You missed out an important part. They used many external companies to hide the debts. The debts were still there but didn't show in the accounts and this allowed the stock price to go much higher than it should have.
Fun fact: Ken Lay died before being convicted of anything related to Enron. You can't convict a dead person, so since he wasn't found guilty of anything, he couldn't be held financially liable. Meaning his family got to keep all the money he made from Enron and didn't have to give anything back to all the pensions and small investors who lost a lot of money.
Nice presentation, you omitted to role of the CFO (Fastow) in devising the financial structures (SPE) that allowed Enron to take its debt off balance sheet, and that’s the reason for the low D/E apart from the retained earning point you mentioned.
You could say 3 people were responsible for this failure and not 2 as you pointed out!! 1. The management of Enron 2. Auditor (Arthur & Anderson) 3. SEC (who approved mtm accounting!!)
Good video, but you forgot the most important accounting issue that actually lead to the sudden downfall: as Enron’s operations didn’t create enough cash (as you mentioned, MTM are just future expectations), they obtained external debt financing, set up Enron-controlled SPVs and basically dealt with itself. But they avoided disclosing the debt on their balance sheet by not consolidating SPVs. When AA finally (way too late) required consolidation, the operations dried out of cash within days. The SPV (‘Raptors’ and so on) set-up and consolidation rules were quite complicated, but a very interesting case for anyone working with US-GAAP/IFRS.
Hi I'm a little confused, if they took out much of their debt under their SPVs, shouldn't that debt still appear under their group financial statements since these statements would take into account all subsidiaries and associates financial activities during the year ? Or is this a new thing that has been taken into account for all group financial statements post Enron ?
HoochIsCrazy My understanding is that the auditors recommended that Enron discloses these SPV‘s in the footnotes. Which they did but they were so complicated that the average reader did not understand it
HoochIsCrazy Yes, it SHOULD have been like this. However, under the US-GAAP rules at that time, some minor outside investment in certain legal structures/partnerships lead to non-control for accounting purposes and hence no subsidiary and no consolidation either. Just disclosure as Financial Controller mentioned. The thing broke down when it was uncovered that also the “outside” investors were in fact Enron-related parties (e.g. their CFO Fastow and his family) or Enron guaranteed for the equity risk. “The Smartest Guys in the Room” and “Conspiracy of Fools” are great reads on that.
Don’t be fooled, Jeff Skilling an evil genius. It doesn’t surprise me he is already working on his new business idea. Hopefully he dropped the evil part.
Hi Bill, very useful video. I like it, keep on going. Good work! 👏🏻❤️😀 Just subscibe your channel due to the same profession from Turkey, Ankara. 🇹🇷 What a nice coincidence, unbeliveable! 👍🏻🤭😂 Like your other videos, too. Can you please make videos about the working life like some hints that make your work effective and efficient? Another demand is you mention about doing business, if you already doing it. Please, make a video about it, too. Just a suggestion, keep in your mind. I think you can speak Arabic, just realized that you pronounce b instead of p. Bublic trust 😀 Just like to say, please do not take it serious. Very nice to meet you, sure I will follow up your videos. Please keep in your mind if you need anything about Turkey like taxation, doing business, etc. I am here to guide you. Very nice to meet you, have a nice weekend Bill, all the best 🖐🏻❤️😀
I watched the movie fun with dick and Jane and I noticed they referenced this enron scandal at the end if the movie. It peaked my interest and I cant believe I have never heard of this before. Super interesting thanks for sharing.
@@TheFinancialController of course i am going to school to become a CFP congrats on getting your CPA cant wait to start rolling in the bejamins and helping others with their money too.
Good video. Thanks. And one thing that I want to clarify about the MTM Accounting, the revenue recognised from expected cash flow, did they really record it all at once to SoPL or defer it over project time?
Great summary! I believe the special purpose vehicles designed for asset dumping were named after Star Wars characters, which deserves a mention. Taking creative accounting to a whole new level.
Now do a video describing how MTM became law...... Please cite the representative involved and their political donations..... Wait a min..... Oh....we still do business this is way? Carry on.....
This is an AWESOME playlist!!!!!!!!!!!!!!! I have been working as an accountant for a while and I have been searching for some podcasts or channels about forensic accounting, accounting fraud, tax fraud (people are asking me so much about tax fraud etc) and this playlist comes the closest to the idea and is full of great real-life information we all wonder about. Don't stop this thread -keep it going and we will keep coming. Super interesting and quite the novelty on a RU-vid :)
“Greed is good”……..lol. Seriously, never take advice as to how to invest your 401K money from your employer. There’s a line from the movie Bonnie and Clyde where Faye Dunaway says to Warren Beatty, “your advertising is just dandy…..folks would never guess you have nothing to sell”. Somehow this seems to be a good description of Enron.
