The document discusses the collapse of Enron, detailing its massive earnings inflation through unethical accounting practices and governance failures. Key figures involved faced severe penalties, and the scandal resulted in significant financial losses for employees and shareholders, as well as widespread regulatory changes, including the Sarbanes-Oxley Act. The aftermath highlighted the necessity for ethical standards and controls in corporate environments to prevent similar crises.

1. The Collapse of Enron
Aakash Khandelwal (2012IPG-001)
Arun Pant (2012IPG-019)
Fatehyaab Alam (2015MBA-13)
Rohit Nimiya (2012IPG-078)
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ABV - Indian Institute of Information Technology and Management, Gwalior
BY –
* All the images in this document are obtained from google images

2. The Enron Story
• Employed approximately 20,000 staff.
• One of the world's major electricity, natural gas, communications, and pulp and paper
companies.
• Revenues of nearly $101 Billion.
• Named Enron "America's Most Innovative Company" for six consecutive years by Fortune
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Broadband
Shipping / freight
Streaming media
Water and wastewater
Principal Investments
Risk management for Commodities etc.
Petrochemicals
Plastics
Power
Pulp and paper
Steel
Weather Risk Management
Oil and LNG transportation

3. Smartest Guys in the Room
• Inflate earnings using Mark to Market Accounting.
“Technique used when trading securities where you measure the value of a
security based on its current market value, instead of its book value.”
The company would build an asset, such as a power plant, and
immediately claim the projected profit on its books, even though
it hadn't made one dime from it. If the revenue from the power
plant were less than the projected amount, instead of taking the
loss, the company would then transfer these assets to an off-the-
books corporation, where the loss would go unreported.
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4. Smartest Guys in the Room
• $30 million of self dealings by the chief financial officer
• $700 million of net earnings disappeared
• $1.2 billion shareholders equity disappeared
• Over $4 billion in hidden liabilities
Corporate Governance: In 1999, Enron’s board waived conflict of interest rules to allow
CFO Andrew Fastow to create private partnership to do business with the firm.
Enron’s 401(k) pension scheme: Almost 62% of this pension scheme was Enron’s stock
which crashed drastically from over $80 in early 2001 to a mere few cents by the end of the
same year.
Relationship with Bankers: Enron was lucrative Investment Banking (IB) business for the
banks. In exchange of the potential profits from IB services, the banks had lend money to
Enron and promote it’s derivatives and securities.
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5. “I am incredibly nervous that we will implode in a wave of
accounting scandals. My eight years of Enron work history will be
worth nothing on my résumé, the business world will consider the
past successes as nothing but an elaborate accounting hoax.
Skilling is resigning now for ''personal reasons'' but I would think
he wasn't having fun, looked down the road and knew this stuff
was unfixable and would rather abandon ship now than resign in
shame in two years.”
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Letter from Sherron S. Watkins, a vice president for corporate development at Enron to Kenneth L.
Lay, the chairman of the Enron Corporation, after Jeffrey K. Skilling resigned unexpectedly as chief
executive on Aug. 14 2001

