 after India's Congress Party voted over it.

To restart the project, Mark worked tirelessly. She has back and forth between Houston and India. Lay recruited the involvement of the Clinton administration, which actively stressed the new Indian Government to restart the project. After some re-arbitration, the project was restart. Enron with help of Clinton's team deal with the Indian government by required the state-owned electric utility to buy power from the Dabhol plant. By some analyzes, the utility would have to settle payments totalling USD 30 billion over the life of the project.

For Mark, the project was a huge success, it brought fame and bonuses. In 1998, she's on the cover of Forbes magazine. She was selected to the Board of Overseers of Harvard Business School and the Advisory Board of Yale's School of Management. Enron proxy statements point out that her combines' compensation for 1996 to 1998 was USD 25.7MM.


Enron had been playing on the idea of developing a water trading market, and she saw this as her opportunity to further her status in Enron. She purchased Wessex Water, one of England's most money-spinning water utilities. She paid USD 2.2 billion, a 30% premium over the utilities market capitalization. Her new water venture was called Azurix.

To keep its debt off Enron's books, a number of outside investors were found to form an SPE which is Marlin Water Trust, take about 50% of stake. Mark begins acquiring more assets. Marlin Water Trust was the biggest after Wessex Water in Argentina.

Mark was determined to bring Azurix to the public. This would give her an independent company far removed from Jeff Skilling. In June 1999, she floated a third of the company at USD 19 per share, raising USD 695MM.


Due to the business issues and sudden closure of Enron, the water business dream which started by Mark never get sense of success, the adventure end in 3 years only, but Enron also has tried something new in financial aspect, this can be a reference to us.

October 1999, Azurix took 3.156 million to buy a 13,600 acre farm in Madera County, California. Because this plot is very close to canals and water pipelines, Azurix plans to use the aquifers to run water bank, which store the water in wet weather and sell it during arid climate. The plan was received opposition from state and federal, environmental agencies and wildlife conversation organizations also believe that there is no argument on the part of the scheme on security and protection of wildlife, and residents nearby also worried about that project will cause loss of their property and even lead to natural disasters which may be due to formation of groundwater pit. Despite the effort put on public relation of Azurix, including the willingness to help the construction of millions of dollars government center building in county, and funding the California about 1.9 billion of water bond proposal which will be use in the project, but the project still failed.

Azurix has a more ambitious plan in Florida-to restore the world second largest wetland which has been destroyed because of the over development in agriculture. Azurix hopes to use a known as aquifers storage and restoration of water (aquifer storage and recovery, referred to as ASR) technology to achieve this goal. ASR is actually by inject dew or treated water and the sewage into the ground, purification by aquifers around six months to meet drinking water standards ,and at the end extract from the ground. Water in Florida is not a commodity, it cannot be used for trading. Water trading has been opposed by most people. In order to promote the project, Azurix hired large number of these experts, including Florida water district mangers and the main initiators of wetland restoration to lobby the government and parliament. They even have a meeting with President Bush, but this motion is not adopted.

Although the progress of the water bank program is not successful, Azurix still continue to try to transform water industry into financial based. February 2000, Azurix established a website trading, storage and transport of water WATER2WATER.COM, the site's model is similar to EnronOnline, to provide information and platform to trading. At this website, people can trade for water rights, also achieve water storage with transport and transact, Azurix only will charge for the commission from the transaction. In July 2000, Azurix is rank at top 200 at B2B website of Forbes, and it was top 10 in the website of energy and utilities. August 2000, Azurix began a small-scale of experiment plan. The aim of the project is to by using the website to help the water rights trading at downstream of Rio Grande.

Although is a good idea, actually to start this kind of trade in water industry is still very hard. For example, there is no open access policy on water transmission, remove water for selling purpose is difficult to get approved from environmental organizations, all of the factors lead to difficult to increase its trading volume by the website, the website is no longer can be connect in the very short period.

Jeff Skilling


In 1979, he earned a MBA of Harvard.

He was a consultant for McKinsey where he advised Enron on how to run its gas tube in the quickly deregulating US natural gas market.

