The smartest guys in the

room

CASE STUDY OF CORPORATE ETHICS & GOVERNANCE

PRESENTED BY(GROUP-4):
AT U L YA D AV R O L L N O 7
DEEPIKA DUBEY ROLL NO 13
D E VA G U P T H A P U S A N D I LYA C H A R A N R O L L N O 1 4
PRAKITISH BARUAH ROLL NO 28
RAMANJANEYULU GALI ROLL NO 33
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 V i s i o n a n d Va l u e s
Missed Vision
Enron's vision is to become the
BUSINESS SEGMENTS world's leading energy company -
creating innovative and efficient
energy solutions for growing
economies and a better
environment worldwide.
Natural gas
Energy trading
providers Lost Values
- Respect :- We treat others as
we would like to be treated
Enron ourselves.
- Integrity :- We work with
corporation customers and prospects
openly, honestly and sincerely
- Communication :- We have an
Weather trading Broadband obligation to communicate
- Excellence :- We are satisfied
trading
with nothing less than the very
best in everything we do.

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Business operations
- Company started its operations as a Natural gas providers
- Kenneth Lay was instrumental in deregulating energy market of US
- First sign, Vahalla Scandal – two oil traders gambled on behalf of the company
and moved the money into their offshore accounts.
- With the entry of Jefferey Skilling, Enron begin to Energy trading in stock
markets
- Enron later ventured in weather trading, selling futures of weather predictions.
- At the verge of downfall Enron ventured into broadband trading to provide
streaming services, this was a failure due to immature technology yet this did
not stop Enron from making entry into the books using Mark to Market
accounting

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Enron - Rise & fall

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Enron - Rise & fall

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Enron – Rise & fall

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FABRIKAM 7
 Corporate governance issues of Enron

- Accounting and financial reporting by “cooking the books” and “window

dressing”
- Conflict of interest using related entities in business transactions and building
relations with auditors and regulators.
- Corporate culture with dysfunctional incentive schemes for executives
- Business model of risky financial trading and counter productive incentives for
sales staff.
- Lack of duty of care discharged by Board

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 Deregulated the natural gas market to set the price on their own
Used mark to market accounting principle to register the profits of the future in the
Enron
present
Creation of shell companies (SPE’s) to channel the debt funded to Enron

In fear of losing business opportunity to the competition, proper audit was not
Auditing and conducted. The financial records as shown by the company were never questioned.
legal firms Enron used to pay a hefty fee to the firms

In anticipation of high return on the ever rising stock of Enron, big firms like JP
Investors Morgan chase, Citi bank, Merrill Lynch with 80 other firms invested in the SPE of
Enron

Traders of Enron were very aggressive. The only objective was to make more
Employees money in order to earn high incentives. “Survival of the fittest” theme was
prevalent in the organization culture

With the political influence of Enron. SEC & FERC never monitored in the
Government operations of Enron. FERC chairman was adopted upon the recommendation of
Kenn Lay.
Laissez faire policy of the US, in fact fueled such motto of Enron
 Jeffrey Skilling – The fraudster
- Aggressive business man. He believe that the single motto of the company is to earn
money
- He is the one who pulled Enron into risky financial trading majorly in energy
commodities.
- He proposed to follow the mark to market principle earn money for business based on
speculated future profits.
- Key member in creating Enron Illusion, becoming the darling of wall street
- He had a passion for adventure and also strongly believed in the instinct of survival of
the fittest.
- Implemented Performance review committee – Rank the employee on a rating of 1-5.
10% of employee should be ranked 5. popularly known as Rank and Yank method.

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Influence on Enron Employees

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 Ethical perspective

Utilitarianism Theory Deontological Theory

• Utilitarianism is an ethical theory that determines • According to Kant under the deontological ethics theory,
right from wrong by focusing on outcomes. the rules are more important than the outcome.

• Top executives of Enron are only interested in creating • In the short term, those involved in faulty accounting
self wealth by incentive pay from rising stock price. practices benefited monetarily from their poor choices. In
• Use of faulty account practices and SPE’s is approved the long term, those same individuals face prison time,
by the board. which didn’t end up serving the good of the company at all.

• Arthur Anderson shown Conflict of interest. On

questioning on Revenue recognition, transactions
with SPE;s, mark to market, Hefty annual audit fees

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 Deregulation and Free Market

What Enron did? Ethical Prespective

• When California deregulated its energy industry, • As per Bentham’s Formulation of Utilatraism , Man is
Enron was able to manipulate the new regulations set under two great masters pain and pleasure. Enron
by California to cause rolling black-outs. Enron asked used these masters to make more revenue for the
the power plants it controlled to create artificial company and traders
power outages, and used these shortages to
• Enron over looked the consequences of having
speculate that the price of energy would go up. In
everyone follow a particular rule and calculates the
other words, loop holes in the new regulations
overall utility of accepting or rejecting the rule.
opened the door for Enron to manipulate the system
to the detriment of the people of California

