enron scandal- corporate governance

3. THE ENRON SCANDAL
A RECIPE OF CORPORATE SOCIAL IRRESPONSIBILITY
A presentation by team SYNERGY.

4. Team Members
1.AMBUJA
2.ASHWINI
3.ALLAMAPRABHU
4.AJAY
5.AMRUTA
6.BHAVNA
7.BHUVANA
8.CHAITRA
9.ARUNDATI
10.AKSHATA
11.JOEL

5. CONTENTS
1. Introduction to Enron
2. The Enron Scandal Summary
3. Lesson from Enron | Corporate governance
4. Conclusion | The bottom line

6. HISTORY - The Company Origins
• Enron began as Northern Natural Gas Company, organized in Omaha,
Nebraska, in 1930 by three other companies.
• The company's founding came just a few months after the stock
market crash of 1929.
• Public Offering in the 1940s.
• Northern continued expanding during the 1970s.

7. ENRON - Board of Directors
Kenneth Lay
Chief Executive Officer, 1986
Jeffrey Skilling
Chief operating Officer, 1991
Andrew Fastow
Chief Finance Officer, 1998

8. Brief Timeline Of
Enron Scandal
• Enron was a Houston-based natural gas pipeline
company formed by merger in 1985.
• By early 2001, Enron had morphed into the 7th
largest U.S. company, and the largest U.S.
buyer/seller of natural gas and electricity.
• Enron was heavily involved in energy brokering,
electronic energy trading, global commodity and
options trading, etc.

9. Continued…
• On October 16, 2001, in the first major public sign of
trouble, Enron announces a huge third-quarter loss of
$618 million.
• On October 22, 2001, the Securities and Exchange
Commission (SEC) begins an inquiry into Enron’s
accounting practices.
• On December 2, 2001, Enron files for bankruptcy.

10. BUSINESSES
OF ENRON
Enron was structured into seven distinct business units.
1. Online marketplace services
2. Broadband services
3. Commercial and industrial outsourcing services
4. Energy and commodities services
5. Project development and management services
6. Enron International
7. Enron Global Exploration & Production, Inc.

11. COMPANY
PROFILE
1. 7th largest company in Fortune 500 companies in 1999.
2. Publicly traded on the New York Exchange
3. Head quarters at Houston, USA
4. Enron’s sales in 1999: $ 40,112,000,000
5. Net Income: $ 893,000,000
6. Cash on hand at end of 1999: $ 288,000,000
7. Enron Board consisted of 17 top professionals from
different fields.
8. Enron collapsed and declared bankrupt in December 2001.

12. COMPANY
PROFILE
US Political connections
As of June 2000, Enron had contributed $ 10,265 to
Senator Slade Gorton’s Campaign.
As of January 2000, Enron had contributed $ 99,750
to George W. Bush’s Presidential Campaign.
Enron contributed more than $ 100,000 to Bush’s
campaign in 1994.

13. ACHIEVEMENTS
• For the fourth consecutive year, Enron has earned the
top spot as “America’s Most Innovative Company” and
the “Most Admired pipeline company” in the annual
Fortune magazine survey 1996-99.
• Forbes Global Business magazine ranked Enron the top
power company in the world in its inaugural A-list
companies as World’s Leading Power Company in 1999.
• “World’s Most Respected Companies”, 1998: Enron was
ranked the world’s 5th most respected chemical company
by the financial times.
• Enron ranks 73 on Fortune’s annual list of best
companies.

14. ACHIEVEMENTS
• In early 2002, Enron was awarded Harvard’s famous Ig
Nobel prize for the most creative use of imaginary
numbers.
• Best sales force in the Nation-Sales and Marketing
Management’s annual survey ranked Enron’s sales force
as the best in the nation for 1999.
• S&MM cited Enron’s sales force for its ability to “target
likely prospects, conduct exhaustive customer research,
gain respect from CEOs, and motivate business leaders
to abandon their ‘business-as-usual’ approach.
• Enron’s sales force was ranked 10th in the 1998 survey.

17. FINANCIAL
PERFORMANCE
• The dramatic collapse of Enron Corporation, following a
series of disclosure of accounting improprieties, has led
many to question the Soundness of current accounting and
financial reporting standards.
• First ,we examine Enron’s financial performance during the 3
years prior to it’s declaration of bankruptcy. This analysis
reveals increasing variability of key performance measures
from 1997 through 2000.
• Enron manages efficient, flexible networks to reliably deliver
physical products at predictable prices. In 2000 Enron used
its networks to deliver a record amount of physical natural
gas, electricity, bandwidth capacity and other products. With
our networks, we can significantly expand our existing
businesses while extending our services to new markets with
enormous potential for growth.

