Enron Corp. - University of California | Office of The President

y Enron to keep high-debt assets like power plants off Enron's balance sheet. Alexander told Lay
that assertions of accounting irregularity were swirling within Enron and that there were stories of
deal-makers enriching themselves to the Company's detriment. When confronted, Lay simply said
he would have Enron's president look into the matter, ended the discussion and did nothing. Other
former Global Power executives agreed that this was an early example of Enron's aggressive
financial techniques and a precursor to the later deal-making with controlled entities that led to
Enron's collapse:
"We were the dead canary in the coal mine," Mr. Alexander said.
Accounting principles generally prohibit a company from basing its profits
on sales to a subsidiary. But Mr. Alexander's team worked closely with Enron's
accounting firm, Arthur Andersen, and its main law firm, Vinson & Elkins, to create
a corporate structure that allowed Enron to own 52 percent of the stock of Enron
Global Power and Pipelines while maintaining that the unit was independent enough
to characterize the sales as profit-making transactions ... Mr. Alexander said. "How
do you have a major interest without having control?"
New York Times, 2/20/02.
8. However, during mid-97, Enron encountered problems due to a huge ($400+ million)
loss on a British natural gas transaction and a $100 million charge due to MTBE transactions, which
called into question its trading skills and risk management capabilities and which resulted in analysts
downgrading Enron's stock and lowering their forecasts of Enron's future earnings per share ("EPS")
growth. Enron's stock price lost one-third of its value by the Fall of 97 and Enron's executives'
performance-based bonuses were slashed. These events were very disturbing to Enron's top
executives and Board members who were determined to halt Enron's stock price decline and get the
stock to advance back to much higher levels. They knew this could only be accomplished by having
Enron report stronger-than-expected financial results going forward, thus enabling it to credibly
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