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

In the 90s, the company began to trade, not only gas, but also 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, in 2001 the company took 7th place in the Fortune 500 rating. At that time, it had 21,000 employees in 40 states. At this time, the country's electricity market was freed from excessive government control, Enron was able to manipulate electricity prices throughout the United States.

Naturally, it was not without close ties with major politicians - it was Enron that became the main sponsor of George W. Bush in his election campaign. The company mainly sponsored the Republicans, although the Democrats received their piece of the pie. Many members of the Presidential Administration ended up closely associated with the energy giant, either as shareholders, advisors, 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 completely legal, but not everything was going smoothly in the giant's accounting department. Thus, the management of the company created thousands of legal entities, mostly offshore. So, at Georgetown, PO Box 1350, in the Cayman Islands, 692 Enron subsidiaries were registered. Interestingly, all offshore companies were created legally, filed relevant reports with 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 operation of the whole scheme was simple - through affiliated companies electricity deals were being made to inflate the value of the entire company, while debts that Enron was not going to show were shifted offshore. As a result, the company's performance grew, the management received multimillion-dollar bonuses, and the value of shares and their packages grew. At the same time, the management managed to make a profit from the offshores themselves, so the chief financier of Enron, Andrew Fastow, who is the ideologist of this whole scheme, was able to receive $ 30 million from one of the offshores.

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

However, debts did not stop growing, accumulating like a snowball. In 2001, the top management of the company began secretly dumping its stakes, although they told their employees about the bright prospects. By October it was no longer possible to hide debts, the company posted a loss of 640 million and a decrease in capital by 1.2 billion. This was blamed Chief Accountant company, immediately fired for offshore fraud.

Enron's stock 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 dollars apiece to one, in December 2001, Enron filed for bankruptcy, which became the largest in the history of the country. About 4,000 employees in the US and 1,000 in Europe were immediately fired, and Dyneji, which had previously wanted to buy a collapsing competitor, abandoned its plans.

In the course of the proceedings, it turned out that the pension savings of 15,000 employees of the company in the amount of a billion burned out, since the Enron pension fund invested in its own shares, which have now depreciated. It turned out that auditors, the Arthur Andersen company, had a hand in concealing unseemly facts.

One of the world leaders in this industry not only participated in the development of the scheme, but also, anticipating the collapse, destroyed a huge amount of valuable information related to the company. Creditors put forward a number of demands not only to the bankrupt, but also to the Enron bankers. Leading US banks are also among the defendants, accused of helping the giant mislead investors.

The scandal spread to Europe as well. 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 this practice, which have now revised their financial results.

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

These events prompted society to think about the connection big business and authorities, as well as a conflict of interest while providing consulting and auditing services. The state passed a number of bills that strengthened state control over the economy, stricter control by shareholders and officials, and the prison term for fraudulent leaders was also increased. 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 prison term. This has angered even US allies, who view this anti-fraud policy as economic imperialism. However, only time will tell how effective these measures will be.

Enron Corp. is a company that reached dramatic heights, only to face a dizzying collapse. The story ends with the bankruptcy of one of the largest corporations America. The collapse of Enron 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. To this day, many wonder how such a powerful business fell apart almost overnight and how it managed to fool regulators for so long with the help of fake, unincorporated corporations.

Enron Named America's Most Innovative Company

Enron was formed in 1985 after the merger of Houston Natural Gas Co. with InterNorth Inc. in Omaha. After the merger, Kenneth Lai, who was the chief Executive Director(CEO) Houston Natural Gas, became Enron's CEO and chairman, and quickly renamed Enron an energy merchant and supplier. The deregulation of energy markets allowed companies to bet 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 consequently, most investors and regulators simply accepted falling stock prices as the new normal.

Enron participated in the creation of Enron Online (EOL), a commodity-focused electronic shopping site in October 1999. Enron was the counterparty for every transaction on the EOL; it was either a buyer or a seller. To encourage participants and trading partners, Enron offered its reputation, credit and experience in the energy sector. Enron has been praised for its expansions and ambitious projects and named "America's Most Innovative Company" Fortune for six consecutive years from 1996 to 2001.

