You missed out an important part. They used many external companies to hide the debts. The debts were still there but didn't show in the accounts and this allowed the stock price to go much higher than it should have.
Fun fact: Ken Lay died before being convicted of anything related to Enron. You can't convict a dead person, so since he wasn't found guilty of anything, he couldn't be held financially liable. Meaning his family got to keep all the money he made from Enron and didn't have to give anything back to all the pensions and small investors who lost a lot of money.
Nice presentation, you omitted to role of the CFO (Fastow) in devising the financial structures (SPE) that allowed Enron to take its debt off balance sheet, and that’s the reason for the low D/E apart from the retained earning point you mentioned.
Good video, but you forgot the most important accounting issue that actually lead to the sudden downfall: as Enron’s operations didn’t create enough cash (as you mentioned, MTM are just future expectations), they obtained external debt financing, set up Enron-controlled SPVs and basically dealt with itself. But they avoided disclosing the debt on their balance sheet by not consolidating SPVs. When AA finally (way too late) required consolidation, the operations dried out of cash within days. The SPV (‘Raptors’ and so on) set-up and consolidation rules were quite complicated, but a very interesting case for anyone working with US-GAAP/IFRS.
Hi I'm a little confused, if they took out much of their debt under their SPVs, shouldn't that debt still appear under their group financial statements since these statements would take into account all subsidiaries and associates financial activities during the year ? Or is this a new thing that has been taken into account for all group financial statements post Enron ?
HoochIsCrazy My understanding is that the auditors recommended that Enron discloses these SPV‘s in the footnotes. Which they did but they were so complicated that the average reader did not understand it
HoochIsCrazy Yes, it SHOULD have been like this. However, under the US-GAAP rules at that time, some minor outside investment in certain legal structures/partnerships lead to non-control for accounting purposes and hence no subsidiary and no consolidation either. Just disclosure as Financial Controller mentioned. The thing broke down when it was uncovered that also the “outside” investors were in fact Enron-related parties (e.g. their CFO Fastow and his family) or Enron guaranteed for the equity risk. “The Smartest Guys in the Room” and “Conspiracy of Fools” are great reads on that.
This is an AWESOME playlist!!!!!!!!!!!!!!! I have been working as an accountant for a while and I have been searching for some podcasts or channels about forensic accounting, accounting fraud, tax fraud (people are asking me so much about tax fraud etc) and this playlist comes the closest to the idea and is full of great real-life information we all wonder about. Don't stop this thread -keep it going and we will keep coming. Super interesting and quite the novelty on a RUclips :)
I could hug you for this short, sweet explanation of such a complicated scandal! Thank you! I need to write an essay on the Enron scandal for my business law class and this is perfect.
Great summary! I believe the special purpose vehicles designed for asset dumping were named after Star Wars characters, which deserves a mention. Taking creative accounting to a whole new level.
You could say 3 people were responsible for this failure and not 2 as you pointed out!! 1. The management of Enron 2. Auditor (Arthur & Anderson) 3. SEC (who approved mtm accounting!!)
Great video bro. I’m about halfway through the book “The Smartest Guys in the Room,” and I think every business student should read it. It’s so well written and helps breaks down Enron’s meteoric rise (and subsequent “Icarus-like” fall). Great vide, btw!
The enron scandal is one of the world most devastating scandal in the accounting profession. Thanks very much for taking out to put this video together, it has really open my understanding of the Mark to Market system. However, this guys were brilliant but failed in corporate governance. Thank you
I had wathced Enron documentary and read some articles on internet but barely understand how Enron accounting manipulated. Finally I find this video and it completed puzzle in my head within 6 minutes! I couldn't thank you enough. Greetings from Indonesia.
@@TheFinancialController There is one mystery left before me though. It is about Special Purpose Entity, which was also significant player in Enron downfall. I didn't find yet materials on internet which are able to explain SPE and its looks on consolidated financial statement as simple and meaningful as your way of explaining things. But I keep digging the internet though.
Hello! Just came across your videos today and i want to say that they are great and very informative! Please keep them coming! You earned a new subscriber today.
The craziest part of the story for me is how they were trying to develop futures market that allowed them to speculate on the weather. There was just so much stuff about the whole scandal that left me perplexed.
Good video. Thanks. And one thing that I want to clarify about the MTM Accounting, the revenue recognised from expected cash flow, did they really record it all at once to SoPL or defer it over project time?
