"Scam of the Century": the story of how a company with fifteen years of history turned out to be a pyramid. "The Enron case". Corporate America in search of ethical standards Enron

The Enron scandal, which went public in October 2001, eventually led to the bankruptcy of Enron, a US energy company based in Houston, Texas, and the de facto dissolution of Arthur Andersen, one of the world's five largest audit firms. The Enron case was cited as the largest audit failure.

Enron was formed in 1985 by Kenneth Laym following the merger of Houston Natural Gas and InterNorth ”... A few years later, Jeffrey Skilling was hired, who developed a whole set of tricks that, through the use of accounting loopholes and financial distortions, allowed billions of dollars to be written off from unsuccessful deals and projects into debt. Chief Financial Officer Andrew Fastov and other executives not only misled Enron's board of directors and the audit committee, but also pressured auditing firm Arthur Andersen to cover up the problem.

Enron shareholders filed a $ 40 billion lawsuit after the company's share price, which peaked at $ 90.75 per share in mid-2000, fell to $ 1 at the end of November 2001. The US Securities and Exchange Commission launched an investigation, and a competitor, Dynegy, offered to buy the company at a very low price. The deal failed, and on December 2, 2001, Enron filed for bankruptcy under Chapter 11 of the US Bankruptcy Code. Enron's $ 63.4 billion bankruptcy was the largest corporate bankruptcy in US history.

Many Enron executives were indicted under a number of articles and several were later sentenced to prison terms. Enron's auditor, "Arthur Andersen", was convicted in the United States District Court of illegally destroying SEC investigation documents that revoked his audit license state companies, essentially shutting down their business. By that time, the ruling was overturned in The Supreme Court USA, but the company lost most of its customers and ceased operations. Enron employees and shareholders have profited from lawsuits despite losing billions in fines and falling stock prices. As a consequence of the scandal, new rules and laws were passed to enhance the reliability of financial statements for public companies.

Enron Corp. is a company that has reached dramatic heights only to face a dizzying collapse. The story ends with the bankruptcy of one of America's largest corporations. The Enron collapse affected the lives of thousands of employees and shook Wall Street. At Enron's peak, his shares were worth $ 90. 75, but after the company filed for bankruptcy on December 2, 2001, they fell to $ 0. 67 by January 2002. Until now, many are wondering how such a powerful business fell apart almost overnight and how it managed to deceive regulators for so long with the help of fake, non-corporate corporations.

Enron named America's Most Innovative Company

Enron was formed in 1985 following the merger of the Houston Natural Gas Co. with InterNorth Inc. in Omaha. Following the merger, Kenneth Lai, who was Chief Executive Officer (CEO) of Houston Natural Gas, became Enron's CEO and Chairman and quickly renamed Enron as an energy trader and supplier. Deregulating energy markets allowed companies to place bets on future prices, and Enron was ready to take advantage.

The normal environment of the era also allowed Enron to flourish. In the late 1990s, the dot-com bubble was in full swing and the Nasdaq hit 5,000. Revolutionary Internet stocks were priced at ridiculous levels, and therefore, most investors and regulators simply accepted falling stock prices as the new normal.

Enron contributed to the creation of Enron Online (EOL), an electronic merchandise-focused shopping site in October 1999. Enron was the counterparty for every EOL transaction; it was either the buyer or the seller. To encourage members and channel partners, Enron offered its reputation, credit and expertise in the energy sector. Enron has been praised for its expansion and ambitious projects and named America's Most Innovative Company Fortune for six consecutive years from 1996 to 2001.

By mid-2000, EOL was executing nearly $ 350 billion in trades. At the beginning of the bursting of the dot-com bubble, Enron decided to build high-speed broadband telecommunications networks. Hundreds of millions of dollars were spent on this project, but the company received little or no return.

When the recession began in 2000, Enron had a significant impact on the most volatile parts of the market. As a result, many trusting investors and lenders have been at a loss from the vanishing market capitalization.

Wall Street Darling collapse

By the fall of 2000, Enron began to crumble under its own weight. CEO Jeffrey Skilling had a way to hide the financial losses of the company's trading business and other operations; called market reporting, it is a method used in securities trading where you measure the value of a security based on its current market value rather than its book value. This can work well for securities, but it can be disastrous for other companies.

In Enron's case, the company will build an asset like a power plant and immediately declare projected earnings on its books, even though it hasn't made a dime out of it. If the income from the power plant was less than the projected amount, instead of taking losses, the company then transferred these assets to an offshore corporation, where the loss would not be reported. This type of accounting allowed Enron to write off losses without damaging the company's bottom line.

The practice of labeling in the marketplace led to schemes that were designed to hide losses and make the company more profitable than it actually was. To cope with the mounting losses, Andrew Fastow, a rising star who was promoted to CFO in 1998, came up with a cunning plan to keep the company in top shape despite the fact that many of its subsidiaries were losing money.

How did Enron use SPV to hide its debt?