By mid-2000, EOL was performing nearly $350 billion in trading. 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 to 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 found themselves at a loss from the vanishing market capitalization.

Crash of Wall Street Darling

By the fall of 2000, Enron began to collapse under its own weight. CEO Jeffrey Skilling had a way to hide financial losses trading business and other operations of the company; it was called market reporting. This is a method used in trading securities where you measure the value of a security based on its current market value, not its book value. This may work well for securities, but it can be disastrous for other companies.

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

Marking practices in the market led to schemes that were designed to hide losses and make the company more profitable than it actually was. To cope with mounting losses, Andrew Fastow, a rising star who has been promoted to financial director 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 orchestrated the off-balance car scheme special purpose(SPV), also known as Special Purposes Units (SPE), to hide mountains of debt and toxic assets from investors and creditors. The primary purpose of these SPVs was to hide accounting realities, not operating results.

The standard Enron-SPV transaction occurred when Enron transferred part of its rapidly growing stock into SPVs in exchange for cash or notes. The SPV will subsequently use the shares to hedge assets listed on Enron's balance sheet. In turn, Enron would guarantee the value of the SPV to mitigate apparent counterparty risk.

Enron believed that its share price would continue to appreciate, a belief similar to that embodied in long-term money management before its collapse. In the end, Enron stock declined. SPV values ​​also fell, forcing Enron's guarantees to come into effect. One significant difference between using an Enron SPV and standard debt securitization is that its SPVs are fully capitalized with Enron's holdings. This directly compromised the SPV's ability to hedge if Enron stock prices fell. The second major difference was equally dangerous and guilty: Enron's failure to disclose conflicts of interest. Enron disclosed the SPV to the investment public, though probably few even understood it, but failed to properly disclose the transactions between the companies and the SPV.

Arthur Andersen and Enron: risky business

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

However, despite Enron's bad practice, Arthur Andersen offered his seal of approval, which was enough for investors and regulators for a while. However, this game could not go on forever, and by April 2001, many analysts began to question Enron's earnings transparency, and Andersen and Eron 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 stepped down in February, flipping his position at Skilling, and Jeff Skilling stepped down in August CEO for personal reasons". Around the same time, analysts began downgrading Enron's stock, with the stock dropping to a 52-week low of $39. 95. By October 16, the company reported its first quarterly loss and closed the Raptor SPE so that it would not have to distribute 58 million shares, which would further reduce profits. This action attracted the attention of the SEC.

A few days later, Enron changed the administrators of the pension plans, essentially barring employees from selling their shares for at least 30 days. Shortly thereafter, the SEC announced that it was investigating Enron and SPVs created by Fastow. Fastow was fired from the company that day. In addition, the company confirmed the profit received in 1997. Enron had a $591 million loss. USA and at the end of 2000 had 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 Nov. 28. By December 2, 2001, Enron filed for bankruptcy.

Enron gets a new name

Once Enron's reorganization plan was approved by the US bankruptcy court, the new board of directors changed Enron's name to Enron Creditors Recovery Corp. (ECRC). The company's new single mission was to "reorganize and liquidate certain of Enron's pre-bankruptcy operations and assets for the benefit of creditors." The company paid out over $21.7 billion to its creditors from 2004 to 2011. His last payout was in May 2011.

Enron Execs and accountants were sued

Following the discovery of the fraud, two prominent institutions in US business, Arthur Andersen LLP and Enron Corp. face federal prosecution. Arthur Andersen was one of the first victims of Enron's prolific demise. In June 2002, the firm was found guilty of perpetual justice for seizing Enron's financial records to hide them from the SEC. The conviction was later overturned 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 charges, 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 pleads guilty to two counts of wire fraud and securities fraud to facilitate Enron's corrupt business processes. He ultimately entered into a federal cooperation deal and served a four-year sentence that ended in 2011.

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

New rules as a result 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 accuracy. financial reporting for public companies. In July 2002, then-President George W. Bush signed the Sarbanes-Oxley Act into law. The law increased the consequences for the destruction, alteration or manufacture financial statements and attempts to defraud shareholders. (For more on the 2002 Act, see: How the Sarbanes-Oxley Act affected IPOs .)

