ENRON

TEAM RED 5
- HUIYING , APPURVA, SREYASHI,
KAMPAL AVALEE
Enron Scandal – An Introduction
 At the end of 2001 it was revealed that Enron’s financial reporting was sustained by a
systemic and creatively planned accounting fraud.

 The actual losses resulted in the bankruptcy of the U.S. energy, commodities, and services
giant, Enron Corporation; and the dissolution of Arthur Andersen, which had been one of Big
Five auditing companies in the world.
 The collapse of Enron, which held more than $60 billion in assets, involved one of the
biggest bankruptcy filings in history.

The scandal generated much debate as well as legislations to improve accounting practices,
and had a long lasting impact in the world of business and finance.
 Enron Major Events Timeline

1985 1990 1993 2000 2001

Enron formed New Business Misleading Own the The Fall
Models Fin Accounts internet After a series of
Houston Natural CFO Andrew Ken Lay and revelations involving
Invested heavily in irregular accounting
Gas, merges with Fastow began Skilling announced
overseas asset. Acted establishing to analysts that procedures
Internorth, a natural more like an numerous special- they were going to throughout the 1990s
gas company to investment firm and purpose entities. open trading for involving Enron and
form Enron. hedge fund, making These allowed their own "high- its auditor Arthur
Kenneth Lay profits off the margins Enron to transfer speed fiber-optic Andersen Enron filed
becomes the CEO of the products it traded liability so that it networks that form for the then largest
would not appear in the backbone for Chapter 11
through Enron Finance bankruptcy
its accounts Internet traffic".
Corp. headed by new
CEO, Skilling. Share prices $11 billion
soared shareholder losses
Enron – An Overview
In just 15 years, Enron grew to be America's seventh largest company, with 21,000 staff in more than
40 countries. Fortune voted it as the most innovative company 6 consecutive times.

But after the boom years in the 1990s , Enron faced increased competition in the energy-trading
business, the company’s profits shrank rapidly.

Company executives began to rely on dubious accounting practices, including a technique known as
“mark-to-market accounting,”

The troubled operations of the company were transferred to so-called special purpose entities
(SPEs), which are essentially limited partnerships created with outside parties. Enron abused the
practice by using SPEs as dump sites for its troubled assets.

As the deception unfolded the firm was forced to file for bankruptcy by December 2001.
The Ethical Dilemma at Enron – Applying the
Framework

The framework does not describe how

to make ethical decisions. But it helps
to explain the factors related to
ethical decision making.

In the following few slides we see how

each of the factors, played out in the
case of Enron Scandal.

Source ( Ferret et al)

Enron – The Ethical Issue Intensity
In hindsight the top management had very low sensitivity to the ethical dilemma of the
decisions that faced Enron at the time.

For example the use of special purpose vehicles was not illegal. But Enron’s top managers
used this practice to deceptively mask the company losses and make it seem profitable to
shareholders and the public.

Under people like Skilling , Enron’s financial claims were accepted at face value. But top
insider’s were aware how Enron had misused the mark-to-market accounting , in which
possible future profits were shown as currently real.
Enron – Individual Factors
• The board of directors permitted unethical decision to maximise their own wealth.

• Kenneth Lay (the Chair) was dishonest and continued lying to the public and employees
that Enron’s future looks perfectly bright and financial forecast is profitable for the
investors. He encouraged employees to buy more shares, even he began selling of his own
stocks.

• Jeffery Skilling (CEO) graduated from Harvard Business School and worked as a Chief
Operating Officer for several years. His bad leadership led him to rely on his past
achievements in manage a firm. He was high self-esteem which would not allow him to see
his faults and take corrections.

• Andrew Fastow (CFO) believed that he was being a hero for Enron in order to help
himself and Enron to make profit. He also claimed that anything he did was not crime.
Enron – Organisational factors
Enron’s corporate
culture:
“The World’s Leading Company”

• Culture of Risk-taking • Rank and Yank • Delivering bad news

• Focusing on business units system could result in the
to reach the profit • Encouraging “DEATH” , the
• Compensation is largely in intense problems were
form of stock. competition among covered rather than
• Failed to increase mid-long employees being communicated
term value of company. to management.
Enron – Opportunity
 The ethical framework suggests that the opportunity for unethical behaviour cannot be
eliminated without aggressive enforcement of codes and rules.

 Enron wilfully engaged in fraudulent accounting practices, silenced analysts who questioned
the company performance, engaged in insider trading , and engaged in cases of bribery at
the highest level to secure power project deal in India.
 These suggest that there was hardly any enforcement of ethical codes or rules.

 There is no evidence that suggests that ethical behaviour led to reward.

Enron – Business Ethics Evaluation
Often in business it is not clear whether the decision taken was entirely ethical or not. Therefore
critical thinking has to be applied to weigh the decisions.

In case of Enron, often the organisational culture set by the very top management was as if the
manipulation of accounting , the bribery , the insider trading practices , was not a big deal at all.

The top management a Enron maintained an illusion of a profitable company. They silenced
analysts who questioned or spotted any inconsistencies. The top managers used expletives to
retort back to anyone who questioned them. Thus setting a culture where the employees
mocked people who questioned the management, for their perceived meddling
Enron – Outcome
• 4500 employees lost their jobs

• Investors lost some $60 billion within a few days; for many it meant losing their old-age security.

• The pension fund for the company's employees was obliterated

• The auditing firm Arthur Anderson lost its accreditation.

• The rules for company financial reporting were drastically sharpened

• The close ties of the company's founder, Kenneth Lay, to US President George W. Bush – Lay was an important financial
supporter of Bush – came under sharp criticism
 In Conclusion…

Enron was becoming a virtual cult of creativity, often placing swagger over substance. New ideas were celebrated for their new
ness, for their potential; tried and true businesses like the pipelines were almost derided.
- Kurt Eichenwald
Q&A