Bus 400 Business & Society

Submitted by: Hatim, Johanne, Sharina, and Valentina Submitted on: April 15, 2010 Submitted to: Brent Groen

[ENRON CORPORATION. AND SATYAMCOMPUTER LTD.]

This paper analysis Enron Corporation and Satyam Computers Ltd. indulged in a similar Ethical Issue

Table of Contents
Background.............................................................................................................................................. 3 Main issue Ethical perspective ............................................................................................................. 4 Enron Corporation ............................................................................................................................... 4 Satyam Computers Ltd ........................................................................................................................ 5 Analysis .................................................................................................................................................... 5 Ethical principles...................................................................................................................................... 5 Utilitarianism ....................................................................................................................................... 5 Rights and Duties ................................................................................................................................. 6 Justice .................................................................................................................................................. 6 Due Care .............................................................................................................................................. 6 Business Ethics Topics ............................................................................................................................. 6 Systemic............................................................................................................................................... 6 Corporate ............................................................................................................................................ 7 Individual ............................................................................................................................................. 7 The Market .............................................................................................................................................. 7 Company Behavior .................................................................................................................................. 8 Contractual and Due-care theory. ....................................................................................................... 8 Conflict of Interest ............................................................................................................................... 9 Comparison between the companies ..................................................................................................... 9 Conclusion ............................................................................................................................................. 10 References....................................................................................................11 Appendix #1 (Letter to Shareholders)...................................................................................................12 Appendix #2 (Numerical Table).............................................................................................................13

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Background
Enron: Enron is an American pipeline company founded in Houston in 1985 by Kenneth Lay. They picked Enron as a name after they found out that the original name they chose Enteron refers to intestines in Greek. They made great profits by working in the electricity and Natural Gas industry, providing their service at the fair value market price. They diversified their business portfolio and became an energy broker who traded electricity and commodities, and even entered the water sector in 1998. Enron was so successful to an extent that it was named 6 consecutive times the American Best Innovative Company between 1996 and 2001. They also offered long-term pensions and very good benefits to its workers which helped them be among the the 100 Best Companies to work for in America according to Fortune Magazine. In 2000, their stock market price was $90, and executives promised that the price will continue to climb to $140, which encouraged investors to buy a huge amount of shares. However, Enrons executives knew exactly what they were doing. According to the Washington post1, Enron hired several PhDs in mathematics, physics, and economics to help manage the risk they were about to embark on, and used Anderson Accounting Firm services (which is among the best 5 American Accounting Firms) to control their illegal cancelation of debts and losses. Critics started to flow in 2001, after Daniel Scotto disclosed Enron financial Fraud. Consequently, their stock price dropped to under a dollar per share. Since then, bankruptcy was knocking at their door, and Kenneth Lay was accused of selling $70 million worth of shares to repay a huge line of credit. Satyam: Satyam is an Indian company founded by Ramalinga Raju in 1987. Their main services are consulting and information technology. However, they also offer a multitude of other services in different areas such as, aerospace, banking or education. Their development and delivery centers in the US, Canada, Brazil, the UK, Hungary, Egypt, UAE, India, China, Malaysia, Singapore, and Australia serve numerous clients, including many Fortune 500 companies. Satyam was regularly ranked among the top 10 largest and best companies to work for in India and is the information technology partner for the 2010 and 2014 FIFA World Cups. Satyam Stock market price was Rs 541, and dropped suddenly to Rs 11.50 two days after the publication of the firm accounting scandal in January 7, 2009 by Satyams founder and CEO, Ramalinga Raju (Appendix #1). Raju announced that the company inflated and baked its financial statements using the help of Price Waterhouse Coopers (One of the five biggest accounting firms) because the situation became uncontrollable over the years prior to the publication, and even described it as riding a tiger, not knowing how to get off without being eaten.

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Main issue Ethical perspective

Enron Corporation and Satyam Computers Ltd were involved in accounting scandals and manipulated financial statements. They exhibited negligence of fiduciary duties, failure to maintain ethical standards and CSR in attempt of representing sound financial position of the corporation. The accounting scandals continue to make the news headlines. Every year notable accounting scandals are reported, where the executives of the company indulge in manipulative representation of financial statements. Manipulative statements could be any misused or misdirected funds, overstated assets or incomes, understated liabilities or expenses, insider trading, failure to report earnings or losses, failure to disclose loans or debts on the company. In this report we have discusses how the corporate rapid success turned out to elaborate scam and then the light has been thrown on the executives behaviour under ethical perspective analysing it under various ethical behaviours.

