I firmly believe I am innocent of the charges
against me as I have said from day one. This is
the statement of Ken Lay after the court verdict
against him. But, the question is, is is true that
he didn't do anything wrong? Let's find out.
Case on hand: Enron Corporation. A short
introduction about
enron, Enron was the nations seventh largest
corporation, valued almost 70 billiion dollars.
Itcollapsed quickly and bankrupt immediaately
becasue of arrogance, intolerance and greed.
The next question is... do you know these
guys? some of them might be the protagonist
or anagonists of our story for today. Let'sstart
with the antagonists.
First is Ken Lay, the Chairman of Enron known
as the apostle of deregulation and earned
more than 300 million dollars in compensation
in stocks for the last 4 years and left nothing.
Second is Jeff Skilling, The CEO of Enron, the
man who knows the answer to what future of
the enron was supposed to be. He strongly
believed that money was the only thing that
motivates people.
Andrew Fastow, the Chief Financial Officer
know as the sorcerers apprentice. He always
wants to to please the boss wherein he
created hundred of special companies to
create a magic.
Louis Borget and tom Mastroeni were the two
traders who
gambled away all the Enron's reserved. They
had to take some 3 million dollars of corporate
funds and put it in his personal account.
Ken Rice, on of the Men with Spikes. He is the
salesman of the group who sell deals to
different energy companies.
Cliff Bexter, company's Chief Dealmaker. He
died because of heartbroken about what
happen to the bankruptcy.
Lou Pai, the Key Skilling Liutenant. He build
this EES or Enron enrgy Services that ells
energy services to inductry line.
Tom White, when Enron Energy Services was
losing 50 million dollars, he made some
anumbers and the strategy that the aswer to
his problem is California.
Tim Belden, the believer of free market and
spent hours for the deregulation of California's
energy industry, looking for loopholes for enron
to make money.
George Bush, he won as the president that
hellped secure billions in government subsidies
for Enron international and helped promote Lay
as deregulations Ambassador at large.
Of course, in every stories there are
Antagonists and Protagonist. Now, let me
present to you the protagonist or the usual
hero of the story.
Amanda Martin, an attorney fron Vinson and
Elkins that is
the first executive that Jeff Skilling hired.
Mike Muckelroy, a veteran trader, suspicious of
Enron Oil's steady high profit.
Gray Davis, the Governor in California who
suspected all along. Hegot terminnated and
was replaced by Arnold Swarzenegger.
Sherron Watkins, was an executive who tried
to warn cheifExecutive Officer Ken Lay about
the company's boks were manipulated. She
become the whistleblower and testified in the
Senate.
Me, myself also is curious as to what went
wrong. So, lend me your ears as we will about
to dig deeper about the most controversial
corporate crime of the century.
Our group gathered the issues and topics
surrounding Enron's Scandal.
1.
First, Corporate Fraud and Accounting
Manipulation.
Since this issue is too narrow, we need to
Mark to Market Accounting was proposed by
Jeffrey Skilling and it was used by Enron
Corporatin to recognize the anticipated future
profits as immediate revenues. This practice
allowed Enron to inflate its reported earnings
by estimating the present value of expected
future cash flows from long-term contracts.
This happened during the contract between
Enron and the Blockbuster which had an
immediate success in days but fell apart
because of Enron's overconfidence totally
neglected their incapabilities with technology.
Special Purpose Entities (SPEs) were created
to hide Enron's debt form investors and
regulators. These entities were created to
appear as independent entities, butin fact
under the control of Enron. This happened
when Andrew Fastow creates hundred of
special companies to create a magic trick
making the debt diappear. Some these are
named Jedi, Chewco, Raptors and the most
ambitious creation is LJM.
Off Balance Sheet- The utilization of SPEs byt
Enron enabled the company to conceal
substantial amounts of debt from its balance
sheet, making a completely artificial
appearance of the company.
The Nigerian Barge Case- The Nigerian Barge
transacgtion was used to manipulate Enron's
financial statements. Since the dealwas treated
as a sale and not
as a financing agreement, it allowed Enron to
report immediate revenue that did not reflect
the true value of transaction. Merill Lynch was
involved in this case wherein it assisted Enron
is cooking its books by pretending to purchase
an existing Enron asset when it was really
engage in loan.
Document Shredding- David B. Duncan
ordered the destruction of of thousands of
paper documents and electronic files relating
the Enron manner after learning the inquiry by
the SEC in the Enron's complexfinancial
transactions.
