enron group 10 - copy

8/2/2019 Enron Group 10 - Copy

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An ethical analysis of the ENRON fiasco

and learnings from it

Presented by Group10

Shikha Yadav(M-10-28)

Pradip Hedaoo(M-10-19)

Nijhum Bera(M-10-17)


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CONTENTS

History

Questions

Results Learnings

References


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CASE

Enron is known as the one of the largestfraud scandals in the United States history.As a result of the investigations, the

company was forced to file for bankruptcyin December 2001. In May 2006, Enrons

former chief executive, Jeffrey Skilling was

sentenced to 24 years in jail while the ex-chairman Kenneth Lay died of heart-attackin July 2006.


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Enron Corporation History A provider of products and services related to natural

gas, electricity and communications to wholesale andretail costumers

In 1985, Houston Natural Gas merged with Inter North toform an energy company based in Huston, Texas (US)

In 1986 when the company chose the name Enron Corp In 1987, after discovering the oil traders in New Yorkhave overextended the company's accounts by almost$1 billion, the company works its loss down to $142million

A year later, Enron Corp. opened its first overseas officein England

Jeffrey Skilling joined Enron Corp. in 1989 and launchGas Bank


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Contd In 2000, Enrons annual revenues reached $100 billion,

more than double the year before, reflecting the growingimportance of trading

In April 2001 Enron disclosed it had owned $570 millionby bankrupt California utility Pacific Gas & Electric Co.

While the top executives were likely aware of the debtand the illegal practices, the fraud was not revealed tothe public until October 2001 when Enron announcedthat the company was actually worth $1.2 billion less

than previously reported. At the end of the year Enrons shares closed at $8.63

per share, an 89 percent drop since the beginning of theyear.

, Enrons accounts for the previous four years had notshown the true state of its huge indebtedness.


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How SPEs work?


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What are the legitimate uses of SPEs? What happens if people are misusingSPEs AND are accounting for them incorrectly?

The principal uses of SPEs are

to obtain liquidity and favorable capitaltreatment by securitizing certain financial

assets, to assist clients in securitizing their financial

assets,

to create investment products for clients.

Unfortunately, in Enron's case, it appears that

many of the SPEs were created strictly for the

benefit of a select few members of top

management.


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What seemed to be failures that played a role in Enron's case? werethese failures systemic or particular to ENRON? Why?

Revenue recognition Mark-to-market accounting Special purpose entities Corporate governance Executive compensation Risk management Financial audit Audit committee Other accounting issues


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Analyzing the Fraud: Timelineand Financial Highlights

Auditor Discovered that they had made a mistake formore than a year

Oct, 16 Enron Press release - $ 618 million lossesfirst Qtrly loss in 4 years

Shareholders equity return down by $1.2 billion

Enron disclosed $591 million losses which werepreviously reported as profits

Qtrly filling showed Depleted cash situation and $690million Debt payment

S&P downgraded Its Credit rating to below investmentgrade


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Immediate repayment of $4 billion in off-balance sheet debt

Cancelled Merger with Dynergy

Enron Declared Bankrupt


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Results

Laid off 4000/20000 workers worldwide

Employees suffered through their 401(K) plans

Stock price depleted significantly within a short

span of time. ( from $90.75 - $0.26 )

It ended up lossing more than $1 billion in Oct &Nov 2001, rendering many 401K accounts

worthless. A market Capitalization of $60 billion valued

company destroyed all its value

Lost Trust and Confidence of all Stakeholders


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Conclusion

The Enron Corp. case - the biggest in a series of scandalsthat damaged the reputations of corporations in US

As a direct result, the Congress passed a law, called theSarbanes-Oxley Act which imposed stricter rules on auditorsand made corporate executives criminally liable for lying

about their accounts. The Enron scandal moved the balance of power away from

the company boards towards the investors. After the scandal there is more caution among corporate

executives about spinning off accounts that might be

inaccurate, as now they face criminal liability. However, thetemptation to boost stock prices has been a feature ofbooming markets mostly when the rewards for executives arehigh.

Sarbanes-Oxley is probably not the whole solution


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Learnings Enron has become the morality play of the new economy. It teaches

the executives and the American public the most important ethicslessons of this decade. Among these lessons are:

i. You make money in the new economy in the same ways you make moneyin the old economy - by providing goods or services with real value.

ii. Financial cleverness is no substitute for a good corporate strategy.

iii. The arrogance of corporate executives who claim they are the best and thebrightest, "the most innovative," and who present themselves as superstarsshould be a "red flag" for investors, directors and the public.

iv. Executives who are paid too much can think they are above the rules andcan be tempted to cut ethical corners to retain their wealth and perquisites.

v. Government regulations and rules need to be updated for the new

economy, not relaxed and eliminated.

True lesson of Enron: loss of trust and confidence ofstakeholder is disastrous


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References Chary, VRK, Ethics in Accounting. Global Cases and Experiences, 2004,

Punjagutta, The ICFAI University Press, India. Swartz, M and Watkins, S, Powerfailure:The Inside Story of the Collapse of

Enron, 2003, Library of Congress Cataloging-in-Publication Data , USA, ISBN 0-385-50787-9

Wells, J.T., Corporate Fraud Handbook. Prevention and Detection, 2004, NewJersey, The Association of Certified Fraud Examiners,Inc.,USA

Enron's Fastow gets six year term BBC news on line,http://news.bbc.co.uk/2/hi/business/5380394.stm March 25, 2007

Enron's Skilling ordered to jail BBC news on line,http://news.bbc.co.uk/2/hi/business/6174855.stm March 25, 2007

Lenient sentences for Enron execs, BBC news on line,http://news.bbc.co.uk/2/hi/business/6160328.stm March 20, 2007

Enron timeline (Business), Enron Fraud, http://www.securitiesfraudfyi.com/enron_fraud.html March 20,

2007.

Enron Financial Scandal, BBC Radio 4,http://www.bbc.co.uk/radio4/today/reports/archive/international/enron.shtml March 20, 2007.
http://news.bbc.co.uk/2/hi/business/5380394.stmhttp://www.securitiesfraudfyi.com/enron_fraud.htmlhttp://www.bbc.co.uk/radio4/today/reports/archive/international/enron.shtmlhttp://www.bbc.co.uk/radio4/today/reports/archive/international/enron.shtmlhttp://www.securitiesfraudfyi.com/enron_fraud.htmlhttp://news.bbc.co.uk/2/hi/business/5380394.stm


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THANK YOU

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