Enron Corporation
Enron used accounting techniques to misrepresent financial statements by overstating the earnings since 1997 (Washinton Post). The manipulation in statements was discovered on Nov 8, 2001 (Buondonno, J., David, N., Pufky, R., & Rollings, M.). Enron set-up Special Purpose Entities (SPEs) to get the loans sanctioned from banks for these SPEs. Further, the financial statements disguised these loans as revenues for Enron creating profits to meet investor expectations (Buondonno, J. et al.). Also, Enron used the mark-to-market trading of its shares to inflate their stock prices. Enron used to forecast higher future market energy sales, thereby increasing the present value of their assets (Buondonno, J. et al.). Basically, securities held for long-term period were treated as sold at the end of companys financial year. Enron, due its dominance in market, was able to determine the price in accordance with the earnings it wanted to report (Buondonno, J. et al.). Thus, financial health of the company reflected was very positive but there were no cash in-flows. By 2000 Enron had negative cash flows of $ 597 million and loans totalling to $ 3.4 billion. It had interest payable approximately $ 2 million every day (Buondonno, J. et al.). Enron: How was the fraud discovered? The fraud was discovered by analysing the indications of questionable events happening at Enron. In Feb 2001, Jeff Skilling takes over as Chief Executive Officer (CEO). And then on Aug 14, 2001 he resigns from the post for personal reasons, when Kenneth Lay, the then chairman takes over as CEO (Washington Post). In august, Sherron Watkin sent a memo to Kenneth Lay raising the suspicion of accounting improprieties. Lay discussed this with her and promised to fire the A. Andersen auditors but did neither (Ackman D., 2009). In October, Enron announces the restating of earnings for past 4 years and 3 quarters due to some accounting errors (Buondonno, J. et al.). On Oct 16, 2001 Enron reported a $ 618 million loss for third quarter after revising statements, and disclosed the $ 1.2 billion reduction in shareholders equity (Washington Post). After the disclosure, SEC sent the notice of enquiry at Enron, and upgraded it into formal investigation by the end of the month. Enron, after the investigation filed the revised financial statements reporting $ 586 million loss on Nov 8, 2001 (Washington Post). Next day, on Nov 9, 2001 Company disclosed its overstated earnings by $ 567 million since 1997 (Washington Post). Then, the Arthur Andersen (Child of Price Water House Cooper: PWC) was investigated for further details and found guilty of involvement in the crime. Both Enron and A. Andersen were subjected to lawsuits.
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Satyam Computers Ltd

Satyam Computers indulged in manipulating financial statements which was to hide forgery and insider trading. Satyam manipulated profit and loss accounts and also the cash-flow statements (The financial Express). Due to fierce competition and pressure to maintain investor expectation, Satyam inflated P/E multiples reflecting high share price (The financial Express ). Mr. Raju has been withdrawing cash by channelling salaries to 13000 non-existent employees of Satyam to invest in real estate through non-existing SPEs (Janalaya S. 2009). He also forged bank statements to back up the FDs from HDFC Banks Bhasirbagh Branch (Janalaya S. 2009). Satyams top-level management and PWC India auditors were indulged in parallel finance department according to G. Rama Krishnan the vice-president of finance department. He stated that parallel financing existed to consult on various issues in Satyam (Ramana, K.V. 2009 ). The two auditors of PWC India S. Gopalakrishnan and Srinivas Tallauri were charged of their involvement in the fraud, though PWC India expresses their surprise for the same (Webcpa). Satyam had a total of Rs. 7136 Cr. (Appendix #2) of fraud amount. Also, Mr. B Ramalinga Raju pledged the shares not disclosed to the shareholders, decreasing the stake from 21.6% to 3.6%, to arrange loan for Satyam (Economic times. 2008). Satyam: How was the fraud discovered? On 7th January, Wednesday, Satyam Computer Services Chairman B Ramalinga Raju resigns and disappears after confessing to the largest fraud in Indias corporate history. But, the scent of the scam was in air since mid-December 2008. It was when on Dec 16, 2008 Satyam announced its intentions of acquiring Matyas Properties and buy 51% stake of Matyas Infra. The two closely held corporation by Mr. Raju (Business Line. 2008 ). Within 12 hours the deal took a U-turn and was cancelled due to investor protest. Satyams intentions of buying corporation running in losses at an overpriced rate were questionable and considered unethical. (CNBC-TV 18. 2008). On Dec 25, 2008 Mangalam Srinivasan the independent director resigns. And on Dec 29, 2008 Vinod Dham and Krishnan Papelu also resigns from the Satyams Board of Directors Committee (Thaindian news. 2008). On Jan 2, 2009 the stake of promoters in the company reduced to 3.6% when the pledged stocks were sold in the market by the lenders to retain their money (Economic times, 2009). On Jan 7, 2009 Mr. Raju confesses the fraud by addressing a letter to Board of Directors (Raju, B.R. 2009) and resigns from the company. The SENSEX (Indicator of Bombay Stock Exchange) plummets by 749 points leading to Satyams fall from various stock indices (Economic Times, 2009).