6. The Disaster Stock
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7. Internal Stakeholders
• Senior executives
 Kenneth Lay – Chairperson and CEO. Died before his sentencing.
 Jeffrey Skilling – Former CEO. Sentence reduced from 24 years to
14years.
 Andrew Fastow – CFO. Sentenced to 6 years in prison.
• Employees
 20,000 employees lost jobs.
 $2 billion in pension fund lost. $85 million were compensated.
• Shareholders
 $40 billion lost in stocks.
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8. External Stakeholders
• Creditors
 JP Morgan Chase, Credit Suisse, Citigroup and other investors were
paid by auction of company's assets after bankruptcy.
• Auditor
 Reputation of auditing firm Arthur Anderson was so server damaged
that the organization had to be dissolved.
• Residents of California
 Faced power blackouts and increased cost of electricity.
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9. Factors Leading to Collapse of Enron
• Poor Corporate Governance
 Board of directors permitted poor business decisions and unethical
behavior of top managers to go unchecked.
 Audit and compliance committee failed to assure correctness of
financial statements.
 The board voted to suspend code of ethics allowing Fastow to go
unethical.
• Compensation and Reward System
 Rank and Yank system
 Compensation was largely in form of stocks. This led to incentivizing
employees to artificially inflate stock prices.
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10. Factors Leading to Collapse of Enron
• Corporate Culture
 Aggressive competition to deliver results.
 High risk taking was appreciated.
 Money symbolized success.
• Inadequate Ethics Infrastructure
 Board occasionally voted to suspend code of ethics to allow for off-the-
book partnerships.
 There were conflict of interest at many managerial positions within the
company. The ethics committee did nothing to address those
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11. Ethical and Moral Issues at Enron
• Activities at Enron are not in sync with deontological or
utilitarian school of ethics. No ethical justification can be
provided.
• Multiple conflict of interests existed in organization, which were
unaddressed:
 Andrew Fastow – Enron vs. companies that he owned.
 Lay and Skilling – Maximizing shareholders wealth vs. maximizing their
own wealth
• Large scale participation of employees in unethical activities
can be explained by Milgram’s Experiment.
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12. Milgram’s Experiment
• People are ready to do unethical
things if they are pressurized/
encouraged by an authority to
do so.
• Senior management at Enron
motivated employees not to pay
attention to rules and
regulations and only focus on
making profits, leading to
building of unethical culture in
company.
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13. Aftermath of Collapse
• Immediate and Massive Lay-offs
• Life-long Savings reduced to ‘0’
• $70 billion Worth of Market Value Lost
• Unprecedented Major Write-downs on Bad Loans
• Suits, Trials and Unwrapping
• Big Five became Big 4
Code of Ethics Violated at Will.
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14. Pyramid of Social Responsibility
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15. The scandal made the authorities realize the importance
of ethics and importance of INTERNAL CONTROL in
business enterprises. It also helped understand the real
meaning of Shareholder’s Wealth Maximization and
the boundaries within which this key objective is to be
achieved. Enron’s opaque financial statements and
records helped conceal the true and sordid fate of it’s
investor’s money.
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16. Sarbanes-Oxley Act
• The Enron scandal was certainly enough to show the American public and
its representatives in Congress that new compliance standards for public
accounting and auditing were needed. Enron was one of the biggest and, it
was thought, one of the most financially sound companies in the U.S.
• In response to what was widely seen as collusion by Enron's accountants,
The Arthur Andersen firm, in Enron's fraudulent behavior, SOX also changes
the way corporate boards deal with their financial auditors.
• All companies, according to SOX, must provide a year-end, report about
the internal controls they have in place and the effectiveness of those
internal controls.
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17. Sarbanes-Oxley Act
• Sarbanes-Oxley, or SOX, is a federal law that is a
comprehensive reform of business practices.
• This act set new standards for public accounting firms,
corporate management, and corporate boards of directors.
• Features -
• Greater Oversight of Accounting Practices
• Increased independence of auditors and analysts
• Increased Penalties for Corporate Crime
• Tighter Controls on Insider Activity
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18. Learnings for Future
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19. Learnings for Future
• Corporate Managers
• Identify the role that can be played in resolving conflict of interests.
• Intervene in cases of malpractices if it comes under one’s purview.
• Report instances of fraud/deceit to subsequent higher levels of
hierarchy.
• Grow on genuine and sustainable foundations.
• Avoid too much risk and excessive competitive attitude.
Don’t take the pill that can’t be swallowed.
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20. Learnings for Future
• Stakeholders
• Keep weighing the options.
• Be decisive while considering the pros and cons.
• Have multiple eggs in the basket.
• Don’t out rightly ignore the alarm bells.
• Profits and responsibility goes hand-in-hand.
Be prepared for any eventuality.
Nothing is infallible.
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21. Learnings for Future
• Policy Makers
• Regular review of existing policies.
• Identify and plug possible loopholes.
• Extra caution if exceptions are being made.
• National policies are for national interests.
• Appeasement often ends in adversity.
• “A stitch in time saves nine.”
Act if one smells the rat.
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22. Thank you!
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