Enron (2)

Enron: A reciepe of Corporate Social Irresponsibility

Group Members

Prashant MahalleArya Kulangarathodi

Introduction

Introduction

• Enron Corporation was an American energy, commodities, and services company based in Houston, Texas.

• Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with claimed revenues of nearly $101 billion in 2000.

Achievements

• Fortune named Enron "America's Most Innovative Company" for six consecutive years.

• It was also an extensive futures trader, including sugar, coffee, grains, hog, and other meat futures.

• At the time of its bankruptcy filing in December 2001, Enron structured into seven distinct business units.

Scandal

• At the end of 2001, it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud, known as the "Enron scandal".

• Enron has since become a popular symbol of willful corporate fraud and corruption.

• The Enron scandal was a financial scandal involving Enron Corporation and its accounting firm Arthur Andersen, that was revealed in late 2001.

• After a series of revelations involving irregular accounting procedures conducted throughout the 1990s, Enron was on the verge of bankruptcy by November of 2001. A white knight rescue attempt by a similar, smaller energy company, Dynegy, was not viable. Enron filed for bankruptcy on December 2, 2001.

Enron’s Fall

Enron’s Business

Business Model• Deregulation generally led to lower prices and

increased supply, it also introduced increased volatility in gas prices

• Standard contract(old)--- allowed suppliers to interrupt gas supply without legal penalties.

• Creating a natural gas “bank”(Enron)----Enron began offering utilities long-term fixed price contracts for natural gas, typically at prices that assumed long-term declines in spot prices.

Business Model

• Off-balance sheet financing vehicles---Special Purpose Entities(SPE) , to finance many of these transactions.

• Enron Online---The creation of the on-line trading model

• The gas trading model was a huge success. By 1992, Enron was the largest merchant of natural gas in North America.

Products

Gas

Oil

Broadband

Electricity

pulp and paper

water

Products

Accounting& The Fraud

• The world’s largest energy trader.

• The total revenue was $100 billion in 2000, 7th of Top 500 in US.

• Blue chip, $80 per share, 21 thousands employees, globalization enterprise.

Remarkable

Company

Bankruptcy

• 2001, a investment agency boss publicly doubts the profitability model of Enron, the stock price decrease from $80 to 42$ in Aug

• 16, Oct. Enron announces the total loss for 3th quarter was $618 million.

• 22, Oct. SEC begin to investigate Enron formally.• 8, Nov. Enron was forced to admit do false

account, profit total false nearly $600 million since 1997.

• 30, Nov. stock price falls to $0.26 per share.• 2, Dec. formally apply for bankruptcy protection.

Why?

• How did it happen?Accounting methodManagement groupUS monitor system

Accounting

method

• Enron’s nontransparent financial statements did not clearly depict its operations and finances with shareholders.

• Accrual accounting: actual costs and actual revenues were received and recorded when selling it.

• Mark-to-market accounting: income was estimated as the PV of future cash flow, but costs were hard to be recorded.

Example: • In July 2000, Enron and Blockbuster Video signed a 20-

year agreement to introduce a new on-line video game to various cities.

• After several pilot projects, Enron estimated profits of more than $110 million form the deal, even though analysts questioned the technical viability and market demand of the service.

• When the net work failed to work, Blockbuster pulled out of the contract, Enron continued to recognized future profits, even though the deal resulted in a loss.

Accounting method

SPE(Special purpose entities)• It is a legal entity created to fulfill narrow,

special or temporary objectives . They are used to hide debt, ownership mostly in real market.

• These shell firms were created by a sponsor, but managed by independent equity investor and debt financing.

• Enron used SPE to manage risks associated with specific assets and disclose minimal details of its SPE.

• By 2001, Enron had used hundreds of SPEs to hide its debt. As a result of one violation, Enron’s balance sheet understated its liabilities, overstated its equity and profits.

Accounting method

Management group

• Corporate governance Enron had a model board of directors comprising

predominantly outsiders with significant ownership stakes and a talented audit committee. Even with its complex corporate governance, Enron was still able to conceal its true performance.

• Executive compensation The setup of the system contributed to a dysfunctional

corporate culture that became obsessed with a focus only on short-term earnings to maximize bonuses.

• Financial audit Enron’s auditor firm, Arthur Andersen, was accused of

applying reckless standards in its audits because of a conflict of interest over the significant consulting fees($27 million).

Anderson’s auditors were pressured by Enron to defer recognizing the charges from the SPE as its credit risks.

US monitor system

• The state accounting committee was an independent body established in accordance with the state Accountant Acts. At the national level, the Uniform Certified Public Accountants Act was just a template method, does not have binding enforce.

• American institute of CPA and State Certified General Accountants Association were traditional civil society organizations, not specifically authorized by law.

• The independence of the CPA.

Business Ethic

• How about the CEO and directors deal with fraud?

Obviously, the top management operated the problem in very well, but all of they intentionally less of attention about the fraud. Including the CEO Skilling, many of the directors were continuing advocated to rise stock price, but selling the stock at the same time.

• Both of they have no business ethics and no long–term development.(1985-2001 Enron)

• Where there is a business ethic, there is a long-term bloom.

Ethics cannot be fragmented… or fragmentation goes against ethics

Company governance must integrate the active participation of all stakeholders who affect the organization's activities or who are affected by these activities

And in all four domains : profitability, equity, dignity and viability

WE also encourage this fragmentation (Shadow)

Lessons to Learn from this Case

Conclusion

Arthur Anderse

n• In July 2002, the one-time Big 5

accounting firm was found guilty of obstruction of justice for shredding documents in the Enron case.

• Their Enron connections essentially put the entire firm out of business, affecting 22,000 workers, most of whom had no connection to Enron.

Conclusions… In conclusion, Enron was a remarkable and innovative company in the world, Its success cannot be neglected.

But there is a interest question for Enron’s bankruptcy: Is there a company can get success without ethics?

To see from the facts, the answer is “no.” Whether Enron or Anderson, they finally pay for their fault on ethics.

We see ethic problem would bring a fatal strike to a company, no matter how it was successful.

Recommendations• Incentives must be paid after a project is

done or at least when the company is really profiting from that certain project.

• Operational risk should be minimized and there should be some sort of check up.

• Careful selection of accounting approach and financial structures to use.

• Minimized payment in stocks.

THANK YOU!!!!!