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Transcript of Enron
Divine Command Theory
"Obey God", 10 Commandments
Criminal investigation into Mark Lay's company's activities but not charged of wrongdoing
Paid over $100,000 to settle a civil complaint
Mark Lay entered a Baptist seminary in Houston with plans to become a minister
CEO Jeff Skilling stated: "We are doing God's work. We are on the side of angels" when questioned about the accounting practices at Enron
Ethical Egoism Theory
"Buy what you want"
Holds that we all act in our own self-interest and that all of us should limit our judgement to our own ethical egos and not interfere with the exercise of ethical egoism by others.
Everything is determined by self interest.
Enron became the largest energy trader in the world and virtually controlled the energy market in the U.S.
"Greatest good for greatest number"
Stated in a memo that losses from EES were being moved to another sector in Enron in order to look profitable
Sent memo to CEO Kenneth Lay and HR with no response or action
Resulted in the memo being sent to to the U.S. House of Representatives' Committee on Energy and Commerce
Sherron Watkins put the entire company and all its employees on the line
She wrote in her memo, "I know it would be devastating to all of us, but I wish we would get caught".
Adam Smith Theory
The Invisible Hand
Background on Enron
The Financial Reporting Issues
Utilized a financial reporting tool intended to provide insight into the true value of the company through a matching of contracts to market price in commodities with price fluctuations
Numbers for earnings on future contracts are subjective
Bonuses and performance ratings were tied to meeting earnings goals
Analysts concerned about method because of non-cash earnings were over 50% of its revenues
Analysts were unwilling to ask questions
The Financial Reporting Issues cont.
Minimal disclosure about their off-the-balance-sheet liabilities
By the time of collapse, Enron has created about 3,000 off-the-book entities, partnerships, and limited liability companies
Created a complex network of these entities and some officers served as principals in these companies and earned commissions for the sale of Enron assets to them
Andrew Fastow, CFO, was a principal in many of these off-the-book entities
Relatives and Doing Business with Enron
The Enron Culture & Board
After the Fall
An American energy, commodities, and services company
Incorporated in 1985
Principal executive offices in Houston, Texas
Revenues of nearly $111 billion during 2000
2001 world's largest energy company
Fortune magazine's 100 "Best Companies to Work For" consistently
Fortune named Enron “America’s Most Innovative Company” for six consecutive years
November 2001 filed for bankruptcy
After the Fall
Hobbesian Self Interest
Kant Categorical Imperative
Contractarian & Justice
Began as a merger of two pipelines
Trade in energy and offer electricity for sale around the country by locking in supply contracts at fixed prices and then hedging on those contracts in other markets
First mover in this market which lead to huge growth
Strategy to grow 15% per year
Online trading of energy had 1,800 contracts
Controlled the energy market in the U.S.
Employees had their 401(k)s invested heavily in Enron's stock
Diversification lead to disasters and decrease in earnings
Series of transactions authorized by Mr. Lay in which Enron did business with companies owned by Mr. Lay's son, Mark, and his sister, Sharon Lay
Criminal investigation into activities of a company founded by Mark Lay
Sharon Lay owned a Houston travel agency
Ms. and Mr. Lay say they made all the necessary disclosures to the board and regulators about their business with Enron
Decline began in November-December 2000
Share price was at $85
Skilling left as CEO in 2001 and share price fell to $43
Wall Street Journal raised questions about Enron's disclosures in August a they began selling off assets
By October, disclosed a third-quarter loss and a $1.2 billion reduction in shareholder equity
CFO Fastow terminated
Restated earnings to $586 million, or 20%, reduction
CEO Kenneth Lay left the company but remained chairman of board
Aggressive culture and rating system
Employees became suspicious of aggressive accounting
Fastow believed he was doing everything right in helping Enron make the numbers
Near the end, he encouraged others to reveal the true financial picture
Members of Enron's board were well compensated with a total of $380,619 paid to each director in cash and stock for 2001
Enron fired 5,100 of its 7,500 employees by December 3, 2001
Each employee received a $4,500 severance package
60% of 401(k) plans were invested in Enron
Employees 401(k) plans were cut so much they could not retire
Just before declaring bankruptcy Enron paid out $55 million in bonuses to executives
Clifford Baxter committed suicide
Enron put a lock down on employees so they could not sell their shares
The Enron collapse created a world ripple effect
5 major Japanese money market funds fell below face value
28,500 contracts scrambled to find new providers
Effect every large investment bank in America
Ground breaking ceremony for Enron's new headquarters was halted
Stephen Cooper was hired to replace Ken Lay as CEO
The collapse ended movement towards deregulating electricity
Mr. Lay died of a massive heart attack one month after being convicted
The collapse of Enron influenced the creation of the Sarbanes-Oxley (SOX) of 2001
Establish accountability requiring CEOs to sign off on financial reports
"I should do what I want everyone to do", Golden Rule
"You should not use other human beings that result in a one sided benefit"
Do not engage in fraud because you don't want to get caught
How would Enron executives feel if they worked 25 years and lost all their retirement funds?
"Respect others' rights"
Enron executives showed no respect towards employees
Manipulating employees to make another dollar
"Do what seems right at the time"
Culture encouraged aggressiveness
Corrupt in that Enron valued financial reporting rather than economic reporting
Bonuses and performance ratings were tied to meeting earnings goals
Former CFO Fastow believed he was a hero for Enron. At the time, he stated he thought he was helping himself and helping Enron to make its numbers.
"Do what's good"
An employee with Enron energy services, Margaret Ceconi, wrote a 5 pg memo to Kenneth Lay stating losses from one sector were being moved to another sector.
Employees voiced concerns in online chat rooms about their suspicions with regards to the "aggressive accounting" that was taking place.
"Follow the rules"
Enron did not follow the rules due to making minimal disclosures about their off-the- balance-sheet liabilities.
Disclosure requirements under GAAP and FASB kicked in at 50 percent ownership at the time.
By the time of the collapse, 3000 off-the-book entities had been created. Since Enron's ownership never exceeded 49% in the entities, the debt and obligations in off-the book-entities did not have to disclosed.
"Buy whatever is legal"
Self interest is part of human nature but laws must be in place to control
Government realizes that corporations and companies could behave unethically just for money
Enron executives deliberately attempted to falsify and fabricate financial reports for the sake of making bigger profits
Enron believed they could lie in their financial statements to get ahead
Temporary benefit from falsifying records and creating undisclosed SPEs
Enron could not keep up with the pattern of dishonest behavior which lead to the bankruptcy and publicity of scandal