18. FINANCIAL
PERFORMANCE
• The system of internal controls of Enron is designed to
provide reasonable assurance as to the reliability of financial
statements and the protection of assets from unauthorized
acquisition, use or disposition.
• Accordingly, even an effective internal control system can
provide only reasonable assurance with respect to the
preparation of reliable financial statements and safeguarding
of assets. Further, because of changes in conditions, Internal
control system effectiveness may vary over time.
• Enron assessed it’s internal control system as of December
31st, 2000, 1999 and 1998, relative to current standards of
control criteria.

23. KEY PLAYERS
IN SCANDAL
• All the facts of the fall of Enron show that Kenneth Lay
(CEO) is a person who is dishonest and lacks integrity.
Under his leadership, Enron was involved in fraud,
causing investors to lose billions of dollars. In 2001,
although known the risky financial condition of Enron,
Lay still announced to employees and investors that the
future growth of the company has never been more
certain and urged them to invest in Enron stock further.
Meanwhile, in the August of 2001, he sold a substantial
amount of his own shares of stock. His announcement
increased the price of Enron’s stock further and
accelerated the bankruptcy of Enron. At last, Lay
destroyed the companies he built.
• CEO Jeffrey Skilling was responsible as ultimately it was
CEO that decided to fudge the numbers by keeping the
extent of Enron’s debt off the books.

24. • Arthur Anderson while not involved in creating the
fraud, shares some responsibility for not detecting it,
and for allowing the Enron Executives to bully them into
accepting audit irregularities.
• As the auditor they had an obligation to dig deeper but
were hesitant to do so because they had lucrative
consulting contracts that were ongoing with Enron.
• The CFO Andrew Fastow was clearly involved in the
fraud as he doctored the books and mislead the Board of
Directors and the auditors about the companies’
liabilities.
KEY PLAYERS
IN SCANDAL

25. THE EPIC
DOWNFALL
• On October 16th 2001, Enron’s creative
financial arrangements began to unravel.
• On December 2nd 2001, Enron made the
largest bankruptcy filing in histroy.

26. COLLAPSE OF
WALL STREET
DARLING
• Accounting Problem
• Corporate culture
• Preferential Treatment
• Inadequate Ethics Infrastructure
• Economic Risk
• Political Connections
• Social Conflicts
• Conflict of Interest
• Off-books financial entities
• Lack of Truthfulness

27. AUDITORS
ROLE
ARTHUR ANDERSEN & COMPANY: An Auditing Company
• It was an American holding co’ based in Chicago formerly one of the
“Big Five” accounting firms, the co’ had provided auditing, tax and
consulting services to large corporations. [Ignored the accounting
issues and was paid weekly $ 1 million (approx.)].
• In 2001 it had become one of the worlds largest MNC.
• In 2002 the firm voluntarily surrendered its licenses to practice as
certified public accountant.
• In the united states after it was found guilty of crimes in the firms
auditing of Enron an energy corporation based in Texas, which had
filed for bankruptcy in 2001.
• In 2005 the supreme court of united states unanimously reversed
Arthur Andersen’s conviction due to various errors in the trial
judges instructions to the jury that convicted the firm.

28. ACCOUNTING
FRAUD
• Enron corporation is often referred to as the “ENRON
SCANDAL” it was ranked as American’s 5th largest company
by fortune magazine in 2002, despite its 2001 bankruptcy
filing.
• Mark to Market method of Accounting and Revenue
Recognition: This method is legal way allowing to recognize
future returns from an asset at current market price.
• Special Purpose Entities; Different kinds of needs, hiding of
debt in the company by transferring it to SPE’s or SPV’s .
There by record less liabilities, higher profits and create cash
flows as well as to increase the stock’s value.
• Hiding Debt of Equity Management

29. CONSEQUENCES
• The losses and subsequent profits and debt restatements
caused Enron stock price to drop drastically.
• A number of financial institutions, including citigroup and j.P.
Morgan paid hundreds of millions in fine for their role that
contributed to Enron collapse.
• 62% of the pension fund was now worthless.
• The company paid its creditors more than $21.7 billion from
2004 to 2011.
• Investors, shareholders and employees lost some $74 billion
dollars in the four years leading up to its bankruptcy; for
many it meant losing their old-age security.

30. CONSEQUENCES
• 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: Sarbanes-Oxley Act (2002).
• Citizen’s trust in the American economic system was destroyed.
• Losses on the financial market amounted to the worst stock
value loss in peaceful times.
• 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.