He came up with the idea of launching a "gas bank".

The gas bank would be named Enron Gas Services. Later on, it changed to Enron Capital and Trade Resources (ECT).

In August 1990, Enron Finance Corp was formed and Skilling was chosen as CEO.

Bits and Pieces of Skilling

While Mark was beginning her Dabhol mission, Skilling was back in the United States continue pursuing his "asset light" policy. By following on the peak of his success of the gas bank, he on the go to bring ECT into natural gas dealing, shaping an active market where none had done it before. ECT jumped into this business when the deregulation in the United States and this given him chances for electricity trading. During the mid of 1990s, it had 200 power marketers working out in this area. In 1995, Enron hopes the Atlantic to release another outlet in London office to deal power and natural gas. The firm became a major force in European energy markets in a short moment. Skilling started discovering new markets to enter it and to apply the "Enron model." Those things included the weather, paper pulp, plastics, and metals.

Skilling also set his wisdom eye sights on retail electricity markets in United States. These were deregulating little and little than the wholesale markets, but the vision was for households to choose an electricity supplier in the same way they choose a phone provider in someday. This vision never panned out. But for a time, Enron devoted wide-ranging resources to building brand awareness. Television advertisements shown in several markets, it also showing the Enron company logo and promoting spirit of Enron's innovative.

Skilling was also working to take over Mark. He deals all things so that ECT would give financing to other divisions of Enron, including Mark's Enron International. Skilling's strategy enabled him to slow Enron International and give him a context to criticize Mark's heavy expenses on projects. Still, Mark can always go for Lay or raise fund outside Enron.

Mark-to-market accounting [5] to ECT's trading books

Skilling's vision was to trade energies and other merchandise to the way Wall Street trades capital. In 1991, he persuaded Enron's Audit Committee to permit him to apply mark-to-market accounting into ECT's trading books. For liquid trading activities, mark-to-market accounting is appropriate and far superior to accrual accounting and it is widely used in the capital markets. In Enron's case, it wasn't always suitable.


Many of the markets which ECT was trading in are not liquid, while Enron was developing in those markets. With no liquid markets be presented, ECT has entered into far-dated gas and power deals. In this situation, it changes to mark-to-model accounting instead of mark-to-market accounting. There was an unaddressed argument of interest on the bonuses to them was relating to the profitability of deals. Much of the profits were uncertain.

That year, Kinder had a conflict with Lay over a condition relating Lay's assistant, Nancy McNeil. Kinder and McNeil left Enron and were married soon after. Lay offers Skilling to replace Kinder as President and COO. Mark remained a major force within Enron, but Skilling was consolidating his position, encouraging a circle of colleague into senior positions. With Ken Lay and Jeff Skilling, Enron now had two business visionaries at its controls, but there was no one can replace Richard Kinder's good wisdom.

Performance Review Committee (PRC)

Skilling recognized an unfriendly corporate culture that makes employees against each other, continuously picking over out those "non-performers" or the "politically isolated" and replacing them with new hires. To centralize to his scheme is to have a performance review committee (PRC), also known as "rank and yank." Skilling had long launched PRC in ECT, but now he implemented it company-wide.

Every six months, every employee's performance was guided by a working group of managers. Employees were rated on a scale of 1 to 5, from best to worst. These employees were "restructured." Those who have rated as 5 were moved to a separate area of the company, given a desk, phone and computer and confirm after several weeks to find another job within Enron. After that, they were let go.

But, managers on the PRC repeatedly will never know the employees they were re-examine, so other employees would submit written view. Each employee could ask five colleagues to hand up letters to give comment on his or her performance, but anyone else could submit unpleasant comments as well. The process was seriously political. Employees could "kick out" each other by just submitting negative comments. Employees would have deals with one another to submit good re-evaluate. If one wanted to eliminate more than 15% of his staff and another wanted to keep the most, they might be in collaborate with. Managers used the PRC to incentive friends, and all employees were under pressure to join up a senior manager as a guardian.

The PRC undermined the risk within Enron. A complex deal and mark-to-model evaluations had to be accepted by risk management. Risk managers knew that they would suffer in the PRC if they have any disagreement on it. Risk management became little and force to just follow it.