Fastow and others at Enron set up off-balance vehicle scheme special purpose(SPV), also known as Special Purpose Units (SPE), to hide mountains of debt and toxic assets from investors and lenders. The main purpose of these SPVs was to hide the realities of accounting, not operating results.

A standard Enron-SPV transaction occurred when Enron transferred a portion of its rapidly growing stock to an SPV in exchange for cash or banknotes. The SPV will subsequently use the shares to hedge assets listed on Enron's balance sheet. In return, Enron would guarantee the value of the SPV to mitigate the apparent counterparty risk.

Enron believed that its share price would continue to value - a conviction similar to that embodied in long-term wealth management before its collapse. In the end, Enron's shares declined. SPVs also fell, forcing Enron's guarantees to take effect. One significant difference between using an Enron SPV and standard debt securitization is that its SPVs were fully capitalized with Enron's inventory. This directly compromised the SPV's ability to hedge if Enron's share prices fell. The second major difference was equally dangerous and guilty: Enron's failure to disclose a conflict of interest. Enron disclosed the SPV to the investment public, although perhaps few understood even this, but was unable to properly disclose the deals between the companies and the SPV.

Arthur Andersen and Enron: a risky business

In addition to Andrew Fastow, a major player in the Enron scandal was the auditing firm Enron Arthur Andersen LLP and its partner David B. Duncan, who controlled Enron's accounts. As one of the five largest accounting firms in the United States at the time, it had a reputation for excellence in risk quality management.

However, despite Enron's poor practice, Arthur Andersen offered his seal of approval, which was enough for investors and regulators for a while. However, this game could not last forever, and by April 2001, many analysts began to question Enron's revenue transparency, and Andersen and Aaron were eventually held accountable for their reckless behavior.

Shockwave around Wall Street

By the summer of 2001, Enron was in free fall. CEO Ken Lay resigned in February, reversing the position at Skilling, and Jeff Skilling stepped down in August general director for personal reasons". Around the same time, analysts began to downgrade Enron's stock, and the stock plunged to a 52-week low of $ 39. 95. By October 16, the company reported its first quarterly loss and closed SPE Raptor, so it would not have to distribute 58 million shares, further dampening earnings. This action caught the attention of the SEC.

A few days later, Enron changed the administrators of retirement plans, which effectively prohibited employees from selling their shares for at least 30 days. Shortly thereafter, the SEC announced that it was investigating Fastow's Enron and SPVs. Fastow was fired from the company that day. In addition, the company has confirmed its 1997 profit. Enron had losses of $ 591 million. USA and at the end of 2000 accounted for 628 million dollars. USA. The final blow came when Dynegy (NYSE: DYN DYNDynegy Inc11. 73% Created with Highstock 4. 2. 6), the company that had previously announced a merger with Enron, withdrew its offer on November 28. By December 2, 2001, Enron filed for bankruptcy.

Enron gets a new name

Once Enron's reorganization plan was approved by the U.S. bankruptcy court, new advice of Directors changed the name of Enron to Enron Creditors Recovery Corp. (ECRC). The company's sole new mission was to "reorganize and liquidate some of Enron's pre-bankruptcy operations and assets in the interests of creditors." The company paid back more than $ 21.7 billion to its creditors from 2004 to 2011. His last payout was in May 2011.

Enron Execs and Accountants Prosecuted

Following the discovery of fraud, two prominent institutions in the US business, Arthur Andersen LLP and Enron Corp. faced federal prosecution. Arthur Andersen was one of the earliest victims of Enron's prolific demise. In June 2002, the firm was found guilty of denying justice for seizing Enron's financial records in order to hide them from the SEC. The conviction was overturned later on appeal; however, despite the appeal, like Enron, the firm was deeply disgraced by the scandal.

Several of Enron's executives have been charged with a variety of fees, including conspiracy, insider trading, and securities fraud. Enron founder and former founder Kenneth Lay was convicted of six counts of fraud and conspiracy and four counts of bank fraud. However, before sentencing, he died of a heart attack in Colorado.

Former Enron Chief Financial Officer Andrew Fastow has pleaded guilty to two counts of wire fraud and securities fraud to facilitate corrupt Enron business processes. He eventually made a cooperation deal with federal authorities and served a four-year sentence that ended in 2011.

Ultimately, former Enron CEO Jeffrey Skilling received the harshest sentence for anyone involved in the Enron scandal. In 2006, Skilling was convicted of conspiracy, fraud and insider trading. Skiling was originally given a 24-year sentence, but in 2013 his sentence was reduced by ten years. As part of the new deal, Skilling was supposed to provide $ 42 million to victims of the Enron scam and stop challenging his conviction. Skilling remains in prison and is due to be released on February 21, 2028.

New rules in the wake of the Enron scandal

The collapse of Enron and the financial chaos inflicted on its shareholders and employees led to new regulations and legislation to improve the accuracy of financial reporting for public companies. In July 2002, then President George W. Bush signed into law the Sarbanes-Oxley Act. The law has heightened the consequences for destruction, alteration, or manufacture financial statements and attempts to defraud shareholders. (For more on the 2002 Act, read: How Sarbanes-Oxley Law Affected IPO .)