There are other new compliance measures in the Enron scandal. In addition, the Financial Accounting Standards Board (FASB) has significantly raised the level of ethical behavior. Moreover, company boards have become more independent, controlling audit firms and quickly replacing bad managers. These new measures are important mechanisms for identifying and closing loopholes that have been exploited by companies as a way to avoid liability.

The bottom line

At the time, the collapse of Enron was the largest corporate bankruptcy ever to hit the financial world. Since then, WorldCom, Lehman Brothers and Washington Mutual have surpassed Enron as the biggest 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 is “a mirror image of Enron: alleged errors corporate governance companies correspond to the factual points in the main provisions of the Law”. (Deakin and Konzelmann, 2003). Extensive regulatory and oversight measures have been put in place to prevent corporate scandals of Enron's magnitudes. However, some companies are still recovering from the damage done to Enron. Most recently, in March 2017, a Toronto 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 buying shares enron,

And for some time reined in the auditors

How each business moves along the path of its development can tell a lot about this business itself. Mind in cooperation with the International Law Firm ICF Legal Service presents a series of publications in which we will introduce our readers to the stories of specific companies. These stories can be instructive in many ways: businesses rise or fall depending on the strategies chosen and how they are implemented.

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

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

Behind him, on his desk, was a letter he had just brought from Sharon Watkins, vice president of corporate development in Enron's global finance division. The message began rather promisingly:

“Dear Mr. Lee, has it really become too risky to work at Enron? For those of us who haven't become fabulously wealthy in the past few years, wouldn't it be a luxury to stay with the company longer...?

Further, Sharon Watkins describes the situation of a related company that is suffering huge losses, and says that it would look to the market as if Enron was 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 an auditing company that is one of the "big five" and had an impeccable reputation - Arthur Andersen. She also played one of the main roles in the scandal that broke out.

Kenneth Lee received this letter in August 2001, three months before the collapse of the corporation, which seemed to be incredibly successful. 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 many months.

Enron's all-time high was $90.75. At the moment when the bankruptcy of the corporation was declared - 25 cents. This image in 2001 flew around all the US news agencies.

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

Start of takeoff

Enron entered the US 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 network of gas pipelines throughout the United States. Her interests included gas, electricity, and then commodity trading. Over the following years, during its rapid growth, this company managed not only to lobby for the maximum state deregulation of energy markets in the United States, but also to join a group of innovative structures that use a new technological achievement in their business - the Internet.

In mid-1999, the idea arose within the company to create trading floor. It all started when someone at Enron decided that it would be much more efficient to make sales transactions through the rapidly developing World Wide Web. Managers appreciated the idea, and on November 29 of the same year, Enron created the electronic trading site Enron Online, which specialized in trading commodities. 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, on four continents, in 15 different currencies. Two years after its launch, the platform was processing an average of 6,000 transactions per day worth $2.5 billion.

The site sold and bought Dutch aluminium, US lumber, European plastics and Argentine natural gas. No commission and no subscription fees, a proposal that has led some analysts to predict the disappearance of traditional brokerage services.

But there was one special condition in this whole procedure: 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 by getting itself into a deal with every potential buyer or seller. And so the power and influence of Enron in markets around the world has reached an incredibly high level. The company's revenue declared for 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 chief executive of Enron.

Fortune magazine called Enron "the most innovative company America" ​​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 literally any stock that had even a remote involvement in Internet technologies. The fact that a business simply had a website on the Internet in one fell swoop raised its stock quotes to exorbitant heights: the Nasdaq stock index reached 5,000 points.

The essence of the "Enron scheme"

As the dot-com bubble began to burst, Enron made the decision to build high-speed broadband communications networks with hundreds of millions of dollars raised from investors. Therefore, the decline in the stock market happened at the wrong time for this company. Its market capitalization began to melt before our eyes. And then it opened unique model a financial fraud concocted by Enron's management to hide financial losses resulting from trading and other operations, in which participation 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 a scam. And that's why.