2.2.3Andrew Fastow, Fall Guy


MBA from Northwestern University, 1986.

In 1990, he worked at Continental Bank by doing asset securitization deals before went to Enron.

He is close to Skilling, and was appointed Enron's CFO in 1996 at the age of 37.

The Fair-haired Boy of Skilling

The former chief financial officer of Enron, Andrew Fastow has created a new set of innovative financing methods. By using this new way, it can allow company's liabilities to disappear from the Enron's balance sheet and still having the authority to control over the assets that stood behind the debt's trap. Fastow earned reputation as a money wizard during the good time of Enron. He was titled as a people can think outside the box. Fastow know how to compensate his boss. Skilling who was prefers "asset light" strategies which always struggling to get return faster. Fastow has created hundreds of special purpose entities (SPE) which can make the asset tables of Enron looks nicer. But, all of these will later on become a nightmare to Fastow.


Enron had craeted a limited partnership called the Joint Energy Development Investment Limited Partnership (JEDI) with a nation's largest institutional investors and highly influential pension fund which is California Public Employees' Retirement System (Calpers). The partnership is to invest in natural gas projects. Participation of Calpers meant that JEDI was separate from Enron. Enron get profits from the partnership, but none of JEDI's debt will exists on Enron's books.


Enron wanted to start a new and larger limited partnership called JEDI II, but it thought that Calpers would be unwilling to invest while it was still invested in JEDI. Enron couldn't simply buy out all Calpers investment in JEDI, which was worth USD 383MM. This would make Enron the sole investor in JEDI and its debt would have to appear on Enron's balance sheet. Calpers pulled out of JEDI II in October 2000 to invest in something simpler and more transparent. Fastow insist to form a new venture, called Chewco Investments, to take Calpers place as an investor in JEDI.

The Fraud of Chewco

Fastow was struggling to keep its debt out from Enron's book. With Chewco, it would again ensure JEDI's debt will exclude from company since Chewco is "independent" from Enron. Fastow placed his subordinates as investor instead of finding a real invester outside the firm. This was ridiculous. Kopper does not have the much personal resources to make such an investment.

Fastow's solution was an involving multiple special purpose entities (SPE) and a direct investment by JEDI of USD 132MM in Chewco. JEDI was investing in Chewco so that Chewco could invest in JEDI-A cycling investment. Besides for USD 125,000 pump in directly by Kopper and his domestic partner, William Dodson, all of Chewco's funding comes either from Enron or as loans undertaken by Enron. Unexpectedly, Enron's board approved the Chewco deal without knowing the whole stories. Enron treated Chewco as an independent entity for accounting purposes, but it will never be.

LJM [6] 

In June 1999, depending on incorrect representations by Fastow and his subordinates, Enron's Board of Directors agreed to allow Fastow to create and serve as the managing partner of a new SPE called LJM1, and later in a larger SPE called LJM2. Transactions entered into with LJM allowed Enron to manipulate its balance sheet by moving poorly performing assets off balance sheet by selling them to LJM. Far from true sales of assets to a third party, Enron's "sales" to LJM were shams. At times, Enron agreed in advance that it would repurchase the supposedly "sold" asset. Further, as the argue, Fastow and an Enron executive had a secret agreement that LJM would never lose money in its dealings with Enron. Enron was also able to manufacture needed earnings through sham transactions with LJM when Enron was having trouble otherwise meeting its financial goals. According to the complaint, the LJM transactions allowed Fastow and others to personally earn huge sums of money in the form of management fees and skimmed deal profits.


The complaint stated that Fastow and others deceived Enron and National Westminster Bank by secretly investing in an Enron SPE, Southampton, and then absorb off millions in income that originally belonged to others. Kopper has pleaded guilty in connection with this scheme, and three British bankers have been charged with wire fraud in connection with their roles in the scheme.