Other new compliance measures have emerged in the Enron scandal. In addition, the Financial Accounting Standards Board (FASB) has significantly improved its ethical behavior. Moreover, boards of directors of companies have become more independent, overseeing audit firms and quickly replacing bad managers. These new measures are important mechanisms for identifying and closing loopholes that companies have used as a way to avoid liability.

The bottom line

At the time, the collapse of Enron was the largest corporate bankruptcy to ever hit the financial world. Since then, WorldCom, Lehman Brothers and Washington Mutual have surpassed Enron as the largest corporate bankruptcies. The Enron scandal drew attention to accounting and corporate fraud, as its shareholders lost $ 74 billion in four years to bankruptcy and its employees lost billions in retirement benefits. According to one researcher, Sarbanes-Oxley Law is “a mirror image of Enron: Alleged Errors corporate governance the companies correspond to the actual points in the main provisions of the Law. " (Deakin and Konzelmann, 2003). Enron has expanded regulatory and oversight measures to prevent corporate size scandals. However, some companies are still recovering from the damage done by Enron. Most recently, in March 2017, a Toronto-based investment firm was approved by a judge to sue former Enron CEO Jeffrey Skilling, Credit Suisse Group AG, Deutsche Bank AG, a division of Merrill Lynch Bank of America for losses incurred in the purchase of shares. Enron,

The biggest scandal of the beginning of the 21st century was the Enron case. The financial collapse of the American energy giant also did not go without the participation of offshore companies. The corporation itself was born in 1985 through the merger of two gas companies in Nebraska and Texas. It was Enron that became the first owner of the gas pipeline network spread across the country.

In the 90s, the company began to engage in trade, not only of gas, but also of electricity. The corporation entered the securities market, which allowed it to have room for financial maneuvers. Enron soon became the largest trader in the electricity market, ranking 7th in the Fortune 500 in 2001. At that time, its staff consisted of 21 thousand employees in 40 states. During this time, the country's electricity market was freed from excessive government control, Enron was able to manipulate electricity prices across the United States.

Naturally, it did not go without close ties with major politicians - it was Enron that became the main sponsor of George W. Bush in his election campaign. The company mostly sponsored Republicans, although Democrats got their piece of the pie too. Many of the employees of the presidential administration ended up being closely associated with the energy giant, being its shareholders, advisers or former employees. As a result, Enron receives unprecedented benefits in the supply of electricity, influences the choice of persons exercising control over this market.

Such activity, by the way, was quite legal, but not everything was going smoothly in the giant's accounting department. Thus, the management of the company created thousands of legal entities, mainly offshore. So, at Georgetown, PO Box 1350, in the Cayman Islands, 692 subsidiaries of Enron were registered. Interestingly, all offshore companies were established legally, submitted the relevant reports to public services Moreover, all this abundance of small partners was approved by the board of directors of the company, its auditors and lawyers.

The principle of the whole scheme was simple - through subsidiaries, electricity deals were carried out, allowing to inflate the value of the entire company, at the same time, those debts that Enron did not intend to show were shifted to offshore companies. As a result, the company's performance grew, the management received multimillion-dollar bonuses, and the value of shares and their stakes grew. At the same time, the management managed to profit from the offshore companies themselves, so the chief financier of Enron, Andrew Fastow, who is the ideologist of this whole scheme, was able to get $ 30 million from one of the offshore companies.

For the tax authorities, in contrast to the shareholders, the company showed all its losses, being unprofitable and receiving tax refunds in the amount of 380 million dollars. The best lawyers and accountants worked for Enron, so it was to be expected that almost any operation of the company could be recognized as legal or challenged in court with good chances for success.

However, the debts did not stop growing, accumulating like a snowball. In 2001, the company's top management began secretly dumping their stakes, although they told their employees about the bright prospects. By October, it became impossible to hide debts, the company announced a loss of 640 million and a decrease in capital by 1.2 billion. The chief accountant of the company was accused of this, who was immediately fired for offshore machinations.

Enron's shares began to plummet. Already in November, the company reduced its reported profit for 5 years by 586 million, and the debt increased by another 2.5 billion. Now the fall of the company could no longer be avoided, the shares depreciated from $ 80 apiece to one, in December 2001 Enron filed for bankruptcy, which became the largest in the history of the country. About 4 thousand employees in the United States and a thousand in Europe were immediately dismissed, and Dynegie, which had previously wanted to buy a crumbling competitor, abandoned its plans.

In the course of the proceedings, it turned out that the pension savings of 15 thousand employees of the company in the amount of a billion were burned, as the Enron pension fund invested in its own shares, which are now worthless. It turned out that the auditors, the Arthur Andersen company, had a hand in concealing the unseemly facts.

One of the world leaders in this industry not only participated in the development of the scheme, but, anticipating the collapse, destroyed a huge amount of valuable information related to the company. The creditors put forward a number of claims not only against the bankrupt, but also against the bankers of Enron. Among the defendants were leading American banks, which are accused of helping the giant mislead investors.

