An agency problem involves the functioning of a typical Principal- Agent relationship. The problem here is ensuring that the agent acts in the principal’s interest, rather than his own. The agency problem occurs due to the fact that the agent has better knowledge of the facts of a given transaction as opposed to the principal and thus the principal has no assurance that the agent’s actions were indeed in his best interest. There are 3 basic types of agency problems 1. The first problem is a conflict between the owners of a firm and the hired managers. 2. The second type of problem is the conflict between the controlling owners of a firm who hold majority and the non- controlling, minority shareholders.3. The third type of agency problem is the conflict between owners of the firm and third transacting parties such as creditors, customers and other employees.  Enron is known as the one of the largest fraud scandals in the United States history. Enron corporation was an American energy, commodities, and services company based in Houston , Texas. Enron formed in 1985 by Kenneth Lay. During 1985, it bought the smaller and less diversified Houston natural gas company. The company initially named itself “HNG/inter North Inc., however was later renamed to “Enron”. Satyam Company Services Ltd. was incorporated on June 24, 1987 Promoters holding of the shares in 1992 was 18.78% Main business of the company was IT related fields and it came into prominence after Y2K problem In 1991, it was in a rented house having 10 Engineers. Company was listed in Bombay Stock Exchange in 1992 company bags its first fortune 500 client John Deere & Co  Revenue crossed $2 Billion -2008 Listing in NASDAQ, USA- 1999 Listed on New York Stock Exchange- 2001 

1. TUNNELING V/s
AGENCY EFFECT: A
CASE STUDY OF
ENRON & SATYAM
Yashleen, Sukhsimran, Harjot

2. INTRODUCTION
 An agency problem involves the functioning of a typical Principal- Agent relationship. The
problem here is ensuring that the agent acts in the principal’s interest, rather than his own. The
agency problem occurs due to the fact that the agent has better knowledge of the facts of a
given transaction as opposed to the principal and thus the principal has no assurance that the
agent’s actions were indeed in his best interest.
 There are 3 basic types of agency problems
1. The first problem is a conflict between the owners of a firm and the hired managers.
2. The second type of problem is the conflict between the controlling owners of a firm who hold
majority and the non- controlling, minority shareholders.
3. The third type of agency problem is the conflict between owners of the firm and third transacting
parties such as creditors, customers and other employees.

3. COMPANY PROFILE : ENRON
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 Enron is known as the one of the largest fraud scandals in the United
States history.
 Enron corporation was an American energy, commodities, and services
company based in Houston , Texas.
 Enron formed in 1985 by Kenneth Lay.
 During 1985, it bought the smaller and less diversified Houston natural
gas company.
 The company initially named itself “HNG/inter North Inc., however was
later renamed to “Enron”.

4. COMPANY PROFILE : SATYAM COMPUTERS LIMITED.
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 Satyam Company Services Ltd. was incorporated on June 24, 1987
 Promoters holding of the shares in 1992 was 18.78%
 Main business of the company was IT related fields and it came into
prominence after Y2K problem
 In 1991, it was in a rented house having 10 Engineers.
 Company was listed in Bombay Stock Exchange in 1992
 company bags its first fortune 500 client John Deere & Co
 Revenue crossed $2 Billion -2008
 Listing in NASDAQ, USA- 1999
 Listed on New York Stock Exchange- 2001

5. ENRON SCANDAL
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6. Timeline
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2006
2006
2006
2006
2002
2002
2001
2001
2001
2000
1985
Enron was formed on
July1985 by Kenneth
Lay after merging
Houston Natural Gas
and Omaha based
InterNorth.
Jeffrey Skilling resigns
as CEO, and Kenneth
Lay becomes CEO
again
Enron and Dynegy
announces the $78
billion merger
agreement. It would own
64% and Enron 36%
The SEC widens its
investigation to include
Enron's chief auditor,
Arthur Andersen, due to
reports of document
shredding
Andrew Fastow is
sentenced to 6years in
prison, four years less
than his plea agreement
stipulated in January
2004.
Jeffrey Skilling is
sentenced to 24 years
and four months in
prison.
Enron reaches No. 7 on
the Fortune 500 list.
Sheron Watkins sends a
memo to Kenneth Lay
about accounting
issues.
U.S. Department of
Justice opens a criminal
investigation into
Enron's collapse.
The jury in the Enron
case finds former CEO
Jeffrey Skilling and
founder Kenneth Lay
guilty of conspiracy and
fraud.
Judge Lake erases
Lay's fraud and
conspiracy convictions.
This is a long-standing
legal practice of the U.S.
federal courts if the
defendant dies before
he/she has a chance for
an appeal to be heard.

