The document discusses the rise and fall of Enron, detailing its unethical business practices, such as manipulation of financial statements and lack of transparency, which ultimately contributed to its collapse. It highlights the roles of various stakeholders, including management, employees, and auditors, while emphasizing the impact of corporate culture on decision-making. The document concludes with recommendations for preventing similar events in the future, such as regulatory reforms like the Sarbanes-Oxley Act.

1. Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

2. Plan of the
Presentation
• Brief of case….. just
a brush up.
• Boundaries of the
case study –
relating facts.
• Pictures.
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

3. Relevant Factors to the Case Study
• Social Environment – Ethics, Value and Culture.
• Political Environment – Marriage of Convenience.
• Legal Environment – Bending the Rules.
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

4. Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

5. The Rise & Shine…
• 1985 – Houston Natural gas + InterNorth Omaha;
Distribution of Natural gas.
• 1986 – Kenneth L. Lay becomes CEO.
• Regulated energy industry till 1980s.
• Deregulation – greater efficiency, better service and
lower prices – Volatility and increased Risks.
• Jeffery Skilling’s ingenious solution – Gas Bank.
• Played Risk v/s Premium to milk the system.
• ‘Options’ and ‘Swaps’.
• 1990 – CEO of Gas Bank; 2001 – CEO of Enron; Lay
becomes chairman.
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

6. …..The Rise & Shine
• Mid 1990s – highly profitable but plateaued.
• Similar sports on identical playing grounds:– Electricity (from gas fired plants).
– Water and Wastewater Businesses (UK).
– Broadband (GE).
– Pulp, Paper, Lumber and Newsprint (clickpaper.com).
• 2001 – Neck deep into Metals, Spl Chemicals, Coal,
Plastics, Emission Crediting, Commodities.
• 1500 traders in corporate office; 1800 products.
• 19000 employees; $100 Bn+ Revenue; 7th in F500.
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

7. Era Business School, New
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8. The Inside Story
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

9. Work Environment
• Strenuous hiring
process.
• Lack of job security.
• Handsome rewards.
• Loan waivers.
• Huge compensations
for top brass.
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

10. Tentacles in Politics
• Huge expenditures on
lobbying.
• Large contributions towards
election campaigns.
• Influenced policy making:– Commodities Future Regulation.
– Securities and Exchange
Commission.
– Commodity Future
Modernization Act.
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

11. Window Dressing of Accounts
• Diversification involved high capital investments.
• Debts incurred; credibility at stake.
• A series of Special Purpose Entities (SPEs) formed
through manipulation; CFO Mr Fastow played a
major role in such deals.
• Existing rules violated; debts transferred to SPEs.
• Revenue manipulated by misusing clauses like:– Market-to-Market Accounting
– Sham swaps
– Prudency Accounting.
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

12. Hand-in-Glove
• Board of Directors – loyal to individual rather than
company; huge compensations.
• Code of ethics broken.
• Auditors (Arthur Andersen) received huge fees;
chose to support mal-practices. Office space
shared; defied own Professional Standards Group
(PSG) objections; both internal and external audits.
• Andersen worked furiously to hide important
information about debts and liabilities.
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

13. Slide and Fall…
•
•
•
•
•
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•
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March 2001- Media questioned share prices.
July 2001 – Slide in share prices began.
August – CEO, Skilling resigned; Lay took over.
Lay makes a false claim about financial health.
Sherron Watkins, VP and an accountant, wrote to
Lay, recommending expert review.
Lay follows her advice but only till a point.
Vinson & Elkins, old legal pals, clear the name.
22 Oct - SEC probe begins; Fastow is fired.
‘Restatement’ of all accounts dating back to 1997.
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