Analysis Ethical principles Utilitarianism

The way that Enron acted when it comes to their financial statements and mixing with the numbers it is unethical because it basically does not give the society any profit at all, and the social injuries became big. They did contribute to society though offering jobs but at the same time, investors and shareholders lost a lot of money and that might become an injury for society, having to clean up after Enron. The way Enron acted is almost the complete opposite than this theory says; minimum social profit and maximum social injuries. Referring to Satyam story from the utilitarian point of view, we can say that there is no argument that could support the behavior of the management since we can suppose (lack of info) that the net social benefits were distributed only among the elite that belonged to the governance and not to the shareholders in general. Despite this assumption it seems that the society as a whole has been positively affected in the sense that Satyam learning environment has created a pool of qualified and skilled workers that in part have flown in other firms of the
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sector and in part have created the base for the renaissance of the company after the scandal.

Rights and Duties

Both Enron and Satyam misrepresented their facts about the actual situation towards the shareholders. Giving a misrepresented view of the firm's economic situation the shareholders were not able to evaluate in the proper way their involvement in the firm. Enrons duty in this case is to look after the interests of the shareholders; they have a fiduciary duty towards them. They have the right to pursue their own interests and others but not if they do not gain any utility to the shareholders. Due to Contractual rights they are violating the ethical rightsthat is central in business contracts; they misrepresented facts through not sharing the whole truth. Looking at the Satyam's behavior under the Contractual rights point of view, it seems that the company was guilty to dis-attend most of the ethical rules that the theory outlines. The stake/share holders had some doubts only when the CEO attempted to merger two companies (belonged to his properties) with Satyam; as a consequence they had to bear the monetary loss.

Justice
The way Enron handled the distribution of benefits and burdens is unethical in the way than the top management received huge amount of money just to come up with different ideas that might not even be profitable in any way at al while the employees at the company lost everything when the company went into bankruptcy. The thousands of employees had to take the big consequences in the companys fall; they lost their careers and pension funds; that can never be taken back. According to this theory Satyam did not behave in a just way since the CEO lied on the real economic situation of the company leading to bad consequences for all the stake/shareholder involved with the company's activity. Compensatory justice is the one more important for this case since the confession of the CEO make us sure of the wrong behavior occurred whose features are the intentionality and the willingness to lie on the real situation.

Due Care
The fact that different people own stocks and invest money into Enron makes them valuable to the company, without them there would not be a company. Enron did not live up to the ethical standards and fulfilling their promise to the shareholders. In one way Enron should have treated them as family, they might actually have done better if they took care of them. The fact that the CEO Raju had accounted on himself all the responsibility for the economic disaster shows that he wanted to protect his accomplices. Therefore it seems that Satyam's CEO had some kind of special care for the group of people who belonged to the management. Despite this, there was no commitment toward the people affected by the corporate policy.

Business Ethics Topics Systemic

The systemic issues are the big deal here. The fact that the system allowed Enron to borrow money from the bank into its Special Purpose Entities and then turn it into profit should have been stopped. That there is no signal that automatically sets of suspicion against the company is a big flaw. If that would have happened this scandal might have been prevented. The fact that the company grew by incredible numbers every year should have made the company
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more prone to inspections as well. It was a big risk that Enron took by doing this and because the system allowed it, they were able to do it and make big profits of it. The economic crisis that is afflicting the world economy provides the context where we can set Satyams failure. The irrational exuberance that has characterized Satyam's risks taking has to be related to the general attitude of the business firms of this decade: the world has seen a lot of exaggerated risk taking in recent times.