In order to delve into the details of fraud, you need to understand the very essence of the American investment market, the extent of participation in investments in the stock market by American investors, as well as the nuances of this activity. In the US, generations of people are used to playing the stock market, not to mention institutional investors - companies and funds. For investors at that time, the most important information about a company was the levels of its stock quotes and the so-called reports for investors, the information in which could differ significantly from those financial reports that these same companies file with the US tax authorities.

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

By and large, Enron managers conducted deals with related (subsidiary) structures created specifically for the deal and for visually increasing assets and, at the same time, hiding losses that were distributed on the balance sheet of the related structure. When the next company was already up to its ears in losses, a new one was created. As mentioned in that very letter from Sharon Watkins to 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 a 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 was not supposed (due to the peculiarities of American legislation of those years) to consolidate Raptor's financial statements into its own as long as there were other co-investors. Enron's chief financial officer, Andrew Fastow, or his wife, often acted as a co-investor. These details came to light later at the trial.

Raptor's (but not Enron's) debts grew in proportion to borrowed borrowed funds, with which Enron settled with suppliers and other creditors.

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

The fact is that at the same time, the inflated bubble of investments in companies that were somehow related to the Internet, although they did not have any justified or profitable business model, burst. The stock market, along with the index of technological companies, fell down.

In the fall of 2001, in parallel with reporting for the previous quarter, Enron has officially shown $638 million in losses. In November, the company was forced to revise its financials again, reporting even bigger losses.

For investors, it was a huge shock. How, where can such a huge “minus” come from in such a short time?! Shares crashed. Already in December, the energy giant filed for bankruptcy.

And although the investigation, conducted after these events by the joint forces of several ministries and the FBI, recognized the financial director of the corporation as the main accused, it turned out that the entire management 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 fraud.

And not only.

"5 - 1"

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

Until 2001, there was a "big five" accounting firms in the world. Arthur Andersen, founded in 1913 in Chicago, has been one of the most successful accounting firms in the world for 90 years. And the largest client of Arthur Andersen's Houston office was Enron, which paid her up to $20 million a year for auditing and the same amount for consulting. After weighing all the risks and benefits, the auditors simply did not want to lose such a client, and issued such a conclusion as Enron wanted to see it, 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.

During 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 operations. And the last straw was precisely the fact that at the moment 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 Consequences

Investors lost a lot of money on Enron shares. The company's rank-and-file employees alone lost all of their corporate pension savings because, as you might expect, Enron invested its pension fund in its own stock.

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

But most importantly, the Enron case exposed huge problems with the American financial reporting system for public companies. 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 the Sarbanes-Oxley Act into law. The document toughened penalties for the destruction, alteration or production of untruthful financial statements and attempts to deceive shareholders. In addition, stringent financial reporting requirements were introduced for companies whose shares are traded on US stock exchanges and foreign companies whose shares are traded in the US. The effect of the law was aimed at certain groups of persons, in particular:

For company managers : The CEO and CFO of the company must personally (with their signature) certify the financial statements, confirming that they are prepared in accordance with all standardized requirements. Must be created and maintained effective work systems internal control providing all investors with reliable and, most importantly, correct information. Reporting manipulation has become a criminal offence.

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

For external auditors: after the Arthur Andersen scandal, the Public Company Accounting Oversight Board (PCAOB) was formed. This organization controls and regulates audit firms. Auditing companies are prohibited from providing their clients (with some exceptions) consulting services along with the audit. The external auditor must conduct an audit of the internal control system and the preparation of financial statements in the company in which he conducts the audit. A rule was introduced prohibiting partners of audit firms from working with the same audit client for more than five years in a row.

Also, the Financial Accounting Standards Board (FASB) significantly tightened the requirements for the level of ethical behavior in general and the regulation of work with related companies. Requirements for the consolidation of reporting of special (subsidiary) companies have been added. A new IFRS standard has appeared - “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. It became a necessary mechanism to identify and close the loopholes that companies used as a way to avoid or misrepresent reporting.