14. …….Slide and Fall
• Suddenly, profits turn into losses.
• Company tries to sell itself to Dynegy (a competitor
and a long time rival) for $8.9 Bn; unsuccessful.
• Rating changed to JUNK and share price ($ 90 per
share 1.5 years back) dips to below $ 1.
• Tried to pull strings to secure bank loans but
political and administrative pals refused to help.
• “ Companies come and go…..they get to pay the
consequences of bad decisions or enjoy the fruits of
good ones” – Paul O’Neill, Treasury Secretary.
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

15. Issues Involved….
• Social Conflicts.
– Claimed to be ‘Good Guys’.
– Hire and Fire policy over-shadowed ‘rewards’.
– Unethical business practices like lobbying, hiding info,
manipulation of accounts and granting favours to people
who mattered eg ex- bosses of regulatory bodies.
– Unethical exploitation of loop holes in the system
through SPE and revenue manipulation.
– Breaking of ethic code by allowing Fastow (CFO) to be a
partner in the major SPE, LJM.
– The whistle-blower.
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– Sudden re-statement of finances -AJ/ Ajay KBn lost. 2012$ 70 Raina; PGDM

16. …..Issues Involved….
• Political Connect.
– Lay’s association with Federal Energy Commission
under Nixon’s administration.
– Personal linkages with Bush family.
– Role in deregulations that meant business.
– Huge donations.
– When political masters said, “Who You!”
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

17. …..Issues Involved
• Beating Legal Tangles.
– Exemptions from oversights.
– No thorough examination of annual reports.
– “If the regulators in Washington were asleep, it was
because the company had made their beds and turned
off the lights”.
– SPE, MTM, Prudency Accounts formats taken for a ride.
– Auditors’ role – sham audits.
– Legal firm’s role – sham scrutiny.
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

18. Discussion Questions
• Who were the key stakeholders and to what
degree were they hurt?
• What factors most contributed to the
collapse?
• What steps should be taken to prevent similar
events from occurring in future?
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

19. Stakeholders….
•
•
•
•
•
•
•
•
•
•
Share holders.
Management.
Employees.
Creditors.
Customers.
Houston Community.
Govt.
Auditors?
Politicians?
Administrative New
Officials?
Era Business School,
AJ/ Ajay K Raina; PGDM 2012-

20. ….Stakeholders….
• Management made money and personal empires.
• Employees lost their livelihood and lifetime savings.
• Customers were left in wilderness as the services
shut down.
• Houston community got affected by loss of jobs and
sinking of share wealth.
• Govt made certain decisions that were made under
unfair political pressures.
• Auditors, Politicians and Officials made merry.
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

21. ….Stakeholders
• Enron's shareholders lost $70 billion ($40 to $45 billion
was attributed to fraud).
• As Enron had nearly $67 billion that it owed creditors,
employees and shareholders, it held auctions to sell
assets including art, photographs, logo signs, and its
pipelines.
• Only $ 15 Bn could be recovered and distributed
amongst stakeholders.
• Linda, Lay’s wife, sold roughly 500,000 shares of Enron
ten minutes to thirty minutes before the information
that Enron was collapsing went public. She was not
tried for any offence.
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

22. Discussion Questions
• Who were the key stakeholders and to what
degree were they hurt?
• What factors most contributed to the
collapse?
• What steps should be taken to prevent similar
events from occurring in future?
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

23. Factors
• Most of the points have been explained. Summary
of the points is as under:•
•
•
•
•
•
•
Fiduciary failures.
High risk accounting.
Extensive Undisclosed Activities.
Conflicts of Interest.
Excessive Compensation.
Lack of Independence.
Ethical Procedure Breakdown.
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

24. Discussion Questions
• Who were the key stakeholders and to what
degree were they hurt?
• What factors most contributed to the
collapse?
• What steps should be taken to prevent
similar events from occurring in future?
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