RADR [8] 

The complaint claimed that in May 1997, Kopper and Fastow created two SPEs, known as RADR. It is to purchase a portion of Enron's interest in certain wind farms in California through supposed independent third-party investors known as "Friends of Enron." The investments were actually funded by Fastow. According to Kopper, when the RADR investments became profitable, Fastow demanded rebate and payments in the forms of annual, $10,000 "presents" to members of Fastow's family.

2.3 Organization involved

2.3.1 Decline of Andersen - The Cost of Dishonesty

Arthur Andersen was founded in 1913 and it headquartered in Chicago. Andersen was one of the top five of world's accounting firm. It represented the audit of 2300 of listed companies in United States. Its occupy 17% of listed companies in United States. In 84 countries worldwide with 390 branched, 4,700 partners, 2000 partner firms, and over 85 thousands of professionals. In year 2001, its total revenue is 9.34 billion of U.S dollars.

But after the explosion of involvement in Enron scandal, this accounting firm sinks. U.S. Congress, the Justice Department, the Securities and Exchange Commission have launched investigations against Arthur Andersen. Including Ford, Merck, Federal Express, Delta Airlines, and others 36 major customers terminate their contract with Arthur Andersen.

Credit is important for all business, while is particularly important for accounting firms. If an accounting firm lost its credit, it means game over for them. But, Andersen seem has forgot this basic fulfilment. In fact, Andersen has toying around the audit activities not just once, it is not a secret as well, but they manage to handle it all, and does not makes much of influence. So, due to trusting to luck and driven by short-term interest, Andersen continues to go beyond it, until it was exposed with massive situation.

We can define Enron and Andersen as brothers. These 2 brothers have same symptoms. With the similar outcome, so-called loser, and they are both view them smart, while harming people, they also are putting themselves to hell.

Arthur Andersen has admitted that they had destroyed part of the information, and announced to dismiss David Duncan, Enron audit partner on January 15, 2002. Anderson accused him of call for meeting in October and destroys the information related with Enron. But Duncan said to the congressional panel, he was acting according to instruction of senior management. He pointed out that, start from September of 2001, person in charge of Chicago headquarters has frequent meeting with auditors of Houston office to discuss on Enron-related issues, some of the company executives also attend the meetings as well.

Although the law does not set that how long should an accounting firm to keep records, but it is illegal to intentialy destroy the documents that in summons notice area. So, Arthur Anderson company or the responsible person will be sue due to deliberate obstruction of the investigation. U.S. House of Representatives Energy and Commerce Committee Chairman, Billy Tauzin said the any foolish destruction of any records shall be dismissed, any attempt to evade investigation by destruction of records of people should be prosecuted.

2.3.2 Audit issues of Arthur Andersen to Enron

From theory, while we look at the major criminals of listed companies, we have to separate the responsibilities of accounting and audit strictly. But it is undeniable that relationship between certified public accountants and listed companies are deeply interlinked. The collapsed of Enron not just cause the evaporation of hard-earned money of Enron employees and the wealth of many innocent investors, also make its audit company, Andersen into desperate situation.

Arthur Andersen has issued a serious misrepresentation of the audit report and internal control evaluation. 2000, Andersen helped Enron to issued 2 reports which are audit report of a unqualified plus explanatory notes section (change in accounting policy) and the other was claimed that internal control of Enron's management give reasonable assurance that the reliability of its financial statements to be approved evaluation report. These two reports incurred in contrast on the Enron accounting problem. After consultation with Arthur Andersen, in November 2001 Enron Corporation submitted 8-K reports [9] to the SEC. The report was use to explain on financial statements over the past 5 years, the profits, shareholders equity, total assets and total liabilities and to clearly remind investors that   audited financial statements from 1997 to 2000 are not reliable. In other words, Enron went up letter after the audited financial statement which does not fairly reflect its results of operations, financial condition and cash flow. Internal controls which approved by Arthur Andersen also cannot ensure the reliability of financial statements of Enron. Arthur Andersen's report based on the financial picture and description of the effectiveness of internal control was having a serious deviation from the actual situation of Enron.

