Business Ethics
Enron: Case Study
Submitted To: Dr. Deepika Dabke
Group Member
?
Rohan Shetye
C-27
?
Sarika Chiplunkar
Saurabh Patil Shan Shende Shradha Bhosale
C-32
C-33 C-35 C-37
?
?
?
Introduction
?
Founded in July1985 by Kenneth Lay through merger of Houston Natural Gas and InterNorth American based energy, commodities, and services company in Houston, Texas One of the world's leading electricity, natural gas, communications, and pulp and paper company. Employed approximately 20,000 staff by December 2, 2001. Arthur Andersen was external auditor firm. Hired numerous Certified Public Accountants (CPA) as well as accountants
?
?
?
?
?
Cont….
?
In just over 15 years, it turned itself from a regulated natural gas company into one of the world's largest energy traders.
?
Enron grew rapidly, containing three businesses - energy, wholesale and global services.
Established itself in the UK at the first signs of energy liberalization At the end of 2001, it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud, known as the "Enron scandal".
?
?
Awards
?
In 2000, it won the Financial Times "energy company of the year" award and "boldest successful investment decision". On 6th February, 2001 Fortune named Enron "America's Most Innovative Company" for six consecutive years. On 14 August 2001, Fortune magazine tipped the firm as one of the 10 growth stocks to last the decade.
?
?
Enron entry into India
?
In1992 India went to the United States to find energy investors to help with India's energy shortage problems. In December 1993, Enron inked a 20-year power-purchase contract with the Maharashtra State Electricity Board
?
?
Construction would be completed in two phases, and Enron would form the Dabhol Power Company to help manage the plan.
Power project was the first step in a $20 billion scheme to help rebuild and stabilize India's power grid In 1996, India's Congress Party was no longer in power
?
?
?
Maharashtra State Electricity Board (MSEB), the local state run utility, was required by contract to continue to pay Enron plant maintenance charges, even if no power was purchased from the plant which was not affordable.
?
From 1996 until Enron's bankruptcy in 2001 the company tried to revive the project and spark interest in India's need for the power plant without success.
Accounting and transactional techniques used by Enron
? ? ? ? ?
?
?
Financial Accounting Standards Board (FASB) 140 transactions Tax transactions Non-economic hedges with SPE and other related parties Share trust transactions Minority interests Prepays Mark-to-market/mark-to-model accounting
The Scam
? ?
It was revealed in October 2001 It is considered to be the biggest audit failure in the American
history
? ?
The reasons for the scam can be listed as follows: Revenue Recognition
?
? ? ?
Mark-to-market accounting
Special purpose entities Other accounting issues Corporate Governance
FINANCE
?
Finance underpins what a business does. Misinterpreting financial information has a negative impact on long term owner value.
?
1. 2. 3. 4.
Unethical audit Concealed liabilities and expenses Fraudulent asset valuations. Fictitious revenues Improper or fraudulent disclosures or omission
How can financial players be encouraged to behave responsibly? Issues of responsibility
1.
The need for truthfulness.
2.
3. 4.
Ethical Remuneration
Transparency & Asymmetrical information. Respect for the rules of the Market.
Instruments of Trust
1.
Personal Relationship. Charters and Code of Ethics Regulations of financial markets
2.
3.
Propose Remedies
?
Provide education to managers to increase awareness Reform U.S. accounting and financial reporting standards Improve the transparency in Core financial as well as non financial areas Improve stakeholder economic democracy in corporate governance.
?
?
?
Reference
?
http://news.bbc.co.uk www.wikipedia.com Enron and World Finance – A Case Study in Ethics
?
?
doc_492577900.pdf
Enron: Case Study
Submitted To: Dr. Deepika Dabke
Group Member
?
Rohan Shetye
C-27
?
Sarika Chiplunkar
Saurabh Patil Shan Shende Shradha Bhosale
C-32
C-33 C-35 C-37
?
?
?
Introduction
?
Founded in July1985 by Kenneth Lay through merger of Houston Natural Gas and InterNorth American based energy, commodities, and services company in Houston, Texas One of the world's leading electricity, natural gas, communications, and pulp and paper company. Employed approximately 20,000 staff by December 2, 2001. Arthur Andersen was external auditor firm. Hired numerous Certified Public Accountants (CPA) as well as accountants
?
?
?
?
?
Cont….
?
In just over 15 years, it turned itself from a regulated natural gas company into one of the world's largest energy traders.
?
Enron grew rapidly, containing three businesses - energy, wholesale and global services.
Established itself in the UK at the first signs of energy liberalization At the end of 2001, it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud, known as the "Enron scandal".
?
?
Awards
?
In 2000, it won the Financial Times "energy company of the year" award and "boldest successful investment decision". On 6th February, 2001 Fortune named Enron "America's Most Innovative Company" for six consecutive years. On 14 August 2001, Fortune magazine tipped the firm as one of the 10 growth stocks to last the decade.
?
?
Enron entry into India
?
In1992 India went to the United States to find energy investors to help with India's energy shortage problems. In December 1993, Enron inked a 20-year power-purchase contract with the Maharashtra State Electricity Board
?
?
Construction would be completed in two phases, and Enron would form the Dabhol Power Company to help manage the plan.
Power project was the first step in a $20 billion scheme to help rebuild and stabilize India's power grid In 1996, India's Congress Party was no longer in power
?
?
?
Maharashtra State Electricity Board (MSEB), the local state run utility, was required by contract to continue to pay Enron plant maintenance charges, even if no power was purchased from the plant which was not affordable.
?
From 1996 until Enron's bankruptcy in 2001 the company tried to revive the project and spark interest in India's need for the power plant without success.
Accounting and transactional techniques used by Enron
? ? ? ? ?
?
?
Financial Accounting Standards Board (FASB) 140 transactions Tax transactions Non-economic hedges with SPE and other related parties Share trust transactions Minority interests Prepays Mark-to-market/mark-to-model accounting
The Scam
? ?
It was revealed in October 2001 It is considered to be the biggest audit failure in the American
history
? ?
The reasons for the scam can be listed as follows: Revenue Recognition
?
? ? ?
Mark-to-market accounting
Special purpose entities Other accounting issues Corporate Governance
FINANCE
?
Finance underpins what a business does. Misinterpreting financial information has a negative impact on long term owner value.
?
1. 2. 3. 4.
Unethical audit Concealed liabilities and expenses Fraudulent asset valuations. Fictitious revenues Improper or fraudulent disclosures or omission
How can financial players be encouraged to behave responsibly? Issues of responsibility
1.
The need for truthfulness.
2.
3. 4.
Ethical Remuneration
Transparency & Asymmetrical information. Respect for the rules of the Market.
Instruments of Trust
1.
Personal Relationship. Charters and Code of Ethics Regulations of financial markets
2.
3.
Propose Remedies
?
Provide education to managers to increase awareness Reform U.S. accounting and financial reporting standards Improve the transparency in Core financial as well as non financial areas Improve stakeholder economic democracy in corporate governance.
?
?
?
Reference
?
http://news.bbc.co.uk www.wikipedia.com Enron and World Finance – A Case Study in Ethics
?
?
doc_492577900.pdf