Enron Case Study

1

Business Ethics Case

Structure:

• Company profile• The ethical point of view• The guilty parties• Main “ingredients” of the downfall• Closing thought

2

Enron Company Profile• Enron Corporation was an American energy company based in Houston, Texas.• Enron employed around 21,000 people and was one of the world's leading

electricity, natural gas, pulp and paper, and communications companies, with claimed revenues of $111 billion in 2000.

• Fortune named Enron "America's Most Innovative Company" for 6 consecutive years.

• It was formed in 1985 when Houston Natural Gas merged with InterNorth. • After several years of international and domestic expansion involving complicated

deals and contracts, Enron was billions of dollars into debt. • All of this debt was concealed from shareholders through partnerships with other

companies, fraudulent accounting, and illegal loans.

Ethical Point Of View

The Guilty Parties

• These include Ken Lay, Jeff Skilling, and Andrew Fastow

• Believe Enron was great for economy• Circulated money, provided jobs, dealt with

international companies• Did not inform public in order to keep Enron in

business

5

The Guilty Parties

Kenneth Lee Lay • Born April 15, 1942

Died July 5, 2006 (age 64)• Charge(s): Fraud, false

statement ; • Penalty: Could have faced

40 years in prison plus monetary fines, but died before sentencing

6

The Guilty Parties

Jeffrey Skilling• Born November 25,

1953 (1953-11-25)• Charge(s): conspiracy,

securities fraud, false statement, insider trading

• Penalty: originally sentenced to 24 years and 4 months and fined $45 million USD, pending resentencing

• Status: Incarcerated7

The Guilty Parties

Andrew Stuart Fastow • Born: December 22, 1961 • Charge(s): conspiracy,

securities fraud, false statement, insider trading

• Penalty: 6 years, followed by 2 years of probation

• Status: Incarcerated

8

The Guilty Parties

• Arthur Andersen was one of the world’s five leading accounting firms (Big Five)• Was paid $52m in 2000, the majority

for non-audit related consulting services.• Type: Limited Liability Partnership• Founded: 1913 • Industry: Accounting, Professional

Services,Tax, Consulting;Licenses of Certified Public

Accountants surrendered in 2002

Arthur Andersen’s Houston branch

The firm said destroying

documents was routine

10

The main “ingredients” for the downfall of ENRON

DEREGULATION – government decision to let gas prices float with the currents of the market

MARK-TO-MARKET – accounting practice that allowed Enron to book potential future profits on the very day a deal was signed

11

The main “ingredients” for the downfall of ENRON

• SPECIAL PURPOSE ENTITIES - is a legal entity (usually a limited company of some type or, sometimes, a limited partnership) created to fulfill narrow, specific or temporary objectives. SPE's are typically used by companies to isolate the firm from financial risk. A company will transfer assets to the SPE for management or use the SPE to finance a large project thereby achieving a narrow set of goals without putting the entire firm at

risk.

12

Closing thought…

“Every fraud could have been prevented

if honest people had asked the right questions

at the right time”

13