The scandal spread to Europe. In England, Enron sponsored the victorious Labor Party, which is now accused of shaping the state's energy policy to please the company. What happened to the giant caused a chain reaction in the American economy, because hundreds of other companies used similar practices, which have now revised their financial results.

In July 2002, another giant of the American economy collapsed - WorldCom. The largest Internet operator in the world filed for bankruptcy, leaving $ 107 billion in assets. The reason - the discovery a month before in the reporting error in the amount of 3.8 billion dollars. And all this time the well-known firm "Arthur Andersen" was the auditors of the company.

These events prompted the society to think about the relationship between big business and government, as well as a conflict of interest while providing consulting and audit services. The state passed a number of bills that strengthened state control over the economy, stricter control by shareholders and officials, and increased the prison term for fraudulent executives. Even foreign companies are subject to these rules, and more than 1,300 issuers are listed on the New York Stock Exchange alone.

For example, if the United States decides that a Russian company listed in the United States does not meet certain financial requirements, then its director may receive a considerable sentence in prison. This caused discontent even among US allies, who regard such a policy of combating fraudsters as economic imperialism. However, only time will tell how effective these measures turn out to be.

And for a while she tied the auditors

The way each business is moving along the path of its development can tell a lot about this business itself. Mind jointly with the International law firm ICF Legal Service presents a series of publications in which we will acquaint our readers with the stories of specific companies. These stories can be instructive in many ways: businesses take off or die, depending on the strategies chosen and how they are implemented.

Our first story is about aAmericanenergy giant Enron. It contains all the signs of a detective story about how the Big Guys played permissiveness and turned a successful and rapidly developing structure into a bubble, dragging many people and companies into the abyss.

Kenneth Lee, head and founder of Enron Corporation, stood at his office window, looking out over the city. Dozens of thoughts flashed through his head, but only one clearly took root: this is the beginning of the end.

Behind, on his desk, lay a letter he had just brought from Sharon Watkins, vice president of corporate development at Enron's global finance division. The message began quite promising:

“Dear Mr. Lee, has it really become too risky to work for Enron? For those of us who have not become fabulously rich over the past few years, wouldn't it be an impermissible luxury to stay with the company longer? .. "

Further, Sharon Watkins describes the situation with a related company that is suffering huge losses, and says that to the market it will look as if Enron is hiding its losses in such companies, which, of course, turned out to be true. This is the essence of Enron-style shenanigans. Indicative is the fact that Sharon's previous employer was a “big five” audit company with an impeccable reputation - Arthur Andersen. She also played one of the main roles in the outbreak of the scandal.

Kenneth Lee received this letter in August 2001, three months before the collapse of a corporation that seemed to be doing incredibly well. Which, however, did not come as such a big surprise to him. This is partly why the "top" of the company gradually sold their shares of Enron over the course of many months.

Enron's all-time high was $ 90.75. At the time when the corporation was declared bankrupt - 25 cents. This image was circulated in all US news outlets in 2001.

It shows very well how, with the almost instantaneous fall in the value of Enron's shares, the company's assets began to evaporate, not to mention income.

Takeoff start

Enron emerged on the United States business horizon in 1985 with the merger of Houston Natural Gas Co. and InterNorth Inc. In the 1990s, it became the first company to have a gas pipeline network throughout the United States. Her interests included gas, electricity, and then commodity trading. Over the next years, in the course of its rapid growth, this company managed not only to lobby for maximum state deregulation of energy markets in the United States, but also to join the group of innovative structures using a new technological achievement in their business - the Internet.

In the middle of 1999, the idea to create a trading floor arose within the company. It all started when someone at Enron decided that it would be much more efficient to complete sales and purchases through a rapidly developing business. " world wide web". The managers appreciated the idea, and on November 29 of the same year, Enron launched the electronic trading site Enron Online, which specialized in commodity trading. More precisely, in trading, if you can call it that.

The company acted as an intermediary between buyers and sellers around the world, allowing you to view commodity prices in real time and make transactions instantly. The volume of supply was about 2,100 different commodities, across four continents, in 15 different currencies. Two years after launch, the platform was processing an average of 6,000 transactions per day for $ 2.5 billion.

Dutch aluminum, American lumber, European plastics and Argentine natural gas were bought and sold at the site. No commission and no monthly fees is a proposal that has prompted some analysts to predict the disappearance of traditional brokerage services.

But in this whole procedure, there was one special condition: Enron became a trading partner in every transaction.

Most shopping sites function by bringing together buyers and sellers from a range of companies. And Enron Online worked, involving itself in a deal with everyone potential buyer or the seller. And so, Enron's power and influence in markets around the world has reached incredible levels. The company's revenue, declared in 2000, amounted to about $ 101 billion.

“With the power of the Internet, we believe the potential to expand our business model into new markets is limitless,” said Jeffrey Skilling, then-CEO of Enron.

Enron has been named America's Most Innovative Company by Fortune Magazine for six consecutive years.