Corporate
When it comes to how a company operates it is hard to say that just one individual in the company causes the whole issue by himself. In this case we think that more than one person knew, but no one said anything, the company and its policies allowed them to behave like this. The companys structure with policies, practices, etc should react when something like this goes on. The activities that Enron did when it comes to taking all this different ways in getting money to be clean and shown as revenue is not ethical. They fact that the company allows this to happen shows that there are issues in their policies and structures. Since it is quite impossible for a man alone to organize a fraud of 1 billion dollar, we have to suppose that he had the complicity of other executives, external auditors, and possibly board members. Indian corporate culture is based on informal, family relations, one third of the main business firms belong to an elite of people whose participation on each other businesses create a highly interweave net of connections. These organizations are controlled by families whose investments are usually limited to 51 per cent of a core company which, in turn, owns 51 per cent of various other second tier firms (Post, J.E., Varma, J.R., Menon, K., Desai, A., Raghavan, A., Srinivasan, V., Parekh, S.P., & Vohra. N., 2009. p 69). We can notice two serious corporate governance problems: entrenched management and diffused ownership. Rajus holdings, and those of his family, constituted a block that immunized him, and his decisions, from accountability. Neither directors nor other shareholders learned of the fraud until it was too late.

Individual
It is hard to say if this is an individual issue, at one point it has to an individual that came up with the idea of moving money to different places and changing the financial statements. At the same time there was many people involved; for example both the CEO and the head of the financial department. We can even include the account firm here; the outside accountant did come up with the solution that Enron asked for, even though it might not be entirely legal. In Satyams case Raju is the unquestioned protagonist, we can suppose that his behavior was first of all dominated by the will to become the most successful and the wealthiest business man of the Indian elite. The letter he wrote to confess the disaster show us that he saw himself more as the owner rather than the manager of the company despite of the fact that he and his family owned only the 8.74% of the firm. From the time line of the events we can also say that Raju's decisions were taken at the emotional level instead that at the rational one. In the case of Satyam, Mr. Raju seems to have been quite successful and effective in managing these alliances with the stakeholders for a long period. However, these communications and alliances were based on an increasingly shaky foundation the financial performance of the company, and the increasing gap between the reported figures and reality ( Post, J.E., et al. 2009. p 69).

The Market
The purpose of the free market approach is to protect private property, contractual rights, and open markets through a limited intrusion of the government. According to this school of
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thoughts firms have the right to decide autonomously their production/sale/distribution policies. According to John Lock perspective on free markets each person has the right to liberty and property. In order to guarantee these rights, the government should avoid interfering in the exchange among the actors involved. Another theorist, Adam Smith, seems to integrate this point of view through the utilitarian argument that unregulated markets and private property will produce greater benefits than the other systems since buyers can purchase what they need at the lowest price in circulation. The invisible hand of the government will ensure the public welfare. Enron is a perfect example when the free market does not work properly. Succeeding through fraud is not ethical and it does not gain the society as a whole anything. The government needs to intervene in this case, so this does not happen. They need to regulate the market so we get a more equal distribution of resources, profits and burdens. The free market allows the company to only think about what is best for them, without thinking about the society. The assumptions on free markets, referring to Satyam, are questionable for a few amounts of reasons. First of all, referring to the systemic level, we can say that it is because of the belief in the high risk-taking and the over confidence shown by the management of Satyam as well as by other firms (Enron is one of them) that we have seen numerous cases of fraud in this decade. For this reason we agree with the Keynesian critics according to whom the intervention of the Government is necessary to guarantee a better balance in the power the actors of the society have, and in the better distribution of resources. This thinking is also supported by the view according to which regulation through dedicated agencies and legislation could help in finding a way to control the firm, but in Satyam case we can notice how this theory is difficult to implement, since on one hand the auditors were involved in the scandal, and on the other there is the clear failure of both US and India regulatory legislation. Another reason against the unregulated free market comes from the Due care perspective because the free market perspective favors a selfish attitude that can easily overcome the respect for the community and the net of stake/shareholders that are affected by the firm's activity. That is exactly what happened in India through Raju's style of leadership.