One method used to raise the much needed cash that was not being generated from the MTM profits was via interest rate swaps. Enron would take the fixed rate/pay the floating rate. As the fixed rate payments were an identifiable income cashflow stream, they would then ask the swap counter party to discount these to cash and pay immediately. As these swaps were at that time off-balance sheet transactions they did not show up as borrowing.
I watched the movie fun with dick and Jane and I noticed they referenced this enron scandal at the end if the movie. It peaked my interest and I cant believe I have never heard of this before. Super interesting thanks for sharing.
@@TheFinancialController of course i am going to school to become a CFP congrats on getting your CPA cant wait to start rolling in the bejamins and helping others with their money too.
A big part of the collapse was the use of Special Purpose Entities (SPE's) and tEnron's CFO, Andy Fastow. He should have made an appearance in your explanation.
Good video, but you should have mentioned how the CFO used SPVs to conceal debt resulting in much lowered debt/equity levels. The cfo also went to jail along with Skilling.
Pls correct me if i'm wrong: To simplify, there were 2 main problems Eron faced in 1997: hide there debts and raise there revenue. 1) to hide there debts, Enron used SPEs and off-balance sheet transactions to transfer bad performing assets and interests from loans from Enron to its SPEs. 2) to earn revenue, Enron used some tricks such as MTM (mentioned on the video) and "agent model" (instead of recording only brokerage and trading fees as revenue, Enron record full value of transactions). Sry for my bad English.
how to discover: financial assets fraud of a company. like it would be hard to discover. im curious the methods used. since so hard to discover it is probably very common crime by big companies. this can be used mislead investors, bankruptsy fraud, and much more, and tax fraud. also how to discover complex web of subsidiaries and other business entities used in these schemes. enron had 1000s of alternate companies to facilitate the crimes. but i wanna know how can this be discovered.
Thanks a lot for the great video! I do have one question though. From my understanding (I have studied only IFRS), MTM basically refers to stating assets at FV and Enron inflated its profits by recording FV gains from these assets (whereby these assets were the deals/projects they were working on). However when presenting FV gains in the income statement, don’t we usually report it under ‘other income’ (as opposed to revenue) and then term the line item as FV gains? I don’t know whether this type of presenting was not done back in 2000 but if it was, I am wondering why analysts didn’t notice that the company’s profit was mainly coming from FV gains. Usually when we analyze companies now, we always exclude FV gains as those are just accounting one off entries.
From what I understand from the video, it is not exactly the FV of assets, but the PV of all expected cash flows of a project and recorded all at once in the SoPL. That's crazy and sounds unbelievable. I also wonder the same question how much different is the accounting back in 2000 vs. now?
Also, you didn't mention Andy Fastow, CFO, who's now a speaker. He starts by showing his year 2000 national account of the year award, the. Shows his 2001 Department of Corrections ID card.
I don't get it, why did SEC approved MTM for ENRON? One of the few basics that I learned in accounting school was always provide for losses but never provide for gains in the books. That's why we have provision for doubtful debts instead of provision for expected revenue. This MTM is a violation of that.
Level up your Accounting Career by enrolling in our 6-weeks program here controller-academy.com/courses/controller-academy
Also let me know what other topics you’d like me to cover. Thanks!
@@TheFinancialController the bankruptcy of lemen brothers please
Did no one from SEC get jailed? The guys that approved this on behalf of all the people that lost their pension funds are the real criminals no?
The Enron case How could such a prestigious investment bank advise investing when the quotations of the shares were falling?
You explained everything very simply and easily, without missing any details. You did what a two hour documentary did in six minutes.
Thanks Kevin!
I am an Accounting majoring and I appreciate the video and the hard work you put into it.
Youre doing a good job. I appreciate all your videos.
@@TheFinancialController Great work young man you got the makings of a entrepreneur
Agree !!!!
You missed out an important part. They used many external companies to hide the debts. The debts were still there but didn't show in the accounts and this allowed the stock price to go much higher than it should have.
Guess you could say something went Enwrong
Haha 😆 guess you could say that...
Ever look at their logo? Didn't it look like something (letter E) very precariously balanced? Isn't that funny? It was like fortune telling. Lol
🤣🤣🤣
This one was painful. But as a dad. I thank you. (3 years later)
Underrated comment
So according to MTM principle, my tiny rental apartment is worth $10 million.
If you are running a lucrative Airbnb, then sure :)
Lol yes basically. Absolutely delusional!
I have a casio Gshock, does it worth 5 millions???
I invested in a Rolex for 7k ... In 100 years it will be worth a million dollars... OH SHIT IM A MILLIONAIRE!!!!!!!!