It should be noted that the end of the 1990s was a unique time in its own way. This period was marked by an unprecedented growth in the US stock market of dot-coms - companies, one way or another involved in the use of the Internet in their business. American households and large institutional investors bought up literally any stocks that had even remote involvement in Internet technology. The presence of a business just a website on the Internet in one fell swoop raised the quotes of its shares to exorbitant heights: the Nasdaq stock index reached 5000 points.

The essence of the "Enron Scheme"

Just as the dot-com bubble began to burst, Enron made the decision to build high-speed broadband communications networks at the cost of hundreds of millions of dollars from investors. Therefore, the downturn in the stock market happened at the wrong time for this company. Its market capitalization began to melt before our eyes. And then a unique model of financial fraud, invented by the Enron management, was revealed in order to conceal the financial losses received as a result of trading and other operations, participation in which was taken on a wave of euphoria from the crazy growth of previous years and the unconditional confidence of investors.

Actually, it wasn't even really a scam. And that's why.

In order to understand the details of the machinations, you need to understand the very essence of the American investment market, the scale of participation of American investors in investments in the stock market, as well as the nuances of this activity. In the United States, generations of people have become accustomed to playing the stock market, not to mention institutional investors such as companies and funds. For investors at that time, the most important information about the company was the levels of its shares and the so-called reports for investors, the information in which could differ materially from those financial reports submitted by the same companies to the US tax authorities.

For its operational activities, Enron created, according to various estimates, about 600-700 companies, which were located in offshore zones located in the United States and on the islands. All electricity transactions were conducted through subsidiaries, significantly increasing the cost and price of output electricity. At the same time, all losses and debts were also registered with these companies. And since US firms had to include offshore company income in the taxable income of US owners, which in the case of Enron did not exist (but not the loss that was), Enron did not include financial information on related offshore companies in its reports.

By and large, Enron's managers carried out transactions with related (subsidiary) structures created specifically for the transaction and to visually increase assets and, at the same time, hide losses that were distributed on the balance sheet of the related structure. When the next company was already head over heels in losses, a new one was created. As mentioned in that very letter from Sharon Watkins Raptor.

For example, Enron created an offshore structure for which debt was created. This could happen either by issuing debt securities (they were backed by one or two highly liquid assets, which Enron, as the founder, transferred to Raptor), or simply by taking long-term loans (again, under the guarantee of "good" assets). De jure - Enron was responsible for this debt, de facto - it should not (due to the peculiarities of American legislation of those years) consolidate Raptor's reporting into its own as long as there were other co-investors. Often the financial director of Enron himself, Andrew Fastow, or his wife acted as a co-investor. These details were revealed later in court.

Raptor's (but not Enron's) debt grew in proportion to the borrowed funds that Enron used to pay off suppliers and its other creditors.

Although for tax authorities, according to the company's reports, Enron has shown a loss for a long time, therefore, in fact, it did not pay income tax. On the other hand, documents directed to investors described bright prospects for new projects, and demand - and therefore the value of shares - grew. But the moment came when it was no longer possible to hide the huge losses and inconsistencies, the avalanche rushed down at great speed, and the collapse of the dot-coms only added fuel to this flaring fire.

The fact is that at the same time, the inflated bubble of investments in companies that in one way or another concerned the Internet, although they did not have any justified or profitable business model, burst. Stock market along with the index of tech companies fell down.

In the fall of 2001, in parallel with the reporting for the last quarter, Enron already officially showed $ 638 million in losses. In November, the company was forced to revise its financial statements again, having reported on even larger losses.

It was a huge shock for investors. How, where can such a huge "minus" come from in such a short time ?! Stocks collapsed. The energy giant filed for bankruptcy in December.

And although the investigation carried out after these events by the joint efforts of several ministries and the FBI, the chief accused recognized the financial director of the corporation, it turned out that the entire leadership of the corporation was in collusion. Former Enron executives Jeffrey Skilling and Kenneth Lay, as well as Andrew Fastow, were aware of Enron's financial machinations.

And not only.

"5 - 1"

The largest scam of the beginning of the century also affected the accounting firm that worked with Enron.

Until 2001, there were the "big five" audit firms in the world. Arthur Andersen, founded in 1913 in Chicago, has been one of the most successful audit firms in the world for 90 years. And the largest client of the Houston office of Arthur Andersen was Enron, who paid her for audit up to $ 20 million a year and the same amount for consulting. Having weighed all the risks and benefits, the auditors simply did not want to lose such a client, and issued such an opinion as they wanted to see in Enron, even when the inconsistencies in the reporting were more than obvious. And then the employees of Arthur Andersen did their main epic fail: they began to destroy documents.

In the course of the investigation, it turned out that the company's management was not only directly involved in the scam, but also developed schemes for conducting dubious transactions. And the last straw was precisely the fact that at the time of the heat of passion, the company's employees destroyed an incredible amount of accounting documentation, which directly or indirectly confirmed the fraud. The obstruction of justice charge marked the end of Arthur Andersen's 90-year history. The Big Five became the Big Four.

