A CASE OF CORPORATE DECIET : ENRON WAY Presented to Mam Eesha Tariq Presented by: ZARA BATOOL HINA ZAFAR

ARSHIA IJAZ

A Case of Corporate Deceit: The Enron Way

This case documents the evolution of fraud culture at Enron Corporation and vividly explains the downfall of this giant organization. The objectives of this case is to show the impact of culture on established management control procedures and emphasize the importance of resolute moral leadership that shape the society and affect the lives of millions of people.

Millions of people were astonished ,and had one single question in their minds.
HOW CAN ENRON COLLAPSE ? How can a company with 20,000 employees and operations in 40 countries fail?

 Background

The Houston Gas Company merged with InterNorth Inc. in

1985 to create the Enron Corporation. The new company founded by Kenneth Lay inauspiciously started with heavy operating losses and several hostile takeover attempts in the early years. At one point it seemed almost certain that Enron would dissolve. But Enron survived, as it repurchased the major blocks of shares at premium price as the New York Times reported clearly on 21 October 1986, Enron buys backs its stock.

Rise of Enron
In early 1987, Enron unveiled its new logo and its first global

advertising campaign.
The company followed a growth strategy with renewable energy and

the customers were ready to pay price premium for renewable energy making it a profitable business.
Kenneth Lay was keenly interested in expanding the Company and

creating value for shareholders. He hired Jeff Skilling who was

the head of energy consulting business at McKinsey and Company to lead the trading and finance operations, who impressed with the GAS BANK PROPOSAL to grab instant success

 Enron was interested in taking advantage of liberalization policies in other

countries and developing institutionalized networks . Became the first company to construct a new power plant in U.K
The business environment was changing fast at this time and exceeding

analyst expectation was viewed as confirmation of company growth.

The shareholders became more demanding and CEOs were pressured

to put shareholder interests above everything else, leading to the proposal that management should have stakes in the company.

In late 1999, web based system, Enron Online was launched in order to broaden the market reach and accelerate the business activity and by the end of 2000 it became the worlds largest web-based e Commerce system.

 In March 1998, Andrew Fastow was promoted as the Chief

Financial Officer because of his market knowledge and capability to play in Enron's favor by designing a complex web of companies that solely did business with Enron. In 1999, Fastow organized two limited partnerships, LJM Cayman (LJM1) and LJM2 Co-investment L.P.(LJM2). The entities were formed to participate as the outside equity Investor in special purpose entities set up by Enron Fastow convince the Enron board to permit him run the companies, effectively waiving the Enron's code of ethics.

 Revenue of Enron company grew from USD 4.6 billion in 1990 to USD 100 billion by 2000, making in the seventh largest company in the united states.
Downward Spiral Skilling totally transformed Enron culture to align with the new economy to thrill the stock market and stakeholders. He expended by re-branding its image, feeding an increasingly expectant investor forums, more risk taking firm Recruited graduates and MBAs of prestigious universities who show up being aggressive ,extrovert ,brightest financial engineers.

 Enhanced Cowboy Capitalism, and those who succeeded were

rewarded in terms of bonus, pays checques. Company encouraged experimentation but discouraged anything other than success. Enron culture shaped a vulgar capitalist ,deregulations of ethics ,behaviors of employees August 2001 ,skilling resigned and soon sold blocks of shares values more than $33 million. Kenneth lay soon joined back to show things getting appropriate But Stock prices started to declining

 By September 2001,enron initiated the process of preserving

the core business by selling marginal assets. By Wall street journal New York for deals and deal-makers Enron official sell shares amid stock price slump. Dynegy (energy trader)agreed to buy Enron in $9 million stock deal . Due to bad market reputations and differences of corporate culture Dynegy decided to give up the deal. Finally US SECURITIES and exchange commission filed civil fraud complaints against Anderson 2nd December 2001 ,ENRON was filed as a bankrupt company Kenneth lay ,skilling ,Fastow were punished in covering range of Bank fraud, securities fraud, all financial crimes

