ENRON: The Ethical Scandal

ENRON: A BRIEF BACKGROUND

Enron was a Houston-based natural gas pipeline

company formed by merger in 1985. By early 2001, Enron had morphed into the7th largest U.S. company, and the largest U.S.buyer/seller of natural gas and electricity. Enron was heavily involved in energy brokering, electronic energy trading, global commodity and options trading, etc.

DOWNFALL
On October 16, 2001, in the first major public

sign of trouble, Enron announces a huge thirdquarter loss of $618 million. On October 22, 2001, the Securities and Exchange Commission (SEC) begins and inquiry into Enrons accounting practices. On December 2, 2001, Enron files for bankruptcy.

The Rise and Fall of Enron

Movement of Enrons share price (USD)

Ethical Issues:
Misrepresentation of

Accounts Insider Trading Government Probing Media Hype

Fudging of Accounts
Tweaking the numbers in financial statements

Hiding losses in off-balance-sheet subsidiaries

Fraudulently misrepresenting Enrons financial

condition in public reports Engineering off-balance-sheet schemes to funnel money to themselves, friends, and family

Role of Top Management

CFO Andrew Fastow

CEO Jeff Skilling

CEO Kenneth Lay

Arthur Anderson (AA) Co

David Duncan

Enron's chief auditor at Anderson His job was to check Enrons accounts He is accused of ordering the shredding of thousands of Enron-related documents in an effort to hide them from Securities and Exchange Commission investigators

Government Lobbying
Spent $3.45 million in lobbying expenses in 1999

and 2000 for deregulation of the energy business Principles of transparency, accountability and citizen oversight all removed under deregulation.
California Crisis.
Influencing Government policies at federal,

state and national levels.

Media Hype
"model for the new American workplace" - New

York Times "America's Most Innovative Company" for six years running- Enron website 22nd in its Companies to "Work for in America Forbes Without the media hype machine, it would be hard to imagine the bubble getting so large.

Role of various entities on a Companys Report

Auditors

Audit Committee(Directors)

Enron Board of directors

Company Report

Share Holders

Impact on The Stake holders

Employe es

Bankers and Creditors ENRON

Share holders

Society

Govern ment

Aftermath Events
SOX Act in 2002
Megaclaims Litigation in 2004

Enron Creditors Recovery

Corporation Legal proceedings against the heads

Conclusion
Reforms in Accounting regulations by SEC

Reforms in Corporate Governance

Closer scrutiny of analysts' recommendations Prohibition of ownership of both auditing and

consulting services by the same accounting firm Influence of private companies in Government Policy Making Change in executive compensation system