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

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

US President George W. Bush in July 2002 solemnly signed legislation passed by Congress to combat corporate fraud. In his speech, he compared such fraud to the September 11, 2001 terrorist attack and promised that neither 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 audit activities under the Commission on securities. Previously, accounting firms in the US were largely self-regulatory.

The law also obliges companies to establish independent audit committees, which must hire auditors to review the company's accounts (previously this was done by the company's management). The law requires the management of the company to personally certify the accounts.

And interestingly, the law makes it easier for shareholders to prosecute the heads of their companies and their auditors. And prison terms 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.

"Successes" Enron

We wrote about the biggest scam of the 20th century - the collapse of the BBCI Bank (BCCI) - in No. 16 (41) of our newspaper in the article "Thirty Years of Scam". The 21st century was not long in coming. It was marked by an equally high-profile scandal - the collapse of the American energy giant Enron.

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

The Corporation has successfully mastered the market of energy futures and derivative securities. Subsequently, this gave it considerable financial flexibility. It soon became the largest trader in the electricity market, and in 2001 even ranked seventh in the prestigious Fortune 500. By that time, the company already had 22 thousand employees in 40 countries of the world!

Note that in the 1990s, the US energy industry was freed from excessive state control. Therefore, by occupying a dominant position in the market, Enron was able to manipulate electricity prices nationwide.

Being a corporation of a national scale, it could not remain aloof from politics. She had extensive 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 to the pre-election needs of various politicians: both Republicans and Democrats. For these purposes, according to experts, only in the period of 1989-2001. about 6 million dollars were allocated. 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 in the past included many high-ranking officials of the US President.

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

Scam scheme

But, for now, there is no particular reason to be indignant at dexterous businessmen. All of the above, in general, is consistent with US 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 reports: both payers and campaign headquarters.

The company's fraud lay elsewhere: in its accounting operations. The company's management has developed and put into practice the most complicated scheme of hiding certain data not only from the public, but also from shareholders and investors. This was done in order to distort the true financial position of the corporation.

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

All these offshore companies were created completely legally, with the filing of appropriate reports with the US tax authorities. And besides, Enron's offshore activity was approved by its board of directors, lawyers and external auditors - the Arthur Andersen firm.

Although the scheme invented seems unusually complex, in fact, it is quite simple. On the one hand, electricity transactions conducted through subsidiaries made it possible to “inflate” the prime cost and, accordingly, the selling price of electricity. On the other hand, the debts of the corporation, which it did not want to advertise, were issued to offshore companies.

I must say that American law is quite strict with regard to offshore operations. Under existing legislation on so-called controlled foreign corporations, the income of offshore companies is forcibly included in the taxable income of their American owners. Therefore, in the US, 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 law.

But the Enron crooks didn't need it. Not profits were dumped into offshore, but losses. The question arises - why? This made it possible to significantly improve financial indicators corporations, which means they grew in the price of its shares. The corporation captured an increasing share of the market. This allowed its management and employees to receive multimillion-dollar bonuses. Naturally, the value of their stakes in their own company also grew.

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

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

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 paid no income tax at all. Moreover, he received large tax refunds from the treasury. For the period 1996–2000 received a total of $380 million.

"How many ropes do not twist ..."

Catch "hot" scammers was extremely difficult. 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 almost legal. And even during the trial there was a high probability of recognizing them as such. But it couldn't go on forever. Hidden debts piled up and grew. Sooner or later they had to come up.

And this happened in 2001 - the first year of our century. New Year Enron started with a new president. It was headed by Geoffrey Skilling. But Kenneth Lay did not leave, but moved to the chair of the board of directors. Till new leader delved into the essence of the matter, six months passed. And having "seen the light", he was frightened and resigned. However, he later testified and argued that he was not guilty.

In August, Enron was again led by Kenneth Lay. Seeing that disaster was imminent, he first dumped his Enron shares (worth more than $20 million) and continued to reassure shareholders that things were going great. Many other corporate leaders did the same. Therefore, they are also accused of misusing insider information.