Fake money
this is the most comprehensive, cohesive explanation of the Enron incident that i've come across. great job !
Thank you!
u better to do some research ， its far more complicated than this
Fun fact: Ken Lay died before being convicted of anything related to Enron. You can't convict a dead person, so since he wasn't found guilty of anything, he couldn't be held financially liable. Meaning his family got to keep all the money he made from Enron and didn't have to give anything back to all the pensions and small investors who lost a lot of money.
Wow now that is extra vindictive of you. maybe you can have people rob the family while your at it.
Nice presentation, you omitted to role of the CFO (Fastow) in devising the financial structures (SPE) that allowed Enron to take its debt off balance sheet, and that’s the reason for the low D/E apart from the retained earning point you mentioned.
Very engaging and simple!! I found your video while I was studying Sarbanes-Oxley Act.
So far, that's the most complete, concise, and engaging explanation I ever heard. Hats off man!
I had to watch the ENRON documentary for my business class and I never knew how crazy companies can get.
Love this! Used it in my Accounting class. Thank you!
Thanks 🙏 Julie
Good video, but you forgot the most important accounting issue that actually lead to the sudden downfall: as Enron’s operations didn’t create enough cash (as you mentioned, MTM are just future expectations), they obtained external debt financing, set up Enron-controlled SPVs and basically dealt with itself. But they avoided disclosing the debt on their balance sheet by not consolidating SPVs. When AA finally (way too late) required consolidation, the operations dried out of cash within days. The SPV (‘Raptors’ and so on) set-up and consolidation rules were quite complicated, but a very interesting case for anyone working with US-GAAP/IFRS.
Great point and thanks for sharing it here. Cheers Ronny!
Hi I'm a little confused, if they took out much of their debt under their SPVs, shouldn't that debt still appear under their group financial statements since these statements would take into account all subsidiaries and associates financial activities during the year ? Or is this a new thing that has been taken into account for all group financial statements post Enron ?
HoochIsCrazy My understanding is that the auditors recommended that Enron discloses these SPV‘s in the footnotes. Which they did but they were so complicated that the average reader did not understand it
HoochIsCrazy Yes, it SHOULD have been like this. However, under the US-GAAP rules at that time, some minor outside investment in certain legal structures/partnerships lead to non-control for accounting purposes and hence no subsidiary and no consolidation either. Just disclosure as Financial Controller mentioned. The thing broke down when it was uncovered that also the “outside” investors were in fact Enron-related parties (e.g. their CFO Fastow and his family) or Enron guaranteed for the equity risk. “The Smartest Guys in the Room” and “Conspiracy of Fools” are great reads on that.
@@hoochiscrazy444 FAS 94 only required three percent of SPE capital to be off balance sheet, now changed to 10% after Enron
Very useful video. I'm doing an accounting apprenticeship and this has really helped me see the Enron scandal from an accounting lens!
This is an AWESOME playlist!!!!!!!!!!!!!!! I have been working as an accountant for a while and I have been searching for some podcasts or channels about forensic accounting, accounting fraud, tax fraud (people are asking me so much about tax fraud etc) and this playlist comes the closest to the idea and is full of great real-life information we all wonder about. Don't stop this thread -keep it going and we will keep coming. Super interesting and quite the novelty on a RUclips :)
Thanks brother
One of the best videos explaining the Enron scandal!!
Thank you!
I could hug you for this short, sweet explanation of such a complicated scandal! Thank you! I need to write an essay on the Enron scandal for my business law class and this is perfect.
Glad it was helpful!
What up Glizzard!
@@bunnyman6321 just doing Glizzard stuff. What about you?
@@glizzard1894 That's what I like to hear!
I'm just doing bunny stuff with 3 Playboy bunnies 😁
May you have much success Glizzard
@@bunnyman6321 love it! Kiss those bunnies for me!
Not gonna lie, but this guy delivered a super-easy-to-understand explanation, love it! Thanks!
Watched a docu on this and learned more from your 10 min video, subscribed
Awesome
I really hope more of these videos are to come. Really liked how you explained it!
Thank you! Yes very soon!
Thank you so much. This was explained so simply. I have a class tomorrow and now I can relate to conversations around Enron. Thank you
Glad it was helpful!
Great summary! I believe the special purpose vehicles designed for asset dumping were named after Star Wars characters, which deserves a mention. Taking creative accounting to a whole new level.
Thanks Emma! Agreed
You could say 3 people were responsible for this failure and not 2 as you pointed out!!
