Flash to Actual Audit Report September 25, 2001 Confidential Enron Americas (EA) Enron Assurance Services Enron Industrial Markets (EIM) Enron Global Markets

Flash to ActualAudit Report

September 25, 2001

Confidential

Enron Americas (“EA”)

Enron Assurance Services

Enron Industrial Markets (“EIM”)Enron Global Markets (“EGM”)

2Enron Assurance Services

Project Objective (EA, EGM, & EIM):

Our review was designed to identify and test key policies, procedures, and controls related to:

the tie-out between the Management Summary and Hyperion the reconciliations between the Daily Position Report (“DPR”) and General Ledger

(“G/L”) by product

the causes for and frequency of reconciling items and the magnitude of these variances

the reasonableness of frequent and infrequent reconciling items

Project Objective (EA, EGM, & EIM):

Our review was designed to identify and test key policies, procedures, and controls related to:

the tie-out between the Management Summary and Hyperion the reconciliations between the Daily Position Report (“DPR”) and General Ledger

(“G/L”) by product

the causes for and frequency of reconciling items and the magnitude of these variances

the reasonableness of frequent and infrequent reconciling items

Flash to Actual Audit

Enron Team Members:

AA Team Members:

Tom Bauer

John Boudreaux

Kate Agnew

Mark Meador

Allen Capps

Robin Dupuis

Georganne Hodges

Elaine Schield

Greg Whiting

Cassie Mayeux

Tracy Irvin

Sarah Brown

EA EGM

Tom Myers

Angeles Beltri

Jeff Smith

Mark Medwedeff

EIM

Allen Ueckert

Darin Talley

Kristen Hanson

Mike Moscoso

Shelly Wood

Donnie Myers


DPR to G/L Reconciliations DPR to G/L Reconciliations

Flash to Actual Sample Summary

Testing Procedures

• AALLP reviewed the entire population of DPR to G/L reconciliations from 1/1/01 to 6/30/01 by business unit and selected a sample as detailed below:

* Judgmentally selected based on risk and volume

^ Represents all reconciliations (Paper, Lumber, & Steel)

• From these samples, we judgmentally selected various frequent and infrequent reconciling items and requested and reviewed the associated support. We also met with client personnel and discussed the items selected, in order to gain a better understanding of the cause behind the specific items and the procedures conducted to clear those items.

Testing Procedures


* Judgmentally selected based on risk and volume

^ Represents all reconciliations (Paper, Lumber, & Steel)

• From these samples, we judgmentally selected various frequent and infrequent reconciling items and requested and reviewed the associated support. We also met with client personnel and discussed the items selected, in order to gain a better understanding of the cause behind the specific items and the procedures conducted to clear those items.

Business Unit

EA EGM EIM

Reconciliation Level

Book Profit Center Product

Sample Size

8* 6* 3^




Testing Procedures


Testing Procedures


EA (Books)

NG Price Options NG Price FT Intra East FT Denver LT Transport East FT Intra Central Power FT West

EGM (Profit Centers)

US Refined Products Interest Rate Affiliate Coal Weather US ARB US Residual Fuels

EIM (Products)

Paper Newsprint Pulp Recycled

Lumber Steel




Frequent Reconciling Items:

• Incorrect general journal (FI) entries Duplicated entries - booked twice Entries booked in reverse - debits that should have been credits G/L entries that did not get booked in the proper month are being booked in

subsequent months

• Entries booked to the the wrong Profit Center or book

• Inter-month timing differences between what has liquidated in one month and settled in a subsequent month.

• Outstanding 2000 items due to lack of time and resources in financial settlements as well as due to the complexities of the conversion from MSA to SAP

• 95 day true-up for weather products causing the need for a G/L adjustment

• Items that were booked as settled but not recognized as liquidated on the DPR because not properly captured in the liquidation system

• Gas Daily rates are incorrect when the last day of the month falls on a weekend

• Occasional differences between systems (for example, differences TAGG & ERMS) are allowed to flow through as reconciling items to be cleared once the Settlements group books the correct amount

Frequent Reconciling Items:

• Incorrect general journal (FI) entries Duplicated entries - booked twice Entries booked in reverse - debits that should have been credits G/L entries that did not get booked in the proper month are being booked in

subsequent months

• Entries booked to the the wrong Profit Center or book

• Inter-month timing differences between what has liquidated in one month and settled in a subsequent month.

• Outstanding 2000 items due to lack of time and resources in financial settlements as well as due to the complexities of the conversion from MSA to SAP

• 95 day true-up for weather products causing the need for a G/L adjustment

• Items that were booked as settled but not recognized as liquidated on the DPR because not properly captured in the liquidation system

• Gas Daily rates are incorrect when the last day of the month falls on a weekend

• Occasional differences between systems (for example, differences TAGG & ERMS) are allowed to flow through as reconciling items to be cleared once the Settlements group books the correct amount



Flash to ActualSample Summary

Infrequent Reconciling Items:

• Category on reconciliations called “NYMEX Income” where amounts booked to the G/L are incorrect due to accounting errors

• Broker fees not completely captured or not captured at all in the DPR

• Entries that should have auto-reversed in prior months that did not auto-reverse

• Changes in P&L due to the incorrect capture of closing prices

• Deals entered incorrectly into the system (for example TAGG) as financial instead of physical

• Transportation Spreads not discovered as a reconciling item during the financial close process are discovered during the DPR to G/L reconciliation process and cause a need to adjust the G/L

Infrequent Reconciling Items:

• Category on reconciliations called “NYMEX Income” where amounts booked to the G/L are incorrect due to accounting errors

• Broker fees not completely captured or not captured at all in the DPR

• Entries that should have auto-reversed in prior months that did not auto-reverse

• Changes in P&L due to the incorrect capture of closing prices

• Deals entered incorrectly into the system (for example TAGG) as financial instead of physical

• Transportation Spreads not discovered as a reconciling item during the financial close process are discovered during the DPR to G/L reconciliation process and cause a need to adjust the G/L



Flash to ActualOutstanding Reconciling Statistics

Enron AmericasAs of June 30, 2001

The following books were selected for further disclosure from our sample based upon risk and volume.