7. 7

8. AUDITOR OF COMPAMY : ARTHUR ANDERSON
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• In July 2002, the one time big 5 accounting firm was found guilty of obstruction and
justice for shredding documents in the Enron case.
• Their Enron connections essentially put the entire firm out of the business, affecting
22,000 workers, most of them had no connection with Enron.

9. AUDITING FIRM’S RESPONSIBILITY
 Regarding auditing good governance requires high
quality standards for preparation and disclosure, and
independence for the external auditor.
 Enron’s external auditor was Arthur Anderson, which
also provided firm with extensive internal auditing and
consulting services.
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10.  Economic Risk - As Enron expanded beyond the natural gas pipeline
business, it also reached beyond the US borders. Enron International, a
wholly-owned subsidiary of Enron, was created to construct and manage
energy assets outside the United States, particularly in markets where
energy was being deregulated. This exposed the company to economic risk.
 Political Risk - International diversification, particularly in developing
economies such as India and China, exposed Enron to political risks. For
example, the Dabhol power project in India represented the single largest
foreign direct investment project until that time in India, and it attracted
considerable political opposition and controversy. Given its limited business
experience in developing economies, Enron did not have expertise in
managing the political risk of expropriation of its assets after the
construction of the plant.
REASON FOR THE FAILURE OF ENRON
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11. SATYAM

12. THE DISATROUS REVELATION
• The black day : 7th January, 2009
• Accounting fraud of over 7800 crore rupees.
• From the past 7 years accounting books were cooked:
-Profits were inflated.
- Understated liability and overstated debts.
- Accrued interests.
- The gaps in the balance sheets are due to the inflated
profits.
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13. 13
SATYAM SHARES – Biggest single day fall for stock in stock market
STOCK MARKET – BSE Sensex fell by 749.05 i.e. 7.25%
NSE fell by 192.40 points i.e. 6.18%
COMPANIES WORTH – 11464 Cr to 1607 Cr
All time low of Rs. 11.50 on 9th January and closed at 23.75 Rs/-
Compared to the highest of 524.90 Rs/- on may 29, 2008

14. HOW DID IT START?
CFO revealed during investigation:
 Started 6-7 years ago
 10 Crore was inflated to 200 Crore in Balance sheet.
 This marginal gap went on expanding over years
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15. 15
ENRON SATYAM
Enron debacle was the consequence of the failure of its
business model.
Satyam was consequence of the success of its
business model.
Enron is a classic case of agency cost. Satyam is a case of tunneling.
Enron started successfully in hardware and ultimately
failed because of the top management focus on
software where it took unreasonable risk.
Satyam started successfully in software and ultimately
failed because of the promoters unending thirst for real
estate.
In case of Agency effect, if managers have their own
way and investors are careless, the end result will be –
bankruptcy, that’s why managers will try to hide the
losses.
In case of tunneling the profit is siphoned and as and
when this fraud comes into public knowledge, this self
dealing could be stopped and company could be again
brought on track.
Enron invested heavily in Dabhol and lost badly due to
the change in government in Maharashtra which
became starting point of fall in Enron.
Satyam got listed in NASDAQ investors started reacting
negatively to the buyout of Mayatas which lead to
battering of Satyam.

16. RECOMMENDATIONS
We need to take some precautious activities, so that we can
eliminate these types of situations. Some of the activities are:
Bann of granting of government permissions on illegal practices
which provides the companies a window through which they can
generate black money.
We should focus upon CSR (Corporate Social Responsibility)
due to involvement of society to the business and these types of
activities affects it.
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17. RECOMMENDATIONS CONTID….
Auditors should perform their work ethically. Manipulations, over
profit, hiding loss etc. are the examples of unethical practices.
 Whole part of profit should avoid for investment. So that if we
suffer from any losses, we have the money with ourselves for
recovery.
 Risk management should be effective. Taking risk is good but
unnecessary taking risks should be avoided. So proper risk
measure tool should be used.
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18. CONCLUSION
 Enron should have public in stockholder reports. Many would
have saved all their money.
 Enron scandal should be a lesson for future businesses
involving ethical dilemmas.
 The scandal made the authorities realize the importance of
ethics and the importance INTERNAL CONTROL in business
enterprises.
 It also helped understand the real meaning of Shareholder’s
wealth maximization.
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19. CONCLUSION CONTID…
More scandals like Satyam can be avoided if –
 Auditing firm is honest
 SEBI plays an active role
 Periodic reviews of legal compliance reports by independent
directors.
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20. Thanks!
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