Enron Vs Bombay

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Enron's increased reliance on trading also brought about some basic changes in accounting procedures. Under Skilling the trading operation adopted mark-to-market accounting in which the present value of anticipated revenue is realized and the expected costs of fulfilling the contract are expensed once a contract is signed. Unrealized gains and losses in the market value of the long-term contracts were required to be reported later as a part of annual earnings when they occurred. Mark-to-market accounting retains a valued place in commonly accepted accounting practices. Enron and its outside auditor, Arthur Andersen, took the practice to previously untested parameters. The stock rose 56 percent in 1999 and another 87 percent in 2000; Enron was losing money on its operations but using certain accounting practices to appear profitable and stable. Enron also made frequent and heavy use of prepaid agreements which allow a company to raise cash, much like a loan, but not include the liability on the balance sheet. In 2001 Enron signed over $5 billion worth of prepaid agreements as it attempted to raise cash and bury debt.

In the early 1990s Enron also began making heavy use of SPEs, shell firms created by a sponsor but funded by independent equity investors and debt financing. Enron used SPEs to fund or manage risk associated with specific projects and assets, and at first Enron set up the SPEs correctly. Enron has been accused of using strong-arm tactics with investment bankers that did large amounts of business with Enron to persuade the bankers to invest in the SPEs. Often prior arrangements included assurances from Enron that an investor's commitment would be for a relatively short period, at which time Enron would find a new investor to assume the third-party role, allowing the initial investor to secure a large profit. When Enron had difficulty finding replacement independent investors, however, it has been asserted that it utilized key management personnel for this role, which cast doubt over the issue of control of the entity. Enron used SPEs as hedge funds to lock-in mark-to-market profits or to hide losses of underperforming assets; it was capitalizing with its own stock. In effect, it was hedging assets with itself.

By 2001 complaints about the opaqueness of Enron's financial reporting were raising concerns. The Raptors, entities which had been created in 2000 to remove troubled international assets from Enron's books, were nearly insolvent. In March the Raptors were restructured which allowed Enron to hide another $200 million in losses. Whitewing and Osprey SPEs had liability points triggered when Enron's stock fell below forty-seven dollars, which happened in July 2001. In 2000 Enron had reported $4.8 billion in operating cash flow. In reality Enron had very little real cash flow. The $100 billion in revenue that Enron had reported in 2000 was primarily revenue from trades in which cash did not change hands. These transactions, however, all needed to be collateralized, demanding a huge amount of affordable credit for Enron. Credit rating services were taking a hard look at Enron's financial position. At the same time prices in the fiber market were plummeting, yet Enron insisted that its business plan for broadband was on target. This improbable assertion generated much skepticism among analysts which further increased inspection of Enron's finances and depressed the stock price.

The second quarter 10Q report filed with the SEC showed a negative cash flow of $1.3 billion YTD. The Marlin SPE, which had been used to conceal Azurix losses, had a payment due to investors at the end of 2001. Enron was able to refinance the obligation in July for $1 billion, however the entire note was due if the stock price fell below thirty-four dollars. Energy prices continued to fall which meant that Enron would have to begin refunding $2 billion in deposits. The rapidly deteriorating situation at Enron led to Jeff Skilling's resignation in July, an announcement withheld from the public until August. Kenneth Lay reassumed the role of chief executive. Skilling's abrupt departure along with other major personnel changes made analysts suspicious, and they began to look even more closely at Enron's finances. Following a five-dollars-per-share decline the day of the Skilling announcement, the price dropped to twenty-five dollars per share on September 12 after the 911 attacks.

Stocks continued to fall in October and hit a low of $20.65 a share. Enron replaced Andrew Fastow as CFO. A liquidity crisis immediately ensued, and Enron was forced to draw upon $3 billion in backup credit lines which only lasted a few days due to Enron's short-term commercial paper. The collapse of the stock price now made billions of dollars of obligations due immediately. Enron secured another $1 billion in loans using the remaining pipelines as collateral, the only asset that Enron had left that was deemed worthy to use as collateral. In November Enron entered merger negotiations with Houston-based Dynegy, Inc., and Enron's stock rose to about ten dollars. Enron received $1.5 billion in cash from Dynegy as well as the first $550 million from the pipeline loan. However, Enron's third-quarter loss was restated to be $664 million, and Enron's fourth-quarter prospects appeared dismal. The merger was reviewed when credit rating services lowered Enron's rating to just above junk status which triggered an immediate repayment demand of $690 million for an SPE called Rawhide. The reduced rating meant that Enron now had more than $9 billion in loans due in 2002. The Dynegy deal collapsed, and banks refused to extend any further credit. On December 2, 2001, Enron filed for protection under United States bankruptcy laws, at that time the largest such filing of its kind in United States history.

Twenty-two Enron executives and partners pleaded guilty or were convicted of criminal charges for their roles in Enron's collapse. Arthur Andersen was found guilty of fraud; the conviction was later overturned on appeal, but the reversal did not come before the firm was forced to dissolve. Several Andersen partners were also personally convicted of crimes committed during their work at Enron. While several Enron executives received probation, others received lengthy prison terms, including CFO Andrew Fastow; accounting chief Richard Causey; CEO of the trading unit, David Delainey; and treasurer Ben Glisan. Former Chairman Ken Lay and CEO Jeff Skilling were found guilty in May 2006. Skilling, guilty of nineteen counts of security and wire fraud, was sentenced to more than twenty-four years in federal prison and began serving his term in December 2006. Ken Lay died suddenly in July 2006 while awaiting sentencing. Federal precedent calls for