Global implications

Investors have lost a lot of money on Enron stock. The company's employees alone lost all of their corporate retirement savings because, as you'd expect, Enron invested its retirement fund in its own stock.

Even the presidential administration of that time, accused of funding its headquarters by the Enron corporation, suffered reputational losses. The company has become a household name, symbolizing willful corporate fraud and the organization of corruption schemes.

Most importantly, the Enron case exposed huge problems in the US public company financial reporting system. The collapse of the company and the financial chaos that befell its shareholders and employees led to the creation of new rules and changes in legislation to improve the accuracy of financial reporting for public companies. In July 2002, President George W. Bush signed into law the Sarbanes-Oxley Act. The document toughened penalties for the destruction, alteration or preparation of false financial statements and attempts to defraud shareholders. In addition, strict requirements were introduced for the financial reporting of companies whose shares are traded on American stock exchanges and foreign companies whose shares are traded in the United States. The law was aimed at certain groups of people, in particular:

For company managers : The CEO and CFO of the company must personally (by their signature) certify the financial statements, confirming that they have been prepared in accordance with all standardized requirements. Must be created and established effective work an internal control system that ensures that all investors are provided with reliable and, most importantly, correct information. Reporting manipulation has become a criminal offense.

For members of the boards of directors of companies: a special audit committee (whose members should be independent from management) was created under the council, which selects auditors.

For external auditors: The Public Company Accounting Oversight Board (PCAOB) was formed following the Arthur Andersen scandal. This organization controls and regulates audit firms. Auditing companies are prohibited from providing (with some exceptions) consulting services to their clients concurrently with auditing. The external auditor should review the internal control and financial reporting system of the company in which he audits. A rule was introduced prohibiting partners of audit firms from working with one audit client for more than five years in a row.

Also, the Financial Accounting Standards Board (FASB) has significantly tightened the requirements for the level of ethical behavior in general and the regulation of work with related companies. Requirements have been added for the consolidation of the reporting of special (subsidiary) companies. Appeared new standard IFRS - Consolidated Financial Statements and Accounting for Subsidiaries.

As a result of all these measures, boards of directors became more independent, controlling audit firms and quickly replacing bad managers. This has become a necessary mechanism for identifying and closing loopholes that companies have used as a way to avoid or distort reporting.

The Enron case has made an invaluable contribution to the fight against financial fraud and thus went down in history not only in the United States, but also in the world.

What already ,a similar scandal is gaining momentum in Ukraine. The methodology for assessing "tied" loans during the audit of the Ukrainian PrivatBank by the global audit company PricewaterhouseCoopers differed significantly from that used by the National BankUkraine. This led to multibillion-dollar losses and subsequent large-scale claims against both PwC itself and its Ukrainian« daughter» , LLC "Auditing firm" PricewaterhouseCoopers (Audit) ". The results of these proceedings have already resulted in PwC's reputational losses, a ban on audits in Ukrainian banks, and even speculation that« big four» risks becoming« big three» .

Harsh measures

US President George W. Bush in July 2002 solemnly signed into law passed by Congress legislation to combat corporate fraud. In his speech, he compared such a fraud to the terrorist attack of September 11, 2001, and promised that neither one nor the other would succeed in undermining the American economy.

What is the essence of the new legislation? It provides for stricter control by the state and shareholders of companies in relation to the companies themselves, their officials and auditors. In particular, the law prescribes the creation of a new supervisory body for auditing activities under the Securities Commission. Previously, accounting firms in the United States were largely self-regulating.

The law also obliges companies to set up independent audit committees, which must hire auditors to audit the company's accounts (previously the management of the company did this). The law requires the management of the company to personally certify the statements.

Interestingly, the law makes it easier for shareholders to prosecute their company's CEOs and their auditors. And the prison sentences for fraudulent leaders have quadrupled - up to 20-25 years.

What prompted the top political leadership of the superpower to take such serious measures? In all likelihood, a huge scandal with the Enron company.

Enron Success

We wrote about the biggest swindle of the twentieth century - the collapse of the bank "BBC-I" (BCCI) - in No. 16 (41) of our newspaper in the article "A Thirty Years Scam". The onset of the 21st century was not long in coming. It was marked by an equally loud scandal - the collapse of the American energy giant Enron.

Enron Corporation was formed in 1985 as a result of the merger of two gas companies from Texas and Nebraska. It became the first company to have a nationwide gas pipeline network. At first, the company specialized only in gas, but over time, it also turned to electricity. Gradually, she transferred her activities to the field of trade.

The corporation has successfully mastered the energy futures and derivatives market. This subsequently gave her considerable financial flexibility. It soon became the largest trader in the electricity market, and in 2001 even ranked seventh in the prestigious Fortune 500 ranking. By that time, the company already employed 22 thousand employees in 40 countries of the world!

Note that in the 90s, the US energy industry was freed from excessive government control. Therefore, by occupying a dominant market position, Enron was able to manipulate electricity prices nationwide.