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 Accounting Tricks

What Enron did? Ethical Prespective

• Opening up multiple companies • Since we are unable to foresee with absolute

• Mark to market accounting certainty what the consequences of an action are, we

• Frequent movement of Assets merely guess at what the best action is for us
(Practical Problem with Uilitariansim )
• Complicated Long-term Contracts
• It is unfair to hold us morally responsible for making a
• Future Options
mistake based upon a lack of information which is
• Hand in Glove with Auditors
caused by no fault of our own (Practical Problem with
• Inside Trading Utilitarianism )

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 Enron Culture

What Enron did? Ethical Perspective

• Aggressive to Employees • By concentrating exclusively on consequences,

• Fire the non-performers frequently utilitarianism makes the moral worth of our actions a

• Find Loop Holes in the System matter of luck. The outcomes were-

• Go for the Idea, Not worrying about the ways and • Greed

means • Arrogance

• No Integrity

• No Limits

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 Ethical perspective
• One way that managers can help create and
maintain ethically praiseworthy business
practices is by cultivating an ethical culture
within their organizations.
• Most companies also have employee codes of
conduct. However, the relative importance of
the stated values and code of conduct of an
organization differ from company to company.
• Other companies may create a values statement
largely for its public relations value and altogether
ignore it in the day-to-day operations and strategic
planning of the organization; Enron is a famous
example of such a company.
• At such companies, employee code violations may
be ignored in cases where employees bring in
substantial revenues or otherwise gain favor with
management. Such a company lacks integrity.
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 Empirical research work – Enron case
U s i n g t h e E n r o n f i l m t o e x a m i n e s t u d e n t a t t i t u d e t o w a r d s b u s i n e s s e t h i c s
S t a t e U n i v e r s i t y o f N e w Yo r k a t O s w e g o

• The research outlined in this study examines – “The effect of the film Enron” and students attitudes towards business ethics.

METHOD

• 57 undergraduate students were participated in the study

• Divided into two major groups- Experimental group and the control group. Experimental group were given a brief lecture on BE,
the Enron film, discussion questions to answer outside of class as homework and an assignment to read “The Emperor’s New
Clothes” and compare the fairytale to Enron case. The control group received an unrelated lecture on motivation in the
workplace, they did not view Enron film nor did any activity like the other group.

• ATBEQ (Attitude Towards Business Ethics Questionnaire) was administered to both the experimental and the control groups
after the experimental manipulation.

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• The sample was 56% male and 44% female. The control group was slightly younger than the experimental group.

• Questionnaire consisted of 22 items, each having five point Likert scale where 1 was “strongly disagree” and 5 was “strongly
agree”.

• Student’s written responses to questions about the film were coded and content analyzed using a qualitative analysis method.

• Descriptive statistics for ATBEQ items was noted (attached along)

• HYPOTHESIS- H1: Students in the experimental group will develop more positive attitudes towards the importance of ethical
behaviour in the workplace.

STUDENT REACTION TO THE FILM:

• Students reacted positively to the film and subsequent discussion, and watched the film with riveted attention.

• Qualitative analysis of students sheds some light on quantitative results like- film takes a negative view of deregulation, artificial
power outages, manipulating the system.

• Experimental group, after viewing the film, agreed to a greater extent that business decisions involve economic factors but no
moral philosophy and agreed to a lesser extent that business people act according to moral principles.

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RESULT AND CONCLUSION:

• Compare to controlled group, students in the experimental condition reported results that were significantly
different (p≤.05 or lower) on six of the 22 ATBEQ items, more than would be expected by chance.

• Students that participated in the Enron class exercise agreed to a greater extent that the only moral of business is
making money, business decisions involve economic factors but no moral philosophy, and that self sacrifice is
immoral.

• On the other hand, students in the control group agreed to a lesser extent that business people act according to
moral principles, business people that act lawfully cannot go wrong, and that conditions of a free society will best
serve the needs of society.

• The experimental and control group did not differ with respect to ethic mindedness.

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Today, Fastow lectures on corporate ethics before students and business groups, and he works
with an artificial intelligence company that seeks to help businesses root out fraud.

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• Skilling served by far the
longest sentence of any of the
Enron defendants.
• He was released from prison
in Feb 2019
• According to sources, Skilling
is planning to make re entry
into energy business using the
present day technologies.
• Skilling has been discussing
his ideas with, the sources
said, is Lou Pai, the former
head of Enron’s Energy
Services division

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• Former Chairman Kenneth Lay
was convicted in the 2006 trial
but died before he could be
sentenced

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 Reforms post Enron Scandal

• Establishment of Public Company Accounting Oversight Board ‘to oversee the audits
of public companies in order to protect investors and the public interest’.
• Rotation of auditors every Five years.
• Auditing committee to be comprised of independent directors.
• CEO & CFO to sign on the financial records and take the accountability on them.

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Issues with ENRON

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THANKYOU

FABRIKAM