Awa Traore

Benih
Hartanti
Irwan
Arfandi

Business Ethics Case

Masters of Management
Gadjah Mada University
Yogyakarta - Indonesia

Group 3
1

Enron Company Profile

Formed in 1985 by Kenneth Lay from
a merger of Houston Natural Gas and
Internorth The first nationwide
natural gas pipeline network in
Houston, Texas
Enron pursued a diversification
strategy by expanded pipeline
business involved natural gas
trading

Timeline of Enrons Collapse

Date

Event

20 Feb,
2001

Fortune Magazine story calls Enron a highly

impenetrable Co. and stock was overpriced.

14 Aug,
2001

Jeff Skilling resigned as CEO, citing personal reasons.

Kenneth Lay became CEO once again.

12 Oct, 2001 Arthur Anderson legal counsel instructs workers who

audit Enrons books to destroy all but the most basic
documents.
16 Oct, 2001 Enron reports a third quarter loss of $618 million.
24 Oct 2001

CFO Andrew Fastow who ran some of the

controversial SPEs is replaced

Timeline of Enrons Collapse

Date

Event

8 Nov 2001

The company took the highly unusual move of

restating its profits for the past four years. It
admitted accounting errors, inflating income by $586
million since 1997. It effectively admitted
that it had inflated its profits by concealing debts in
the complicated partnership arrangements.

2 Dec,2001

Enron filed for Chapter 11 bankruptcy protection and

on the same day hit Dynegy Corp. with a$10 billion
breach-of-contract lawsuit.

12 Dec 2001

Anderson CEO Jo Berardino testifies that his firm

discovered possible illegal acts committed by Enron.

9 Jan 2002

U.S. Justice department launches criminal

investigation.

Enrons Accounting Fraud Diagram

Enron

Seller

Buyer

Mark To Market Method

Forecaste
d Future
Price

C
O
M
P
A
R
E

Original
Price
paid for
the
contract

Overstated

Debt

Understated
Special Purpose Entity
Profit

Debt
&
Failing
Investme
nt

Sales
Revenue

Ethical Point Of View

The Systemic Issues

White collar crime done by the
vital executive in an organization
(Enron and Arthur Andersen)
The crime is included not only as the
crime in Law point of view but also
as the organizational fraud which
effect the whole shareholder of the
organization.

Corporate Issues
In Enron
The Enron deception was practicing the
accounting fraud by creating the SPS
(Special Purpose Entity) which exchange
the debt and failing investment into sales
revenue in financial statement.
This Fraud is done by the cooperation of
Enron CFO, few of Enron people and
Andersens chief auditor for Enron

In Arthur Andersen Public

Accountant
As an organization of public
accountant Arthur Andersen
violated the regulation of the
Public Accountant practices because
Andersen was not only as the
internal auditor but also as the
external auditor of Enron.

Individual Issues
Moral Hazard conducted by several
individual in a important role of an
organization (CFO and Chief Auditor)
Whistle blowing done by Sherron
Watkins (Vice CFO)

10

Suppose : Enron Acc. Practice allowed

by GAAP and the stock was not fall
This action still considered as an
unethical behavior in business, because
the basic intention for conducting this
action is fraudulence.
If, this action is allowed by the GAAP and
no one have the intention for conducting
an any fraudulence action, so the
unethical behavior would be the
Whistle Blowing, because the related
person basically has no right to share the
company information to other without the
11
authority of the company itself

Andrew Fastow and with Arthur

Andersens
Assistance set up a series of limited
Partnership called special purpose
entities

The Guilty Parties

Oct 2, 2002 :
Andrew Fastow is arrested on
charges of fraud
and money laundering. He would
eventually
face 98 charges
Jan 14, 2004 :
Former Enron CFO Andrew Fastow
agrees to a
plea agreement and a 10-year prison
sentence. He pleads guilty to one
count of
conspiracy to commit wire fraud and
one
count of conspiracy to commit
securities
fraud. He also agrees to co-operate
with

Enrons Former CFO, Andrew

Fastow
12

The Guilty Parties

Lead Partner for Enron Account, David

Duncan

Jan. 10, 2002: Arthur Andersen

says its employees destroyed a
"significant but undetermined
number of Enron documents
David Duncan were cited as the
responsible managers in this
scandal as they had given the
order to shred relevant
documents
On April 9, 2002 he pleaded
guilty; the maximum sentence
for his crimes is ten years, but
since he pleaded guilty and
became a witness for the
prosecution he would have
presumably received a much
smaller sentence.

14

Conclusion

Enron was a massive failure, partly because of its size,

partly because of its complexity, partly because the
controls to protect the integrity of capital markets failed,
and especially because of the massive greed and collusion
of key participants. Management failed, auditors failed,
analysts failed, creditors/bankers failed, and regulators
failed. The intersection of multiple failures sent a signal of
structural problems. Suddenly, the consequence of
deceptive financial data resulting from structural failure in
the capital markets was not merely a hypothetical
possibility. The speed with which the system responded
indicates the importance of fairly presented financial
information.

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