31. CRIMINAL
CHARGES
• Arthur Andersen was one of the first casualties of Enron's
notorious demise.
• June 2002, the firm was found guilty of obstructing justice for
shredding Enron's financial documents to conceal them from
the SEC.
• Several of Enron's executives were charged with conspiracy,
insider trading, and securities fraud.
• Enron's founder and former CEO Kenneth Lay were convicted
on six counts of fraud and conspiracy and four counts of bank
fraud.

32. CRIMINAL
CHARGES
• Enron's former star CFO Andrew Fastow pled guilty to two
counts of wire fraud and securities fraud for facilitating
Enron's corrupt business practices.
• Former Enron CEO Jeffrey Skilling received the harshest
sentence of anyone involved in the Enron scandal.
• In 2006, Skilling was convicted of conspiracy, fraud, and
insider trading. Skilling originally received a 24-year sentence,
but in 2013 it was reduced by 10 years.
• As a part of the new deal, Skilling was required to give $42
million to the victims of the Enron fraud and to cease
challenging his conviction.

33. ROLE OF
WHISTLE
BLOWERS
• In 2001, Sherron Watkins was the vice president at Enron. After
reporting internally, the rampant fraud she discovered Enron was
committing, Watkins was fired, and her reputation tarnished.
• At that time, corporate whistleblowers in the U.S. had no legal
rights.
Sherron Watkins
The Whistle Blower
• Watkins began her career in 1982 at Arthur Andersen as an auditor.
• She spent 8 years at Andersen in both the Houston and New York
offices.
• She joined New York-based MG Trade Finance in 1990 to manage
their portfolio of commodity-backed finance assets until October
1993.
• She joined Enron in 1993 and departed in November 2002.

34. CORPORATE
GOVERNANCE
• Corporate governance describes all the influences that have
effects on the institutional processes of a firm.
• Corporate governance is a system designed to direct and
manage a firm that effects three main aspects used for judging
a firm’s success: objectives, risks, and performance.
• Corporate governance is about the responsibilities of a firm's
board in managing the firm and the board's relationship with
stakeholder.
• In achieving good corporate governance, it is required that all
participants in corporate governance systems ensure there is
accountability for their actions and that they fulfil their
responsibilities.

35. GOVERNANCE AT
ENRON
• In the Enron case, the weakness of corporate
governance that ultimately lead to Enron's demise was
caused by all participants, including the Board of
Directors, top executive officers, the internal auditor,
the external auditors, and whistleblowers as well.
• The Board did not build up an environment in which the
external auditor, the internal audit function, and the
whistleblowers could operate effectively.
• Enron’s management was greedy and acted in its own
self-interest, which seriously harmed the Corporation.
• Enron’s whistleblowers were not encouraged to come
forward.

36. PROPER CORPORATE
GOVERNACE MODEL
Corporate governance
attributes
Practicing good governance
Board structure and
processes
Providing effective oversight of the corporation
management actions, such as directly
controlling key business transactions,
maintaining regular meetings of the Boards,
carefully designing and governing executive
compensation, establishing proper procedure
for whistleblower protection, and separating
the role of CEO and the chairpersons.
Audit function Setting up the internal audit department to
enhance the integrity of corporate governance,
separating internal and external audit
functions, not paying higher fees to the
auditors for non-audit services than an audit.
Stakeholders rights and the
corporate culture
Formulating and strictly complying with the
Corporation Codes of Ethics and the Codes of
Conducts.
Reference: Corporate Ownership & Control / Volume 8, Issue 3, 2011, Continued - 6

37. This epic downfall of Enron was due to a number of factors.
But the deciding factor that led to the drastic collapse of the
company is the poor governance system, structure and
processes. Specifically in relation to the directors, its evident
that Enron’s Board of Directors did not fulfil their fiduciary
duties towards the corporation’s shareholders.
CONCLUSION:
THE BOTTOM LINE

38. REFERENCES
REFERENCEFORBUSINESS.COM
ARTICLE LIBRARY.COM
INVESTOPEDIA
JOURNAL OF ACCOUNTANCY.COM
IVEYBUSINESSJOURNAL.COM
CHRON.COM SPECIAL REPORT: “THE FALL OF ENRON”
WALL STREET JOURNAL “GLOSSARY OF QUESTIONABLE DEALS”
CORPORATE OWNERSHIP AND CONTROL|VOLUME 8,ISSUE 3,2011
ENRON: A FINANCIAL REPORTING FAILURE VOLUME- 48|ISSUE-4 ARTICLE 3- ANTHONY .H. JR.
WWW.NYTIMES.COM

39. THANK YOU