1. The management of Enron
2. Auditor (Arthur & Anderson)
3. SEC (who approved mtm accounting!!)
Thank u so much for this! Great help for us students who have financial management subject.❤
It's my pleasure Chita
MORE VIDEOS LIKE THIS PLEASE. I love economic history!
Thank you very much for the video.
It was simple and the timeline of events was properly understandable.
Great video bro.
I’m about halfway through the book “The Smartest Guys in the Room,” and I think every business student should read it.
It’s so well written and helps breaks down Enron’s meteoric rise (and subsequent “Icarus-like” fall).
Great vide, btw!
Thanks for your input Jim. It’s a great book
Great job explaining the Enron fiasco. You're like the Cliff Note of the financial sector.
Thank you! Fiasco is the right word indeed ;)
Thank you so much, this video really helped me understand, very well put!
Thanks!
This was good stuff!! Thank you! I needed to learn about SOX as I am getting into Cybersecurity.
The enron scandal is one of the world most devastating scandal in the accounting profession. Thanks very much for taking out to put this video together, it has really open my understanding of the Mark to Market system. However, this guys were brilliant but failed in corporate governance. Thank you
Utterly astonishing that the SEC approved the smoke and mirrors accounting of "mark to market" in 1992. Absolute madness.
That’s what I am sayin!! :)
THIS WAS INFORMATIVE AND EDUCATIONAL. LOVE LEARNING ABOUT THIS PARTICULAR SUBJECT. THANK YOU!!
Now this is what we call “in a nutshell”. Everything was explained so clearly!!
Thanks Ritika!
Perfect explanation of the Enron case. Thank you!
Good video, but you need to do more episodes on ENRON. This is only the tip of the iceberg. Don't forget about all the off balance sheet liabilities.
Nico thanks. Yeah I will soon. I just wanted to give an overview to the non financially inclined folks
I had wathced Enron documentary and read some articles on internet but barely understand how Enron accounting manipulated. Finally I find this video and it completed puzzle in my head within 6 minutes! I couldn't thank you enough. Greetings from Indonesia.
Thanks for watching:)
@@TheFinancialController There is one mystery left before me though. It is about Special Purpose Entity, which was also significant player in Enron downfall. I didn't find yet materials on internet which are able to explain SPE and its looks on consolidated financial statement as simple and meaningful as your way of explaining things. But I keep digging the internet though.
Thank you, this is better than reading academic articles
Just amazing! Thanks for this
Glad you enjoyed it!
Superb video, concise explanations and you included the timeline.
Glad you liked it!
Amazing explanation, thank you
Too bad these hedge funds always find loopholes to keep making profits, no matter what it takes.
Great explanation! Thank you!
You're welcome!
Excellent. Could be improved by adding Arthur Anderson and Sarbanes Oxley dates to whiteboard timeline
Agreed! :)
This is so well explained. Definitely subscribing
Hello! Just came across your videos today and i want to say that they are great and very informative! Please keep them coming! You earned a new subscriber today.
Thanks Bayar!
Very straightforward explanation.
Simple and easy to understand and remember! Thanks 😊
Thanks!
Great presentation! Thanks for making a quality video, it was solid!
this explained it so simply! can you make a video over the spe’s?
What a great explanation, thank you.
Glad you liked it
Thank you for sharing it. It is really clear and simple for understanding.
Thanks Lay!
Finnaly it has been explained to where I can understand. Thank you
Great thank you for watching!
Perfect explanation- thank you!
Very neatly presented...
Excellent explanation
keep the videos coming. great explanation.
Thank you so much! I will.
But the Securities and Exchange Commission approved the mark to market accounting rules
I learned about Enron in a business law course in college. Great vid
Thanks!
But why did the external auditors and board fail to prevent Enron’s failure?
The craziest part of the story for me is how they were trying to develop futures market that allowed them to speculate on the weather. There was just so much stuff about the whole scandal that left me perplexed.
Good video. Thanks. And one thing that I want to clarify about the MTM Accounting, the revenue recognised from expected cash flow, did they really record it all at once to SoPL or defer it over project time?
The Enron case How could such a prestigious investment bank advise investing when the quotations of the shares were falling?
Great explanation - thank you!
Amazing lecture
Thank you for the detailed information sir.
My pleasure!
One method used to raise the much needed cash that was not being generated from the MTM profits was via interest rate swaps. Enron would take the fixed rate/pay the floating rate. As the fixed rate payments were an identifiable income cashflow stream, they would then ask the swap counter party to discount these to cash and pay immediately. As these swaps were at that time off-balance sheet transactions they did not show up as borrowing.
i enjoyed the video, but I would have liked more detailed explanation on how Enron abused mark to market accounting.