 Reasons of Downfall of Enron. Skilling contributed to a culture of arrogance ,extreme decentralization, fierce internal competition, an attitude that the company can do anything. Company discouraged anything other than success. Executives began to tamper the books in order to support the huge growth engine. Several special partnerships were created that were not reported on Enrons Books Valuing integrity was down the list

 Continued
Entire emphasis was on Stock values almost to the exclusion of

everything else and MONEY was the only Yardstick. Those who did not produce deals were quickly TERMINATED. Putting enormous pressure for short term output. Employees who succeeded in Cowboy capitalism, were rewarded large pay cheques, bonus and stock options No risk Assessment and control system

Difficulties in detection of corporate fraud

Executors are familiar with accounting procedures and have

the ability to cover up fraud. Auditors may lack adequate training in the nature of fraud and investigative methodologies. The time and budgetary constraints associated with external audit results in external auditors increasing their reliance on managements representations of financial statements. External auditors can experience an agency problem of an inherent conflict of interest because they are investigating the party that paid for their services, thus creating built-in conflict for auditors.

 Management can address fraud risk by two corporate control

mechanism 1-internal Audit Function 2-External Audit Function . Management pay close attention to four aspect of policy development 1-Clear understanding regarding theft behavior 2-Enforcement of sanctions 3-Publicizing the sanctions 4-Continous dissemination of positive information

MANAGEMENT CONTROL Model at Enron

Leadership of Richard kinder leadership of Jeff-skilling

1-both people and number oriented. 1-Numbers oriented. 2-emphasize long term result 2- emphasize short term goals 3-fair performance 3- unattainable performance 4-promoted realistic proposals 4-promoted overly ambitious proposal 5-compensation mainly salary 5- stock based compensation 6-state of the art control 6- control system but destabilized viz risk control ,performance and dysfunctional review and code of ethics. 7-Compliance approach to managing 7- unconcerned approach to manage business ethics business ethics

Summary
Fraud in an organization can be occurred by examining

elements that comprise such actions. According to standard chartered board, Fraud triangle consists of 3 main conditions .1 INCENTIVE /or pressure to commit fraud, 2-oppurtunity for fraud to be perpetrated.3-Attitude that enable person to rationalize fraud.
ENRON CASE IS ONE OF THE CORPORATE DECIET

CASE.As it was 7th largest corporation in United states based on its report revenues. In previous 10 years Enron has evolved from regional natural gas provider to, among other things.

 Trader of natural gas (Gas bank) established by Skilling,

electricity and other commodities, with retail operations in energy and other products. For the past 16 years Enron is filled with bankruptcy. Main factors involved were:Accounting malpractices. Extreme corporate culture Extreme decentralization Unrealistic goal setting from top management .

Main purpose was to earn PROFIT ,Grab Shares from the

market as much as they can.

 Not valuing integrity .

Were focusing on growth strategy. Trades at Enron were recorded at full value as revenue, rather

than aligning in accordance to actual profit achieved. Code of ethics was Window dressing. -Ethical norms were demoted . -Put high emphasis on short term output rather than long-term -Faulty independent Auditor performance contributed to collapse of this giant organization.

 Steps were finally taken in regulatory environment to

investigate Fraudulent companies and non-compliant organizations

AICPA (American institute of certified public accountants) to

oversee auditors of publicly held companies. AICPA agreed to develop improved financial reporting models ,set new measure for tracking fraud practices.
The most important change that occurred was the Enactment of

Sarbanes -Oxley Act ,that was passed on 30th July 2002,as a reaction to the growing corporate and accounting scandals,and control corporate deceit in future. Penalty was also enhanced in its domain.

 Enrons auditor Arthur Anderson firm was closed after the

scandal ,Skilling was sentenced to 24 years of prison, while Kenneth lay died in July 2006 before the sentencing was due.

Thank-you