In October 2001, when the quarterly reporting deadline approached, further concealment of debts turned out to be impossible. And Enron announces a loss of $638 million, as well as a reduction equity corporations for 1.2 billion dollars. The losses were written off to offshore fraud by chief accountant Andrew Fastow, who was immediately fired.

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

And the situation kept getting worse. In November, Enron was forced to revise its accounts once again. And profits over the past five years have been reduced by $586 million, while debts have increased by another $2.5 billion. Shares of the corporation, still at the beginning of the year held at about 80 dollars. apiece, collapsed to below $1! It was a disaster...

As expected, everyone quickly dissociated themselves from the former prosperous giant. In December 2001, the corporation filed for bankruptcy, which was the largest bankruptcy in American history. More than 4,000 employees were laid off in the US and more than a thousand in Europe.

Even the mother-in-law of the current American president, Jenna Welsh, suffered. She lost as much as $8,180 on Enron shares. This figure looks especially good against the background of those hundreds of thousands of dollars of retirement savings that Enron's ordinary employees lost as a result of bankruptcy. It turned out that about $ 1 billion of pension savings that the corporation-controlled pension fund had invested in the corporation's shares burned out. Now they cost nothing.

A criminal investigation followed. Naturally, first of all, they became interested in auditors. And it turned out that the employees of the Arthur Andersen auditing company, being participants in the scam, themselves developed schemes for fraudulent operations. 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 corporate vice president Cliff Baxter committed suicide. And in August, New York Times economics editor Allan Myerson jumped out of his 11th-floor office window. It was Myerson who was the author of the revealing materials about the financial fraud of the Enron energy company.

Several departments are involved in the investigation of the events that preceded the bankruptcy of Enron - the FBI, the Department of Justice, the Department of Labor. Of course, the Congress did not stand aside, joining the investigation almost faster than anyone else: 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. For fraud, he faces forty years in prison.

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

Who is 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 six times with the leadership of Enron. 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 $60,000 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 lawsuit. However, experts believe that it will not be easy for deceived depositors to prove their accusations against bankers in court.

The scandal spread across the ocean. So, in the UK, Enron sponsored the Labor Party, which won the election. Now the Conservatives accuse Labor of pursuing the country's energy policy to the benefit of Enron as a thank you.

The collapse of Enron set off a chain reaction in the American economy. Hundreds of companies that used a similar practice of "creative accounting" were under attack and were forced to audit their accounts. Of the corporations listed on US stock exchanges, 10% have revised their financial results over the past five years. For many this has led to fatal consequences.

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

American legislation has now tightened the requirements even for foreign companies. To those whose shares are listed on American stock exchanges (after all, 1,300 foreign issuers are represented on the New York Stock Exchange alone). They are subject to the same requirements as for US companies, including with regard to reporting rules and assurance.

Thus, the management of the company 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 considerable term in an American prison can also be received by the director, for example, listed in the USA Russian company(and there are currently five of them) if the US decides that its financial statements do not meet US standards.

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

But most importantly, the Enron bankruptcy revealed serious problems associated with 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 to investors, creditors and business partners has come under big question. We can safely assume that disclosure standards, especially in terms of off-balance sheet and management transactions, will be tightened in other countries as well.

100 great scams [with illustrations] Mussky Igor Anatolyevich

The Enron case

The Enron case

The sudden bankruptcy of Enron, the seventh largest US company and the world's largest electricity merchant, shocked America. Reports of bankruptcies, even large ones, rarely make it to the front pages of newspapers. But Enron is a special case. Its collapse was a life-changing disaster for many American families. And not only American ones. The company operated in two dozen countries on four continents.

Enron filed for bankruptcy on December 2, 2001, by filing with a New York court to declare the firm bankrupt under section 11 of the relevant law, which assumes that the firm continues to operate while its creditors reorganize the company's finances.

Enron Group logo

Why did the concern suddenly collapse, which until yesterday was considered a symbol of reliability? It all started with the fact that Enron made a very bad deal, buying a company that brought only losses. For a strong corporation to cope with such difficulties is a matter of honor and professionalism. However, if losses are shown in the reports, this can reduce credit rating company, then investors will turn away from it, shareholders will begin to get rid of their stakes - as a result, the company will lose the necessary working capital.

