Enron Scandle

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Scandal… how it is starts?

A city boy, Kenny, moved to the country and bought a donkey from an old farmer for $100.00. The farmer agreed to deliver the donkey the next day. The next day the farmer drove up and said, "Sorry son, but I have some bad news, the donkey died last night." Kenny replied: "Well then, just give me my money back." The farmer said: "Can't do that. I went and spent it already." Kenny said: "OK then, just unload the donkey." The farmer asked: "What you goanna do with him?"

Kenny: "I'm going to raffle him off." (Note: To raffle is to sell a thing by lottery - draw lot - to a group of people each paying the same amount for a ticket) Farmer: "You can't raffle off a dead donkey!" Kenny: "Sure I can. Watch me. I just won't tell anybody he's dead." A month later the farmer met up with Kenny and asked, "What happened with that dead donkey?" Kenny: "I raffled him off. I sold 500 tickets at two dollars apiece and made a profit of 998.00." Farmer: "Didn't anyone complain?" Kenny: "Just the guy who won. So I gave him back his two dollars." Kenny grew up and eventually became the chairman of Enron. Page  2

Enron-Introduction

 Enron began in 1985 and it started as inter state pipeline company.  Enron is formed by the merging of Houston Natural base and Obama based InterNorth.  In 1988 it opens an office in UK & further extended to Gas Bank in 1989.

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Enron-Rise and Fall  Long term suppliers of natural gas  Holdings in U.K., Europe, South America and India  Broadband unit with natural gas business  Mark to Market Accounting practices  Constant losses  Largest bankruptcy in U.S. market  Suicides and imprisonments  Accountancy firm given maximum obstruction

Former Enron CEO Jeff Skilling

 4000 employees lost job  Charges against trading lay  11 criminal charges, including security and wire fraud, making false statements

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Enron founder Ken Lay

What went wrong?

 Accounting and corporate governance in the United States, ethical quality of the culture of business generally and of business corporations in the United States.  Change of business strategy and corporate culture to satisfy false means.  Lack of efficient board of directors.  Off book accounts.  Excessive stock options and excessive corporate compensation.  Financial cleverness.  Misuse of Government rules and regulations.

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Unethical practices & Culprits

 1993-2001: Enron senior management used complex and murky accounting schemes to reduce Enron’s tax payments • to inflate Enron’s income and profits • to inflate Enron’s stock price and credit rating • to hide losses in off-balance-sheet subsidiaries • to engineer off-balance-sheet schemes to funnel money to themselves, friends, and family • to fraudulently misrepresent Enron’s financial condition in public reports

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Lax accounting by Arthur Anderson (AA) Co? “Rogue” AA auditor David Duncan (fired 1/15/02)? Enron’s management for hiding losses in dubious offbalance-sheet partnerships? CFO Andrew Fastow for setting up these partnerships (10 year prison sentence 1/14/02)? CEO Jeff Skilling (24 year prison sentence 10/23/06)? CEO Kenneth Lay (died 7/23/06 with charges pending)? Media exaggeration and frenzy? Stock analysts who kept pushing Enron stock?

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Business Ethics violated

 Auditing companies consult for the companies they audit.  Auditing companies often accept jobs from their client companies  Appointment of accounting company by shareholders in practice but by senior management in actual.  Board of directors are paid largely in stock  Directors can sell early on the basis of insider information

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What needs to be done to avoid these scandals?

 Strong laws to avoid money laundering  Government control over corporate governance  Accounting practices need to be monitored by Government  Auditors to be changed every three years  Executive accountant shall not be from the auditing firm  Proper regulations on stock options buying and selling

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Conclusion and Questions remaining

 How to bring accounting firms and financial analysts to integrate CSR norms ?  … guarantee that these norms represent reality ?  … ensure company governance ?  … make companies responsible not only towards shareholders ?  … “de-co-opt” media and other organizations ?  … increase the integrity of business students and managers ?  … diminish the phenomenon of “ethical leveling”, denounced by Kierkegaard in …1850 !?

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Speakers – slidewise Slide 2 – Shainy Slide 3 – Amit Slide 4 – Sathish Slide 5 – Rajesh Slide 6 – Ramesh Slide 7 – Dinesh Slide 8 – Umesh Slide 9 – Himanshu Each one has to prepare speech for 1 min. We will have 2 practise sessions on 9th at 5.15 pm as the presentation might be scheduled for 10th . Study material on what to speak: You can get it from other attached PPTs / PDF sheeets. We need not speak on each item. Pick up key points in your respecitve slides & prepare for a speech of exact 1 min. (it can be slightly more than 1 min, but not less than 1 min) Page  11