Company Behavior Contractual and Due-care theory.

When investors bought shares in Enron it became the companys duty to look after the shareholders interests. Though, they did not live up to the standards of a contract, they misrepresented facts to the shareholders, and they got the shareholders to invest on false grounds; the company was not going good on the financial side, still the investors invested their money. This issue goes hand in hand with the due care theory, the company has to look after the shareholders interests. Enron did this in one way, they presented a result to the shareholders that matched their expectations and maybe even exceeded them. Still it was misrepresenting facts, Enron had all the information but did not share it, even though it is their duty. In the end people suffered from financial injuries that Enron caused by not sharing the right information and their duty is to prevent that from happening when they are practicing due care. According to the contractual theory, Satyam has the duty to provide a product, in this case the information on the revenues and profits of the company, that is coherent with the empirical status of the organization. Among the business moral duties there are the disclosure of the nature of the contract and the avoidance of misrepresentation. As we have seen, these are the main irregularities committed by Satyam's CEO: the spiral of false information have allowed the company to meet the trust of the stakeholders for a pretty long period of time, thanks to
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the protection guaranteed by the interconnections of the management members. To go deep inside this discussion it is interesting the point of view kept by the due care approach, that states that since the firm has an advantaged position thanks to the asymmetric information toward its stakeholders, it has the moral duty to take care of the people affected by its behavior, delivering a fair knowledge of the company's condition. This view has the fault to be paternalistic (caveat vendor) because gives all the responsibilities to the firm. Are we sure that the stakeholders did all they could to avoid to be deceived? Maybe the Indian cultural background allows hidden lobby activity?

Conflict of Interest
The biggest conflict in the Enron case is an objective conflict, it all comes down to the wrong numbers in the financial statements. The auditor that was supposed to help out in this case also helped creating the subjective conflict. The company had financial relationships with their shareholders, since it was their money the company was using. In one way an actual conflict also occurred because the company did not perform their duties towards the shareholders and the world around them, they choose to do what they wanted and lie about the situation. Even a subjective conflict occurred when they thought that they could be clever enough and fix the whole situation. They were almost ready to use extreme measures to be sure of that no one got to know about the real situation; when Sherron Watkins notices that Andrew Fastow tried to fire her and take her computer away to confiscate the information from reaching the public. We have identified them in two kinds of situations in the Satyam case. First of all there is the objective conflict of interest that involves the firm and the auditors of PWC since the latter should have been impartial in their evaluations. Secondly in Satyam's case there is the subjective conflict of interest due to the emotional approach kept by the CEO, who could have decided to repair the situation of his company while it was still possible, rather than to give the wrong appearance of a great success.

Comparison between the companies

In this comparison we are just going to mention the part that we think are the corner stones in the two scandals. There are a number of differences and similarities between the companies, for example they both have almost the same issues with living up to the standards of the ethical principles. The companies both wanted to have a good surface towards the public but neither of the companies shared the truth with society and through that society did not gain any benefits. They did not live up their duties which they had undertaken when they entered contracts with the shareholders. When it comes to the three ethical topics we have noticed that the systemic issues allowed both the companies to take advantage of this weak point in the system, as we mentioned there should be more warning signals coming up when companies act in this way; borrowing money, hiding information, inside trading, etc. It seems that the free market approach did not play its part in these two cases; the behavior of the companies showed that the lack of regulations at should enforce the law had many flaws. Even though there might be problems within the system there were some key individuals in both companies that came up with the ideas of behaving this way. Here, the big difference is that in Saytam there was the CEO alone that conducted the fraud while in Enron there were at least three people involved with the scam.

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Another big part in the cases is the conflicts of interest. The main conflict in both companies was the objective conflict; they wanted money for themselves instead of living up to the expectations of the shareholders. In India it was even worse because the culture allowed relationship based on power and political influence, they ended up at number 84 of 180 in the international corruption index. (Transparency International).