In 1998, 36-year-old Andrew Fastow, who had been with the firm for eight years and had a reputation as a financial genius, was appointed CFO of Enron. It was he who invented a clever scheme that allowed the company not only to exclude losses from its accounting documents, evade taxes, but also attract new investments.

Fastow has established partnerships with numerous companies registered around the world, usually offshore. Upon closer examination, the firms turned out to be dummy - they were controlled by the managers of Enron itself. The energy giant had more than three thousand such "branches". Only at one legal address (Georgetown, PO Box 1350) in the Cayman Islands, 692 (!) Subsidiaries of the energy giant were registered! The partner firm bought illiquid property from Enron along with debts, paying off the shares of Enron itself received as a share of the authorized capital. In this way, the energy concern not only excluded debt from its balance sheet, but also showed blocks of shares invested in partnerships as assets in documents, although in reality it only shifted shares from one pocket to another and back.

Despite the complexity of the Fastow scheme, its principle is quite simple: on the one hand, electricity transactions conducted through subsidiaries made it possible to overestimate the cost, and hence the sale price of electricity, as necessary, on the other hand, those debts of the corporation were registered offshore which she didn't want to reveal.

By publishing false reports, Enron executives artificially and many times overstated the market value of shares, attracting new investments and directing them to the same offshore network. What at first was a temporary, extreme and forced measure, gradually turned into the main content of the activities of its top managers.

The most amazing thing is that all offshore companies were created on absolutely legal grounds, with the submission of appropriate reports to the US tax authorities. Moreover, their activities were approved by the board of directors of the Enron company, lawyers and external auditors, the famous Arthur Andersen firm. There is no doubt that the auditors took an active part in the development of the fraudulent scheme.

Since Fastow and his colleagues ran offshore partner firms, they received considerable remuneration there. In particular, Fastow received more than $30 million from the activities of only one of the offshore companies, and his assistant Michael Copper received $10 million.

All debts and expenses were provided to the tax service in full, and as a result, the corporation was considered unprofitable there. Enron hasn't paid income tax for years! Instead, he even received solid tax refunds from the treasury: between 1996 and 2000, a total of $ 380 million was transferred to the company's accounts.

Enron, a nationwide corporation, had extensive connections in political circles, especially in the Republican Party. The company's president, Kenneth Lay, was a close friend of George W. Bush and his biggest private sponsor. In 2000 alone, Enron spent $2.4 million lobbying the White House and Congress. It is known that 71 senators and 188 congressmen received support from the energy company.

The Enron leadership funded not only the Republicans, but also the Democrats. There was a reason for this. If you give enough money to both parties, you can maintain influence no matter which party is in power.

In early 2001, Enron had a new president, Jeffrey Skilling. Kenneth Ley, who headed the company for fifteen years, remained chairman of the board of directors. However, Skilling unexpectedly resigned a few months later.

In August 2001, Kenneth Lay again came to the leadership of the corporation. He soon received an alarming letter from a knowledgeable employee of the company, Sharron Watkins. She reported that Enron had been doing "unacceptable bookkeeping" for years and was now close to collapse: "I'm afraid that we will soon explode from scandals." Kenneth Lay directed lawyers to conduct a "limited" investigation into the allegations made in the letter.

Knowing full well that Enron's papers would soon depreciate, top managers began to dump their shares. Kenneth Lay sold 1.8 million shares worth $101 million. So did the 29 Enron board members, who cashed out $1.1 billion in shares. At the same time, Lay assured the rank and file employees of Enron that the company was doing just brilliantly and that its shares would grow in price by 800 percent in the next ten years.

On October 15, 2001, the law firm of Vincennes and Elkins warned Enron executives in a report that the company could soon be the subject of public scandals and legal action. Three days earlier, Enron's accountants had already ordered the destruction of documents related to the audit.

Further concealment of debts proved impossible. Enron posted a $638 million loss and a $1.2 billion decrease in corporate equity. The losses were written off to offshore fraud by Andrew Fastow, who was fired from the company.