The audit of Arthur Andersen to Enron is lack of independence. Andersen does not just provide the audit services to Enron, but also well-paid consulting service. Andersen provided consulting services and even on bookkeeping. The community have wondered, from Enron for Andersen's consulting revenues rewarding, can it remain independent? Is there presence of severe conflict Enron which Andersen audit for? Can it be independent of position on issues Enron's financial statements without unbiased opinion? Even though Arthur Andersen was found significant accounting issues, but it may be risking the loss from resignation to the large consulting revenue can it still stand on independent position? The questions such as these, even if Andersen can defend themselves from the professional point of view there is no breach of professional ethics, but the public will think that still lack of formal independence of Arthur Andersen.

Many of Enron senior management was the former employees of Arthur Andersen. The close relationship between them has undermined the formal independence of Arthur Andersen. Enron's chief financial officer, chief accounting officer and vice president of corporate development and other Enron senior managers are recruited from over Arthur Andersen. Number as for the resignation from Arthur Andersen to Enron as a lower-level managers are also numerous.

They did not take the necessary corrective measures when they have been aware on the situation of Enron's accounting problems. The disclosure of evidence by United States Congress Investigation has stated that, they did not report to any authorities or take any measures when they have been discover the inside story of Enron. A congressional investigation team was having an Arthur Andersen e-mail said that Andersen's senior partners as early as in February 2001 had discussed the lifting of the business relationship with Enron due to that Enron's accounting policy as too radical. We note that 2000 annual financial statements of Enron, the audit report was issued by Andersen in February 23, 2001. Thus there is reason to believe that Arthur Andersen in is likely to have been aware of exist of Enron's accounting problems; otherwise, the partner will not discuss whether to resign in February.

Destruction of audit working papers has lead to obstruction of justice investigation. In the uproar of the Enron scandal, the most unexpected for the accounting profession is actually destruction of thousands of Andersen's audit files. Destruction of audit records by Andersen was a flagrant provocation of accounting ethics. It also exposes they are lack of respect for the law. When the scandal was out, Arthur Andersen has fired Enron's audit, David. Duncan, at the same time lifted the position of 3 senior partners in Houston. However, this is not best way. Duncan told the Ministry of Justice, Federal Bureau of Investigation and the SEC's Inquiry, he claimed that he is destroying the audit papers after instruction reached to him and was stop it when received instruction from lawyers. Destruction of audit records not only lost the credibility of Arthur Andersen, and has increased the suspicion of collusion. If this is just the result of a miscalculation of audit failure of Andersen, is it worth taking risk the to destruct of audit files? Only one answer: the audit reports which has been destructed has hiding a shame collusion.

2.3.3Reflections on Enron -Analyze on Enron accounting and auditing problems 

Enron debacle should bring to the community, especially the attention from accounting professions. It is because Enron incident does not just showing distortion on accounting information, but also exposes that serious flawed on authenticity of the accounting information system. Analyze on Enron which happened in the mature stock market can help us to learn from it and avoid it happens in the future.

Accounting and auditing issue which led to Enron's collapse.

Enron's improper of using SPE led to over-estimate on profit and underestimate its liabilities. Enron use SPE to exclude the debt of JEDI, Chewco, and LJM I from its books. It causes them to over-estimated about 499 million during 1997 to 2000 and also underestimate billions of its debt.

The major accounting issues of Enron were almost absurd accounting practices. According to U.S accounting practices before Enron, if non-related parties (either companies or individuals) in a "special purpose entities" in equity investment capital is more than 3%, even if the "special purpose entities" in the risk borne mainly by listed companies, listed company can choose to not include the "special purpose entities" consolidated statements. Enron took advantages on it, regardless to the leak on accounting practices which does not care on economics substances. Enron set up hundreds of SPE as a tool to conceal it liabilities and cover up the loss.

Enron also using air hanging notes of receivable to overvalue its asset and shareholder equity. Enron set up 4 SPE which were titled Raptor I, Raptor II, Raptor III and Raptor IV in 2000 to hedge market risk investment. In order to solve SPE capital's problem, Enron Company issued 172 million of common shares in first quarter of 2000. Without really paying the dividends from SPE, Enron still insist to include it in its account receivable, and resulting inflated assets and shareholders' benefit of 172 million dollars. Accordance with generally accepted accounting principles, the deal should be seen as shareholder debt, as a reduction of equity.