Great content! Keep going and you'll become a pretty big channel, from what I've seen in the past. Just don't use that projected growth to attract investors ;)
Also, you didn't mention Andy Fastow, CFO, who's now a speaker. He starts by showing his year 2000 national account of the year award, the. Shows his 2001 Department of Corrections ID card.
how to discover: financial assets fraud of a company. like it would be hard to discover. im curious the methods used. since so hard to discover it is probably very common crime by big companies. this can be used mislead investors, bankruptsy fraud, and much more, and tax fraud. also how to discover complex web of subsidiaries and other business entities used in these schemes. enron had 1000s of alternate companies to facilitate the crimes. but i wanna know how can this be discovered.
Great video bro. I’m about halfway through the book “The Smartest Guys in the Room,” and I think every business student should read it. It’s so well written and helps breaks down Enron’s meteoric rise (and subsequent “Icarus-like” fall). Great vide, btw!
I could hug you for this short, sweet explanation of such a complicated scandal! Thank you! I need to write an essay on the Enron scandal for my business law class and this is perfect.
i just googled mark to market and it seems to be the gold standard. also I still have no idea why they went bankrupt. all the videos are just repeating the same timeline. sorry for my harsh comment but I hate wasting time.
Thanks a lot for the great video! I do have one question though. From my understanding (I have studied only IFRS), MTM basically refers to stating assets at FV and Enron inflated its profits by recording FV gains from these assets (whereby these assets were the deals/projects they were working on). However when presenting FV gains in the income statement, don’t we usually report it under ‘other income’ (as opposed to revenue) and then term the line item as FV gains? I don’t know whether this type of presenting was not done back in 2000 but if it was, I am wondering why analysts didn’t notice that the company’s profit was mainly coming from FV gains. Usually when we analyze companies now, we always exclude FV gains as those are just accounting one off entries.
From what I understand from the video, it is not exactly the FV of assets, but the PV of all expected cash flows of a project and recorded all at once in the SoPL. That's crazy and sounds unbelievable. I also wonder the same question how much different is the accounting back in 2000 vs. now?
Great video! Very helpful, you put a lot of information in such a short amount of time. Similiar story to Wirecard. But Enron acted not 100% illegal, sure a lot of things were illegal and not good but Wirecard was a whole lie. Not sure, if those guys were brilliant or just unempathic criminals. Maybe both.
Not bad but You failed to mention how Enron hid all of its debt and troubled assets from its balance sheet using “Special Purpose Entities” while reporting the false gains and revenues that you mentioned on their balance sheet (like from the Blockbuster deal that fell thru). It is also important to mention that fair value accounting or “mark to market” is a legitimate accounting practice but when it comes to the Gas Business there were no quoted prices to base valuations so Enron was able to create whatever valuation they wanted and did not have disclose for the assumptions and methods used to base these high valuations!
Good video, but you should have mentioned how the CFO used SPVs to conceal debt resulting in much lowered debt/equity levels. The cfo also went to jail along with Skilling.
Very interesting video! In fact you are allowed today based on IFRS to recognize income (I believe it's Other comprehensive income) by adjusting the historical value of fixed assets to the fair value. That income then ends up in a Revaluation surplus in Equity. However, from what I understand from this video, is that in Enron case the fair value of that plant was way too high as it included projected, future revenues. Do I understand the case right? Because otherwise I can't imagine how much higher a fair value of a fixed asset can become to lead to a scandal :).
@@TheFinancialController Thank you very much, Sir! It's clear now. And once again, great job with the video :) I just subscribed and I'll see more. I was also very surprised to find out thanks to your video that this guy Jeff Skilling is back in business... What the hell...
Funny how Dick And Jane, a movie based on this scandal, is now on NETFLIX. Which was NOT bought by Blockbuster × Enron, leading to the untimely demise of Blockbuster. So many layers to this onion.
Can someone explain me but WHY? Why did Skilling wanted to have the future performance as something that would happen straightaway? To attract investors or what?
I don't get it, why did SEC approved MTM for ENRON? One of the few basics that I learned in accounting school was always provide for losses but never provide for gains in the books. That's why we have provision for doubtful debts instead of provision for expected revenue. This MTM is a violation of that.
A big part of the collapse was the use of Special Purpose Entities (SPE's) and tEnron's CFO, Andy Fastow. He should have made an appearance in your explanation.
