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Copy of Enron Case Study
Transcript of Copy of Enron Case Study
The Downfall of Enron Ethical Issues LEGAL ISSUES STAKEHOLDERS PUBLIC INTEREST GATEKEEPERS
Downfall began at end of 2001.
Fastow's Special Purpose Entities were being used to hide millions of debt
This inflated Enron's profit
No actual money was being traded
Losses began to surface and Enron lacked revenues
company was forced to access a line of credit of $3 billion.
Credit ratings agencies downgraded the company's debt ratings
creditors, fearing they might not get paid in event of an Enron bankruptcy, increased Enron's debt payment schedules.
On Dec. 2, 2001, Enron filed for bankruptcy, laying off thousands of workers in the process.
Largest bankruptcy of a publicly held company in history. It has resulted in thousands of employees losing their retirement savings in 401(k) plans that had been tied to the failed energy company's stock. Grew wealthy due largely to promoting power, and its high stock price What went wrong?
What are the facts? "America's Most Innovative Company" by Fortune for six consecutive years, from 1996 to 2001.
Fortune's 100 Best Companies to Work for in America" list in 2000.
Employees had luxurious offices Stakeholder Deception
The lack of truthfulness by management about the health of the company and its business operations
Lack of Corporate Governance
they had to protect their reputations and their compensation as the most successful executives in the U.S.
Hostile Coporate culture
Skilling used coercive and pacesetting leadership styles
“rank and yank”
inside rivalry and competition; rewarded innovation, punished those deemed weak
breaking of laws and rules was acceptable as long as they yielded high profits Hailed by many to have long term pensions, benefits for its workers and extremely effective management ` CRIMINAL ACTS (subject but not limited to)
1969 Texas Gulf and Sulfur Supreme Court Case
illegal for directors to have inside price sensitive info on stock to trade in that stock.
Submitted false information to the manager of California’s electricity grid
sole power force behind California Black-outs
off balance sheet partnerships
Special Purpose Entities (SPEs) were used to cover their debts
Board of Directors let Fastow (CFO) break code of ethics to establish SPEs PRINCIPLES, AIMS AND VALUES 1990 1985 •Enron was formed in 1985 by CEO, Kenneth Lay when he merged his company, Houston Natural Gas with InterNorth COMPENSATION ETHICS (cc) photo by medhead on Flickr Enron’s code of ethics was based on respect, integrity, communication, and excellence 2000 Sherron Watkins meets with Lay and gives him a letter in which she says that Enron might be an "elaborate hoax." She discussed concerns of murky finance and accounting that could ruin the company. Lay hires Jeffrey Skilling to lead the company's effort to focus on commodities trading in the deregulated markets.
Andrew Fastow is hired as Chief Financial Officer (CFO) STAKEHOLDER
INTERESTS 1997 Skilling named president and chief operating officer of Enron.
Fastow (CFO) establishes SPECIAL PURPOSE ENTITIES
off balance sheet partnerships that isolate firm from financial risk
hide debt and inflate profits to keep stock prices high and rising Enron announces $638 million in third-quarter losses
$1.2 billion reduction in shareholder equity stemming from write-offs related to failed broadband and water trading ventures. 2001 THE ROAD BELOW: The Downfall of Enron EMPLOYEES Moral Imagination 1. live your corporate values
treat ethics as more than an artifact
Enron Ethics-contradiction between words and deeds
2. Establish an Ethics Committee to constantly keep the organization focused on the seven main provisions of the Federal Sentencing Guidelines of 1991 in mind.
Examine your ethical climate and put safeguards in place
3. Separate auditing from consulting functions ... small KEY PLAYERS STAKEHOLDERS OUTCOMES CASE QUESTIONS
How did the corporate culture of Enron contribute to its bankruptcy?
Did Enron’s bankers, auditors and attorneys contribute to Enron’s demise? If so, how?
What role did the company’s chief financial officer play in creating the problems that
led to Enron’s financial problems? With deregulation, the company the Energy Trading company begins focusing on financial trading of energy, electricity and bandwidth Ken Lay (CEO):
Convicted of six counts of fraud and conspiracy in May 2006, faced 45 years in prison.
died of heart disease while awaiting sentencing,
Jeffrey Skilling (ex-CEO);
convicted of 19 of 28 counts of securities fraud and wire fraud
sentenced to 24 years and 4 months in prison
Andrew Fasttow (Chief Financial Office)
charged with 98 counts of fraud, money laundering, insider trading, and conspiracy, among other crimes.
sentenced to ten years with no parole in a plea bargain to testify against Lay
Arthur Anderson (Gatekeeper):
charged with and found guilty of obstruction of justice 4000 former employees lost their jobs and more than $2 million in pension plans
Individual and institutional investors lost $60 billion in market value
public interest lost confidence in Coporate America
unreliability of presented financial statements Hostile corporate culture prevented the employees from speaking against unethical practices
Skilling killed the mesengers of "bad news"
Sherron Watkins (Vice President)
forewarned Lay of the impact the accounting practices would implode
demoted from her position and given busy work Losses caused investors to lose confidence in the company
were concerned of Fastow's and Andersen's conflicts of interest
Credit Rating Agencies lowered grade of its financial products
California residents exploited over the price of electricity Lawyers
helped structure the SPEs with questioned legality
dismissed Sheeron Watkins allegations of accounting fraud
Arthur Andersen LLP
Enron's primary auditor and a major business partner
certified financial statements without looking into the complex partnerships
utilized risky investment practices
hepled Enron meet earning goals at the end of 1999 buying Enron's debt and which they would resell back to Enron after income statements were released. Enron declared Ch 11 Bankruptcy and was restructured to 3 different companies in order to pay off creditors.
Prisma Energy International
CrossCountry Energy Corporation
Portland General Electric
Scandal resulted in passage of the Sarbanes-Oxley Act 1990s BACKGROUND INFORMATION $100 billion annual revenues
sixth largest energy company globally 1998-2000