Enron also using limited partnership to operate profit. The company through a series of financial innovations, including the establishment of a limited partnership controlled by fund-raisind and hedging. It was invest by LJM I and LJM II which was registered in the law for private investment limited partnership. The partner of LJM has been seperate into general partners and limited partners. Since LJM start-up, a clear explanation on establishment on it has inform to Board of Directors. The purpose of it is to source funds to purchase assets, as a investment partner and reduce the investment risk.

From June 1999 to September 2001, Enron and LJM occurred in 24 deals the company, most of these transactions the price deviations from the fair value. Enron has disclosed information that the 24 deals has been increased Enron's pre-tax profit by 578 million U.S. dollars. During year 1999 and 2000, its pre-tax revenues were 743 million of U.S dollars. In these 24 transactions, Enron pre-tax revenues were 87.3 million through selling its asset to LJM II. But Enron's third quarter 2001 write-off of the SPE investments has recognized the fact that loss of 1 billion U.S. dollars. It lead to doubt on appropriateness of the trading profits of Enron in 1999 and 2000.

Enron has use of partnership networks to self-dealing and allegedly to conceal huge losses. Enron owns a large and complex networks for the special purpose mainly to buy Enron assets or for its financing. Enron enstablished 3000 partnership and subsidiaries and 900 of it was located at overseas tax avoidance haven.

2.4 Enron Settlement

September 2, 2002, Fortune magazine has noted that Citigroup and JP Morgan Chase on suspicion of involvement in the Enron Corp. and other companies on the problems of company's accounting fraud. The article further noted that the banking industry in U.S. is also likely to suffer because of this event a huge and lead to credit crisis.

These two major banks in United States have been confirmed engaged and helped Enron to design a complex finance transaction. The structural behind it was simply is loan. They have helped Enron to (1) inflate the cash flow of operation, (2) underreport the real amount from finance activities, (3) underreport the huge debt which insist hide it by Enron.

2.4.1 J.P. Morgan Chase

SEC stated that, all of the "pre-pay" and transaction deal with Enron means to J.P Morgan was generated from loan. Due to structure, it has eliminated all commodity price risk that would usually appear in commodity trades. The accomplishment from it will turn the risk back to the Enron. While each step of this structure is exist as a commodity trade with supplements of others elements, Enron received cash earlier and agreed to repay it with negotiated interest. It has lead to credit risk to J.P Morgan Chase because of did not check for ability to paying back by Enron later on.

2.4.2 Citigroup

From the investigation of SEC, it has stated that Citigroup also involve in certain "pre-pay" transaction with Enron. Although the structure was not totally same with J.P Morgan Chase, but the outcome is most likely the same. Besides that, SEC's action against Citigroup was with accordance on two others transaction with Enron, which are Project Nahanni and Project Bacchus. Citigroup involving in helped Enron to do the transaction which to generate cash from its operation by selling the T-Bills by loan from Citigroup. Citigroup also helped Enron to sell certain of its pulp and paper businesses to a SPE with granted of loan $200 million.

A complex financing to Dynegy on Project Alpha also granted with a $300 million by Citigroup. Based on what had found by SEC, Citigroup knew there was a mismatch between its "mark-to-market" earnings and operating cash flow which is also loan transaction by Citigroup.

2.4.3 Settlement by J.P Morgan Chase and Citigroup

After all of the investigation by SEC, J.P Morgan Chase and Citigroup will have to bear for its responsibilities.

JP Morgan, without admitting or denying the allegations against it, has agreed to pay the SEC $135 million US dollars, while under the terms of the SEC settlement, Citigroup will pay $120m to the SEC in disgorgement penalties and interest. Of that, $101.25m relates to Enron and $18.75m to Dynergy. As part of the settlement with the Manhattan district attorney (DA), Citigroup will also pay $12.5m to New York State and $12.5m to New York City and $500,000 for the costs of the investigation. JP Morgan will pay $27.5m, of which $2.5m is to cover the DA's costs and the rest is penalties.