As a corporation on a national scale, it could not remain aloof from politics. She had wide connections in political circles, especially in the Republican Party. Suffice it to say that Enron President Kenneth Lay was considered a personal friend of George W. Bush. And, in fact, the corporation was the number one sponsor of the current US president in his political career in general and in the election campaign in particular.

Cash contributions were generously distributed for the campaign needs of various political figures: both Republicans and Democrats. For these purposes, according to experts, only in the period 1989-2001. was allocated about 6 million dollars. Only for the needs of George W. Bush, even during his governorship, the corporation donated more than 600 thousand dollars, and another 300 thousand - for the inauguration. Enron's leadership has in the past included many senior officials of the President of the United States.

Therefore, it is not surprising that the company received an unprecedented share in government electricity supplies and large tax breaks. In addition, she had the final say in the selection of those responsible for regulating the energy market (those who are called to oversee the corporation itself).

Scam scheme

But, so far there is no particular reason to be indignant with dexterous businessmen. All of the above, in general, is consistent with American law. Thus, pre-election contributions were made not "blindly" (as is customary in some other countries), but by bank transfers. All this was reflected in the reporting of both payers and campaign headquarters.

The company's fraud was about something else: its accounting operations. The company's management has developed and implemented a very complex scheme to conceal certain data not only from the public, but also from shareholders and investors. This was done in order to distort the true financial situation corporations.

Not just a few, but thousands of legal entities were created, mainly offshore companies and partnerships. For example, at one legal address only (Georgetown, PO Box 1350) in the Cayman Islands, 692 subsidiaries of the energy giant were registered. Think "fake" firms? Not so simple.

All of these offshore companies were created completely legally, with the filing of the relevant reports with the US tax authorities. And in addition, Enron's offshore activities have been approved by its board of directors, attorneys and external auditors, Arthur Andersen.

Although the scheme that was invented seems to be extremely complex, in fact, it is quite simple. On the one hand, electricity transactions carried out through subsidiaries made it possible to “inflate” the prime cost and, accordingly, the selling price of electricity. On the other hand, the corporation's debts were registered with offshore companies, which it did not want to advertise.

I must say that American law is quite strict with regard to offshore operations. Current legislation on so-called controlled foreign corporations provides for the compulsory inclusion of the income of offshore companies in the taxable income of their American owners. Therefore, in the United States, it is impossible to simply dump profits offshore in order to avoid paying taxes, and at the same time remain (at least formally) within the framework of the law.

But the Enron scammers didn't need it. Not profits were dumped offshore, but losses. The question arises - why? This made it possible to significantly improve the financial performance of the corporation, which means that the price of its shares grew. The corporation was gaining more and more market share. This allowed her management and employees to receive multimillion-dollar bonuses. Naturally, the value of their shareholdings in their own company also grew.

And in parallel, some employees managed to make a profit from the trading activities of offshore companies, through which financial flows went. Thus, the chief financial administrator of Enron, Andrew Fastow, who developed this grandiose scheme, received more than $ 30 million from the activities of one of the offshore companies, and his assistant, Michael Copper, received $ 10 million. Thus, a conflict of interests of the corporation and its employees arose.

Do you think that such a powerful and break-even corporation paid a lot of taxes? Not at all. After all, balance sheet profit and profit for tax purposes are different things. And at Enron they were fantastically different. The data that was shown to shareholders and tax authorities differed sharply.

All debts and expenses were provided to the tax authorities in full. As a result, the corporation was completely unprofitable for the tax authorities. Therefore, Enron did not pay income tax at all. Moreover, he received large tax refunds from the treasury. For the period 1996-2000. received, in total, 380 million dollars.

"How many rope does not twist ..."

It was extremely difficult to catch scammers "hot". After all, the most experienced and highly paid lawyers and accountants in the world worked for them. Interestingly, every single Enron transaction, contract or tax calculation was legal or nearly legal. And even during the trial, there was a high probability of their being recognized as such. But this could not last forever. Hidden debts accumulated and grew. Sooner or later, they had to surface.

And this happened in 2001 - the first year of our century. Enron started the new year with a new president. It was headed by Jeffrey Skilling. But Kenneth Leigh did not leave, but moved to the chair of the chairman of the board of directors. While the new leader was delving into the essence of the matter, six months passed. And "having received his sight," he got scared and resigned. However, he later testified and proved that he was not guilty.

In August, Kenneth Leigh again took over Enron. Seeing that disaster was imminent, he first dumped his Enron shares (worth more than $ 20 million) and continued to convince shareholders that things were going brilliantly. Many other leaders of the corporation did the same. Therefore, they are also accused of misuse of insider information.

In October 2001, when the deadline for submitting quarterly reports approached, further concealment of debts was no longer possible. And Enron announces losses in the amount of $ 638 million, as well as a decrease in the corporation's equity by $ 1.2 billion. The losses were attributed to the offshore machinations of chief accountant Andrew Fastow, who was immediately fired.

A sharp drop in the shares of the corporation followed. It smelled like a disaster. Lei turned to the government for help, hoping for a "special friendship." But a blow awaited him. The Cabinet of Ministers had its own considerations, and the Securities Commission launched an investigation into a possible conflict of interest in transactions with offshore companies.