I really like your explaination, which gives me the overview of the whole story. Keep doing your good work.
Thanks shalom!
You didn't mention Fastow's raptors.
I watched the movie fun with dick and Jane and I noticed they referenced this enron scandal at the end if the movie. It peaked my interest and I cant believe I have never heard of this before. Super interesting thanks for sharing.
Funny I just watched Dick n Jane on Netflix as well! Yeah it’s all fascinating. Thanks for watching!
@@TheFinancialController of course i am going to school to become a CFP congrats on getting your CPA cant wait to start rolling in the bejamins and helping others with their money too.
CFP is a very rewarding profession bc you get to help others achieve their dreams. Good luck @johnny.
@@TheFinancialController my exact thoughts.
1. What are the ethical issues(ethical dilemma).
2. The breach of auditing principles.
Very Informative! 👍
Thank you in advance, that was all I wanted
Thank you so much for explaining it so nicely!
Snigdha you are welcome!
A big part of the collapse was the use of Special Purpose Entities (SPE's) and tEnron's CFO, Andy Fastow. He should have made an appearance in your explanation.
Good video, but you should have mentioned how the CFO used SPVs to conceal debt resulting in much lowered debt/equity levels. The cfo also went to jail along with Skilling.
But what necessitated the declaration of bankruptcy in 2001?
Excellent explanation
Quite good explanation. A really shame the Enron case.
Thanks!
If the SEC approved of MTM on what grounds did they have to arrest Lay/Skilling?
Really well explained. Subscribed sir!!
Good job, thanks :)
No mention of the SPEs? That was a major component of the scandal
Pls correct me if i'm wrong:
To simplify, there were 2 main problems Eron faced in 1997: hide there debts and raise there revenue.
1) to hide there debts, Enron used SPEs and off-balance sheet transactions to transfer bad performing assets and interests from loans from Enron to its SPEs.
2) to earn revenue, Enron used some tricks such as MTM (mentioned on the video) and "agent model" (instead of recording only brokerage and trading fees as revenue, Enron record full value of transactions).
Sry for my bad English.
Up
Up
How did Enron explain away the difference between their financial statements, and their tax returns?
how to discover:
financial assets fraud of a company. like it would be hard to discover. im curious the methods used. since so hard to discover it is probably very common crime by big companies. this can be used mislead investors, bankruptsy fraud, and much more, and tax fraud.
also how to discover complex web of subsidiaries and other business entities used in these schemes. enron had 1000s of alternate companies to facilitate the crimes. but i wanna know how can this be discovered.
I really appreciated it.
Thanks a lot for the great video! I do have one question though. From my understanding (I have studied only IFRS), MTM basically refers to stating assets at FV and Enron inflated its profits by recording FV gains from these assets (whereby these assets were the deals/projects they were working on). However when presenting FV gains in the income statement, don’t we usually report it under ‘other income’ (as opposed to revenue) and then term the line item as FV gains?
I don’t know whether this type of presenting was not done back in 2000 but if it was, I am wondering why analysts didn’t notice that the company’s profit was mainly coming from FV gains. Usually when we analyze companies now, we always exclude FV gains as those are just accounting one off entries.
From what I understand from the video, it is not exactly the FV of assets, but the PV of all expected cash flows of a project and recorded all at once in the SoPL. That's crazy and sounds unbelievable. I also wonder the same question how much different is the accounting back in 2000 vs. now?
Really good explanation !!! thanks a lot
Glad you liked it
Also, you didn't mention Andy Fastow, CFO, who's now a speaker. He starts by showing his year 2000 national account of the year award, the. Shows his 2001 Department of Corrections ID card.
Why is no one talking about SEC who authorized MTM for enron after initially rejecting it?
Excellent video. Can you do a video on svb
Thank you for sharing ❤
very interesting video thanks for explain everything about that
🙏 thanks
Thank you so much
Great explanation
This sounds crazy but the SEC approved MTM. If that's what the scandal was all about how was it illegal?
I don't get it, why did SEC approved MTM for ENRON? One of the few basics that I learned in accounting school was always provide for losses but never provide for gains in the books. That's why we have provision for doubtful debts instead of provision for expected revenue. This MTM is a violation of that.
Your channel is much valuable ♥️♥️♥️
Thanks mhd!
really helpful video. very well done
Thanks cooper!
So SEC who approved MTM is completely innocent.