Enron AmericasAs of June 30, 2001

The following books were selected for further disclosure from our sample based upon risk and volume.

FT West Power

Pre 2001 Uncleared Income (982,499) (79,870,534) Pre 2001 Uncleared Loss 7,540,443 75,176,713 Net Pre 2001 Uncleared 6,557,944 (4,693,821) 2001 Uncleared Income (14,178,587) (167,258,709) 2001 Uncleared Loss 7,468,115 207,141,113 Net 2001 Uncleared (6,710,472) 39,882,404

Net Uncleared (152,528) 35,188,583




Enron Global MarketsAs of June 30, 2001

The following profit centers were selected for further disclosure from our sample based upon risk and volume.

Enron Global MarketsAs of June 30, 2001

The following profit centers were selected for further disclosure from our sample based upon risk and volume.

Refined Products Weather

Pre 2001 Uncleared Income 5,157,442 2,280,541 Pre 2001 Uncleared Loss (6,521,137) (2,290,198) Net Pre 2001 Uncleared (1,363,695) (9,657) 2001 Uncleared Income 19,207,534 6,550,294 2001 Uncleared Loss (10,528,915) (18,125,732) Net 2001 Uncleared 8,678,619 (11,575,438)

Net Uncleared 7,314,924 (11,585,095)




Enron Industrial MarketsAs of July 31, 2001

Enron Industrial MarketsAs of July 31, 2001

Paper Lumber SteelTotal Unreconciled Income (18,886,944) (185,423) (10,830,248) Total Unreconciled Loss 17,496,147 - 14,107,381 Net Unreconciled Balance (1,390,797) (185,423) 3,277,133


Flash to Actual

High Priority Items


Flash to Actual Audit ObservationsHigh Priority

Items to be addressed Action Step Target Date

Responsible Party

A Due to EIM being a newly formed business unit

in FYE 2001, the process of reconciling between

the DPR and G/ L for physical trading is

currently being implemented. Currently EIM

reconciles Paper, Steel, & Lumber separately,

and variances for each of these products

between the G/ L and DPR have been

established. However, there is an uncertainty

as to what comprises the majority of the detail

of these balances. Each month the new variance

balance is determined, all detailed variances

that can be isolated are cleared, and the

remaining balance is rolled to the following

month.

EIM should enhance its reconciliation process for

physical trading to ensure efficient and timely clearing

of items. Implementing a process similar to the one

utilized by EA & EGM would help ensure all variances

are detailed and cleared in as timely a manner as

possible.

11/ 30/ 01 Allen Ueckert/

Kevin Sweeney


Flash to Actual Audit ObservationsHigh Priority

Items to be addressed Action Step Target Date

Responsible Party

B EA and EGM have various reconciling items

related to FYE 2000 that are being rolled

monthly in the current reconciling variance

from the DPR to the G/ L for numerous profit

centers within the respective business unit. The

balances created have not been cleared in a

timely manner as a result of turnover in the

Settlements group. Thus the settlements

function has not remained current.

Compounding the problem for EGM is the fact

that they are a relatively new business unit

created approximately one month after the

implementation of SAP and the subsequent

transition from MSA.

Both EA and EGM personnel have informed us that

clearing these items is a priority and the ultimate goal

is to clear all reconciling items in a timely manner. EA

and EGM have committed to clearing FYE 2000

reconciling items by 2001year end. Both business units

should concentrate efforts on clearing these old

balances in the near future.

12/ 31/ 01 (EA)

12/ 31/ 01 (EGM)

Greg Whiting (EA)

Tom Myers (EGM)


Flash to Actual Audit

Low Priority Items


Flash to Actual Audit ObservationsLow Priority

Items to be addressed Action StepA EGM has variances called NYMEX Income on their respective

reconciliations. These represent swaps entered through a NYMEX broker.

The amounts are captured properly on the DPR; however, a single

individual in the EA group prepares a report to book the amount to the

G/ L that is based on links to various DPRs for “NYMEX Income”.

EGM personnel currently book an accrual to correct these errors and have

suggested implementing an internal confirmation process to ensure the

correct amounts are booked.

B EA, EGM and EIM (physical trading) have no documented procedures in

place for the DPR to G/ L reconciliation process. EIM currently has

procedures in place for the financial OA process.

EA, EGM, & EIM should document their procedures. This documentation

should include, but not be limited to:

a detail of the process,

the authorized approvers for the reconciliations and journal entries to

correct reconciling errors,

procedures for reducing the amount of recurring errors,

and limitations for how long an item can remain as a reconciling items

without being cleared.

C We noticed various inconsistencies in the method used to reconcile the

DPR to G/ L among the various books for EA and profit centers for EGM.

Thus it appears there is no uniform method for reconciling between the

DPR and G/ L within the different business units. This may ultimately

create difficulty to a secondary user who prepares a reconciliation.

EA, EGM, & EIM should utilize a uniform reconciliation method, within

each business unit, so that reconciliations are comparable, and can be

performed in a consistent manner. This standardization should improve

efficiency and minimize error.

Documents

Flash to Actual Audit Report September 25, 2001 Confidential Enron Americas (EA) Enron Assurance Services Enron Industrial Markets (EIM) Enron Global Markets