Post on 06-Apr-2018
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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.stm8/2/2019 Enron Group 10 - Copy
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THANK YOU