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Awa Traore
                         Benih Hartanti
                         Irwan Arfandi



Business Ethics Case

Masters...
Enron Company Profile
• Formed in 1985 by Kenneth Lay from a merger
  of Houston Natural Gas and Internorth  The
  first ...
Timeline of Enron’s Collapse
   Date                                       Event
20 Feb, 2001   Fortune Magazine story cal...
Timeline of Enron’s Collapse
   Date                                     Event
8 Nov 2001    The company took the highly u...
Enron’s Accounting Fraud Diagram
                          Enron
Seller                                           Buyer


...
Ethical Point Of View
The Systemic Issues
• White collar crime done by the vital executive
  in an organization (Enron and Arthur
  Andersen)
• ...
Corporate Issues
In Enron
 The Enron deception was practicing the
 accounting fraud by creating the SPS (Special
 Purpose ...
In Arthur Andersen Public Accountant
 As an organization of public accountant
 Arthur Andersen violated the regulation of
...
Individual Issues
• Moral Hazard conducted by several individual
  in a important role of an organization (CFO
  and Chief...
Suppose : Enron Acc. Practice allowed by GAAP
          and the stock was not fall
• This action still considered as an un...
The Guilty Parties
Andrew Fastow and with Arthur Andersen’s
Assistance set up a series of “limited
Partnership” called spe...
The Guilty Parties

                                               •   Jan. 10, 2002: Arthur Andersen says its
           ...
14
Conclusion
• Enron was a massive failure, partly because of its size, partly because of its
  complexity, partly because t...
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Enron Fall

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Enron Fall

  1. 1. Awa Traore Benih Hartanti Irwan Arfandi Business Ethics Case Masters of Management Group 3 Gadjah Mada University Yogyakarta - Indonesia 1
  2. 2. Enron Company Profile • Formed in 1985 by Kenneth Lay from a merger of Houston Natural Gas and Internorth  The first nationwide natural gas pipeline network in Houston, Texas • Enron pursued a diversification strategy by expanded pipeline business  involved natural gas trading
  3. 3. Timeline of Enron’s Collapse Date Event 20 Feb, 2001 Fortune Magazine story calls Enron a highly impenetrable Co. and stock was overpriced. 14 Aug, 2001 Jeff Skilling resigned as CEO, citing personal reasons. Kenneth Lay became CEO once again. 12 Oct, 2001 Arthur Anderson legal counsel instructs workers who audit Enron’s books to destroy all but the most basic documents. 16 Oct, 2001 Enron reports a third quarter loss of $618 million. 24 Oct 2001 CFO Andrew Fastow who ran some of the controversial SPE’s is replaced
  4. 4. Timeline of Enron’s Collapse Date Event 8 Nov 2001 The company took the highly unusual move of restating its profits for the past four years. It admitted accounting errors, inflating income by $586 million since 1997. It effectively admitted that it had inflated its profits by concealing debts in the complicated partnership arrangements. 2 Dec,2001 Enron filed for Chapter 11 bankruptcy protection and on the same day hit Dynegy Corp. with a$10 billion breach-of-contract lawsuit. 12 Dec 2001 Anderson CEO Jo Berardino testifies that his firm discovered possible illegal acts committed by Enron. 9 Jan 2002 U.S. Justice department launches criminal investigation.
  5. 5. Enron’s Accounting Fraud Diagram Enron Seller Buyer Mark To Market Method C O Overstated Original M Forecasted Price P Future Price paid for the A contract R E Debt Understated Special Purpose Entity Profit Debt & Sales Failing Revenue Investment
  6. 6. Ethical Point Of View
  7. 7. The Systemic Issues • White collar crime done by the vital executive in an organization (Enron and Arthur Andersen) • The crime is included not only as the crime in Law point of view but also as the organizational fraud which effect the whole shareholder of the organization.
  8. 8. Corporate Issues In Enron The Enron deception was practicing the accounting fraud by creating the SPS (Special Purpose Entity) which exchange the debt and failing investment into sales revenue in financial statement. This Fraud is done by the cooperation of Enron CFO, few of Enron people and Andersen’s chief auditor for Enron
  9. 9. In Arthur Andersen Public Accountant As an organization of public accountant Arthur Andersen violated the regulation of the Public Accountant practices because Andersen was not only as the internal auditor but also as the external auditor of Enron.
  10. 10. Individual Issues • Moral Hazard conducted by several individual in a important role of an organization (CFO and Chief Auditor) • Whistle blowing done by Sherron Watkins (Vice CFO) 10
  11. 11. Suppose : Enron Acc. Practice allowed by GAAP and the stock was not fall • This action still considered as an unethical behavior in business, because the basic intention for conducting this action is fraudulence. • If, this action is allowed by the GAAP and no one have the intention for conducting an any fraudulence action, so the unethical behavior would be the Whistle Blowing, because the related person basically has no right to share the company information to other without the authority of the company itself 11
  12. 12. The Guilty Parties Andrew Fastow and with Arthur Andersen’s Assistance set up a series of “limited Partnership” called special purpose entities Oct 2, 2002 : Andrew Fastow is arrested on charges of fraud and money laundering. He would eventually face 98 charges Jan 14, 2004 : Former Enron CFO Andrew Fastow agrees to a plea agreement and a 10-year prison sentence. He pleads guilty to one count of conspiracy to commit wire fraud and one count of conspiracy to commit securities Enron’s Former CFO, Andrew Fastow fraud. He also agrees to co-operate with federal prosecutors. 12
  13. 13. The Guilty Parties • Jan. 10, 2002: Arthur Andersen says its employees destroyed a quot;significant but undetermined“ number of Enron documents • David Duncan were cited as the responsible managers in this scandal as they had given the order to shred relevant documents • On April 9, 2002 he pleaded guilty; the maximum sentence for his crimes is ten years, but since he pleaded guilty and became a witness for the prosecution he would have presumably received a much smaller sentence. Lead Partner for Enron Account, David Duncan
  14. 14. 14
  15. 15. Conclusion • Enron was a massive failure, partly because of its size, partly because of its complexity, partly because the controls to protect the integrity of capital markets failed, and especially because of the massive greed and collusion of key participants. Management failed, auditors failed, analysts failed, creditors/bankers failed, and regulators failed. The intersection of multiple failures sent a signal of structural problems. Suddenly, the consequence of deceptive financial data resulting from structural failure in the capital markets was not merely a hypothetical possibility. The speed with which the system responded indicates the importance of fairly presented financial information. 15

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