Enron shares fell in price. Kenneth Lay unsuccessfully tried to use his connections in the Bush administration. He called Commerce Secretary Don Evans and Treasury Secretary Paul O'Neill, urging them to influence the rating agencies. But the scandal has gone too far. The Securities Commission has launched an investigation into a possible conflict of interest in offshore transactions.

In November 2001, Enron revised its accounts for the past five years. Profits for this period were reduced by $586 million, while debt increased by another $2.5 billion.

Leading corporate credit rating agencies have given Enron a so-called "junk" rating. If in August 2001 the company's share was worth $90, then after the bankruptcy announcement, the price fell to 42 cents. Many shareholders who willingly bought Enron's papers, focusing on its rosy reporting, went bankrupt. Robert Belfer, one of the directors of Enron and the largest private shareholder in the electric company, has lost two billion dollars! Among the investors were large pension funds, so tens of thousands of teachers, police officers and firefighters lost part of their pensions.

Enron's bankruptcy was recognized as the largest in American history. The market price of Enron's losses was $75 billion. More than 4,000 employees in the US and more than 1,000 in Europe lost their jobs. Among the firm's employees, the so-called "401 retirement plan" was popular, under which all the savings of employees were invested in Enron shares. As a result of the catastrophic fall in share prices, pension assets have almost completely depreciated.

The auditing firm Arthur Andersen deliberately covered up Enron's financial flaws in order to keep a profitable client. After all, in 2000 alone, Andersen received more than $50 million from the energy giant for its services. Employees of the company not only participated in the development of schemes for the activities of the corporation, but also destroyed a huge amount of documentation related to Enron on the eve of the collapse.

The management of the auditing firm Arthur Andersen was forced to admit "mistakes" made in checking the financial transactions and reporting of the energy company, but tried to scapegoat the head of the department, David Duncan, who led the destruction of documents. He was immediately fired from the firm. However, Duncan's lawyers proved that their client acted on direct orders from the company's central office.

A grand jury found the firm "Arthur Andersen" guilty of obstruction of justice, after which it effectively ceased to exist. The number of its employees was reduced from 28 thousand to 250 people.

On January 25, 2002, the first body appeared in the case: former Enron vice president Baxter shot himself in his Mercedes parked two miles from his home. According to police, he left a suicide note. Baxter was one of those who received congressional subpoenas to testify. As vice president of strategy, he was directly involved in the Enron pyramid schemes and earned $ 35 million from the scam.

The main actors refused to testify to the Congressional Commission, citing the relevant article of the law. And only the former head of Enron, Jeffrey Skilling, decided to answer the questions of congressmen. However, he showed amazing forgetfulness and ignorance: Skilling answered almost all the questions of the legislators that he did not remember or know anything bad.

With particular impatience, congressmen and the press were waiting for the speech of Sharron Watkins, vice president of the development company. She named Fastow and Skilling as the main schemers, these two kept Ley in the dark. Sharron said that Fastow was just furious when he found out about her meeting with the head of the company Ley. “He demanded that I be fired immediately and that my computer be taken away,” Sharron said. “The computer really had to be given away later, but I managed to transfer all the valuable files to my laptop.”

The US Congress passed a law to combat corporate fraud. The new legislation provided for stricter control by the state and shareholders in relation to companies, their officers and auditors. Prison terms for fraudulent executives have quadrupled to 20 years, and in special cases to 25.

In 2004, Andrew Fastow was sentenced to ten years in prison. The financier claimed that he had never violated the laws. Later, he fully admitted his guilt, testified in the case of two former leaders Ley and Skilling. As a result, the court reduced Fastow's sentence to six years.

Kenneth Lay died on July 5, 2006 from a heart attack. A federal court in Houston acquitted him posthumously. Geoffrey Skilling received 24 years and 4 months in prison. For the first time in recent US history, such a harsh sentence was handed down to a high-ranking leader.

The collapse of Enron set off a chain reaction in the American economy. Hundreds of companies were forced to revise their financial statements. For many this has led to fatal consequences.