Conclusion
The cause of the problem could be the power of greed, not just for money but competition, success, and prestige, which overshadowed the responsibility to meet fiduciary duties. Corporations are under pressure to impress investors, keep shareholders happy, and maintain high stock prices in the market. There is more focus on the short gains. The other lacuna in the modern financial world is lack of human touch. It could also be concluded that the reputation depends largely upon the person involved in the scandal. Enron had many key people involved in the scandal and ended up filing the bankruptcy but, Satyam scandal was a game played by just one person Mr. Raju. Thus, even if Satyam lost some important clients such as State Farm Insurance and Coca-Cola, the company had the possibility to not lose its reputation (of company with competencies). We would recommend that the system in which the corporations operate need to improve. The system has to take steps to avoid these scandals and should be more preventive. And even if a company indulges in unethical practices, the system should impose penalties and punishments. At individual level, the change has to start at the top. Business culture forms by the way managers and the top level management performs. Management should understand that they need to lead by example. And if the top management is involved in such practices the system should encourage employees to blow the whistle. Also, key people in the organization should understand that they have a big responsibility and need to change their attitude towards the way they run the organization.

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References
Buondonno, J., David, N., Pufky, R., & Rollings, M. (n.d.). The Enron accounting scandal. Retrieved from www.crazymonkies.com/papers/Accounting%20-%20Enron%20Scandal.pdf Washington Post. (2004). Timeline of Enrons Collapse. Retrieved from http://www.washingtonpost.com/wp-dyn/articles/A25624-2002Jan10_5.html Ackman D. (2002). Sherron Watkins had whistle, but blew it. Retreived from http://www.forbes.com/2002/02/14/0214watkins.html The Financial Express. (2009). How Satyam pulled off India Incs biggest fraud. Retrieved from http://www.financialexpress.com/news/how-satyam-pulled-off-india-incs-biggest-fraud/408333/ Janalaya, S. (2009). Raju diverted salaries of 13,000 non-existent Satyam staff: CID. Retrieved from http://www.indianexpress.com/news/raju-diverted-salaries-of-13-000-nonexistent satyam-staff-cid/414310/ Ramana, K.V. (2009). The canary sings: 100 knew it. Retrieved from http://www.dnaindia.com/money/report_the-canary-sings-100-knew-it_1222670 Webcpa. (2009). PWC India auditors charged in Satyam case. Retrieved from http://www.webcpa.com/news/31258-1.html Raju, B.R. (2009). Letter to Shareholders. Retrieved from http://www.hindu.com/nic/satyam-chairman -statement.pdf Economic Times. (2008). Satyam Board to discuss dilution of stake. Retrieved from http://economictimes.indiatimes.com/Infotech/Satyam_pledges_shares_with_lenders/articleshow/3905 278.cms Business Line. (2008). Satyam to buyMatyas Infra, Matyas Properties for $ 1.6 b. Retreived from http://www.thehindubusinessline.com/2008/12/17/stories/2008121751540100.htm CNBC-TV 18. (2008). Experts decry Satyam-Matyas deal: Call it unethical. Retrieved from http://www.moneycontrol.com/news/market-outlook/experts-decry-satyam-maytas-deal-call-itunethical-_371198.html Thaindian News. (2008). Two more directors resign from Satyam board. Retrieved from http://www.thaindian.com/newsportal/uncategorized/two-moreHYPERLINK%20%22http://www.thaindian.com/newsportal/uncategorized/two-more-directorsresign-from-satyam-board_100136131.html%22directors-resign-from-satyam-board_100136131.html Economic Times. (2009). Promoters stake in Satyam dips to 3.6%. Retrieved from http://economictimes.indiatimes.com/markets/stocks/stocks-in-news/Promoter-stake-in-Satyam-dipsto-36/articleshow/3944218.cms Economic Times. (2009). Satyam fallout: Sensex felled by wall of shame. Retrieved from http://economictimes.indiatimes.com/markets/analysis/Satyam-fallout-Sensex-felled-by-Wall-ofShame/articleshow/3949400.cms Post, J.E., Varma, J.R., Menon, K., Desai, A., Raghavan, A., Srinivasan, V., Parekh, S.P., & Vohra. N., (2009). The Satyam Story: Many Questions and A Few Answers. Vikalpa: The Journal for Decision Makers,34(1), 69-88. Retrieved from Business Source Premier database. Transparency International. (2009). Corruption Perceptions Index 2009. Retrived from http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi_2009_table

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Appendix #1

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Appendix #2

Creative Accounting

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