And the situation was getting worse. In November, Enron was forced to revise its accounts once again. And profit over the past five years has been reduced by $ 586 million, and debt has increased by another $ 2.5 billion. The shares of the corporation, at the beginning of the year, were holding at about $ 80. apiece, collapsed to below $ 1! It was a disaster ...

As you might expect, everyone quickly dissociated themselves from the former successful giant. In December 2001, the corporation filed for bankruptcy, which became the largest bankruptcy in American history... More than 4 thousand employees in the United States and more than a thousand in Europe were laid off.

Even the mother-in-law of the current American president, Jenna Welch, has suffered. She lost as much as $ 8,180 on Enron shares. This figure looks especially good against the backdrop of the hundreds of thousands of dollars in retirement savings that ordinary Enron employees lost as a result of bankruptcy. It turned out that about $ 1 billion in pension savings that the corporation-controlled pension fund invested in the corporation's shares had been burned. They were now worthless.

This was followed by a criminal investigation. Naturally, first of all, they became interested in auditors. And it turned out that the employees of the audit company "Arthur Andersen", being participants in the scam, themselves developed the schemes of fraudulent transactions. They, on the eve of the disaster, destroyed a huge amount of documentation. Arthur Andersen was found guilty of obstruction of justice. After that, one of the leading audit firms in the world actually ceased to exist.

In January 2002, former vice president of the corporation, Cliff Baxter, committed suicide. And in August the editor economic department Allan Myerson threw himself out of his office on the 11th floor of the New York Times. It was Myerson who authored the disclosures about the financial machinations of the energy company Enron.

Investigation of the events preceding the bankruptcy of "Enron", engaged in several departments at once - the FBI, the Ministry of Justice, the Ministry of Labor. Of course, Congress did not stand aside, which joined the investigation almost the fastest: after all, the interests of so many voters are affected!

One of the main defendants in the case is Andrew Fastow, the chief accountant of the corporation and the alleged author of the criminal scheme. In October 2002, he was charged with fraud, and at the same time with money laundering, conspiracy, etc. He faces forty years in prison for fraud.

Enron CEO Kenneth Lay denies all charges against him. He surrendered to the authorities himself, so he is counting on leniency. He faces “only” 175 years in prison.

Who's guilty?

Some members of the presidential administration found themselves in an awkward situation. It turned out that Vice President R. Cheney and his advisers in 2001 met with the leadership of "Enron" six times. The last such meeting took place less than a month before the announcement of its bankruptcy. US Attorney General John Ashcroft refused to investigate the Enron case. According to information published in the media, during the Senate elections, he received 60 thousand dollars from Enron.

And George W. Bush himself was forced to issue an official statement, denying the fact that the administration knew about the financial difficulties and the impending bankruptcy of Enron and promised to conduct a thorough investigation.

The scandal flares up and the proceedings will obviously be long. A number of leading American and foreign banks (including Citigroup and J. P. Morgan Chase) are involved in the litigation. However, experts believe that it will not be easy for deceived depositors to prove their accusations against the bankers in court.

The scandal spread overseas. For example, in Great Britain, Enron sponsored the Labor Party, which won the elections. Now the Conservatives are accusing the Laborites of implementing the country's energy policy in return for the benefit of Enron.

The collapse of the Enron company set off a chain reaction in the American economy. Hundreds of companies using similar creative accounting practices have been hit and have had to revise their accounts. Of the corporations listed on US stock exchanges, 10% have revised their financial results over the past five years. For many, this led to fatal consequences.

American society, and, above all, the business elite and politicians, have seriously thought about the relationship between business and government, the role of commercial structures in financing election campaigns, the influence of energy companies on the country's politics, and the conflict of interest while providing consulting and audit services.

American law has now tightened the requirements even for foreign companies. To those whose shares are quoted on American stock exchanges (after all, 1,300 foreign issuers are represented on the New York Stock Exchange alone). The same requirements apply to them as to American companies, including with respect to reporting and assurance rules.

So, the company's management must sign the balance sheet only under oath, which automatically translates the provision of incorrect data into the category of a criminal offense (perjury). So a director, for example, quoted in the United States, can get a considerable sentence in an American prison. Russian company(and such on this moment five) if the US decides that its financial statements do not meet US standards.

All this irritates even the closest allies of the United States, for example, Germany, which has its own legislation against fraudsters. Foreign businessmen are unhappy with US interference in the affairs of their companies. These unilateral actions by the American Themis are characterized by them as "economic imperialism."

But the main thing is that the bankruptcy of Enron revealed serious problems related to the American system of financial reporting of public companies (Generally accepted accounting principles, GAAP).

On the basis of this system, as well as its European counterpart IAS (International Accounting Standards), all public corporations in the world build their reporting. Today, the effectiveness of a system designed to provide reliable information investors, lenders and business partners, has come under a big question. It is safe to assume that disclosure standards, especially with regard to off-balance sheet transactions and management transactions, will be tightened in other countries as well.