25. Recommended Steps…
• While a study of the underlying factors, as
explained above, would point towards the steps
required to be taken, a look at the actual steps
taken in USA will give us a fair idea about the same:– Sarbanes-Oxley Act 2002 : The mirror image.
• Establishment of the Public Company Accounting Oversight
Board.
• Standards for the preparation of audit reports.
• Restriction on providing non-auditing services when auditing.
• Provisions for the independence of audit committee members.
• Executives required to sign off on financial reports
• Relinquishment of certain executives' bonuses in case of
financial restatements; and expanded financial disclosure of
companies' relationships with unconsolidated entities
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

26. ….Recommended Steps…
• NYSE Provisions 2002:– All companies must have a majority of independent directors.
– Independent directors must comply with an elaborate
definition of independent directors.
– The compensation committee, nominating committee, and
audit committee shall consist of independent directors.
– All audit committee members should be financially literate. In
addition, at least one member of the audit committee is
required to have accounting or related financial management
expertise.
– In addition to its regular sessions, the board should hold
additional sessions without management.
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

27. Conclusions…
Common Sense
• Innovations pay.
• Foresight and inside information do help companies
with connections.
• Business plans are more likely to fail than succeed.
• Expansion and diversification are alright but asset
growth can not be faster than profit growth.
• Unethical practices land you in soup sooner or later.
• When ships begin to sink, rats jump off first.
• There are no permanent friends AJ/ Ajay K Raina; PGDM 2012in politics.
Era Business School, New

28. …..Conclusions
The Underlying Cause : Ethical Breakdown
• Culture – harsh (20% rule) and condescending;
emphasized competition and financial goals .
Implications:– Deception; looking good = survival.
– Hiding faults led to cheating = mass cheating.
– No sharing of info; no grooming = falling proficiency.
– Focus on money and not wealth = self interests.
– No concern for employees = no concern for company.
– Both executives and most of employees behaved
unethically when they encountered conflicts of interests
– political linkages, audit manipulations, share prices.
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

29. Repercussions
• Here, we saw the weakness of human beings; when
the executives encountered dilemmas, they chose
the wrong way.
• It took Enron 16 years to go from about ten billion
dollar assets to more than sixty-five billion dollar
assets, and took twenty-four days to go bankrupt.
• Employees lost their jobs and pensions, and
investors lost billions of dollars.
• Two years after the collapse of Enron, Arthur
Andersen went from an international firm of 36,000
employees to a state of nonexistence. Raina; PGDM 2012Era Business School, New
AJ/ Ajay K

30. What is the Way Out?
• Importance of correct corporate culture because it will
impact the decision of both the employees and
employers when they face ethical dilemmas.
• Need to build and follow a robust ethics infrastructure.
• It is an ethical dilemma—protecting our own interest
with a predicted harm to all the investors, or just
protecting most of stakeholder’s interest and give up
our own short-term interest. Ways out?
– As per the Utilitarian Theory, ‘resolution of ethical dilemmas
requires a balancing effort in which we minimize the harms
that result from a decision even as we maximize the
benefits’.
– The Categorical Imperative theory states a standard ‘you
cannot use others in a way that gives you a one-side benefit’.
– OR simply, ask ourselves the following three questions: Is it
legal? Is it balanced? How does it make meRaina; PGDM 2012Era Business School, New
AJ/ Ajay K feel?

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32. Era Business School, New
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33. Do You Find Anything in Common?
ENRON
Era Diversification; ever rising
Business School, New
ITC
AJ/ name and fame
stock prices,Ajay K Raina; PGDM 2012-

34. Fortunately, Enron and ITC
are different despite the
Stated similarities.
Matter of :- Ethics;
- Time factor involved;
- Efficacy of systems.
Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-

35. Share Price Dynamics
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36. Era Business School, New
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37. In the Titanic, the captain went
down with the ship. And Enron
looks to me like the captain first
gave himself and his friends a
bonus, then lowered himself and
the top folks down the lifeboat
and then hollered up and said,
'By the way, everything is
going to be just fine.‘
U.S. Senator Byron Dorgan
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AJ/ Ajay K Raina; PGDM 2012-

38. Era Business School, New
AJ/ Ajay K Raina; PGDM 2012-