Arbitrage Oppurtunity - this is an idea of Tim
Belden wherein they selected California to
experiment with the new concept of
deregulated electricity.
Ricochet is an example of this. In the midst of
energy shortages, Enron's traders started to
export power out of the state and when the
prices soared, they brought it back ijn, By
shutting down power plants, they could create
artificial shortages the would push the stock
pirces even higher.
2. Leadership and corporate Culture-
Ethical Erosion- Jeff Skilling instituted a system
known as the Performance Review Committee
that requires the people to be evaaluated and
graded from 0 to 5 and those who are in
graded as 5 will immediately be fired.
Image over Substance- also, Ken Lay does not
care even if the Corporation would not benefit
for a longer time since he's only target is to
create or produce more money. Just like what
happened to Vanhalla scandal, he prioritize
profit over the concern of the operation.
Lack of Risk Assessment- Enron kept on losing
money so the solution of Skilling was to take
enron to cybersace by creating bandwidth
trading market. And in India, they persisted to
invest and build a powerplant despite of
enormous risk. But then they failed to see
something which is that Indians can't afford to
pay for the power that is why they lost billion
project and paid up the executives.
3. Regulatory Oversight and corporate
governance
Auditor Independence- A.A. received 1 million
dollars per week as a financial benefits from
consulting services that created a conflict that
compromised its a bility to provide objective
and independent audits.
For the information of everyone, there are 3
common types of audts as to type of auditor.
1. External Audit- where Arthur Andersen belong.
They are performed by CAs in public practice
those who have acconting firm and they are
independent from aaudit client. They are
associated by FS audit that are directed
towards the internal users. Bakit kailangan ng
idependence? Para mapaniwalaan yung
sinasabi nung nageexpress ng independence.
2. Intenal Audit- Appraisal activity within the entitiy
or yung belong sa mgaa departments.
3. Government Audit- audit services performed by
government auditors.
So, ang role ng A.A. is t be be independent to
Enron pero hindi yun yung nangyari. According
to court document, Enron and Arthur Andersen
had improperly categorized hundreds of
millions of dollars as increase in SHE thereby
misinterpreting the tru value of corporation.
It did not also follow GAAp principles when it
considered dealing with related partnerships.
These dealings helped enron conceal some of
its losses.
Conflict of interests- this is the same as to what
i have discussed earlier.
o Andrew Fastow was a pleaser, like what i
have mentioned earlier he created hundred of
special companies. And LJM was the most
controversial company. Here, Andy was the
general partner at the same time CFO. He's in
trouble whether they are looking after Enron's
best interst or their limited partnes because
LJM existed solely for the interest of Enron.
Lack of Transparency- Bethany Mclean's
investigate reporting on Enron played a crucia
role in highlighting
the lack of transparency and the financial
irregularities within the company. May part sa
film na tinawagan ni Beth si Jeff and all of a
sudden may isang question siya na binigay kay
Jeff about sa financial position that no one
could answer which is " how exactly does
Enron make its mone? and she also write an
article tited "Is Enron Overpriced?" na naglead
sa pagudududa or naging eye opener ng iba.
4. Investor Trust and Market Manipulation-
The analysts become dependent as to the
informatuin that is available at that time. They
also trusted the company's financial statement
amd representation of company's
management. And some of them are willing to
believe at what Jeff says.
The Western US Energy Crisis if 2000 and
2001- Tim Belden was the person behind this
crisis, they took advantage to the new
deregulation rules for California's energy
market. Enron traders learned that by shutting
down powerplants, it could drive up prices
even more and even bet money on whether the
price of power would rise up by 2 billion dollars.
5. Employee impacy
Employee Welfare vs. Shareholders Profit-
While the employees ar suffering because the
2 billion dollars of pension and retirement funds
had disappeared, the top
executives cashed in 116 milllion in stock.
Pension and Retirement Funds Manipulation-
The employees lost everything due to Enron's
collapsed and retirement accounts of Enron's
rank and file workers were frozen.
Whistleblower Protection- As a result, the
unethical practices happened, ultimately
resulting in the bankruptcy of Enron. This
Enrons scandal highlighed the significance of
providing an athmosphere in which employees
can feel secure to report any unethical or illegal
conduct
6. Government involvement
Presidential Bet- In the midst of energy crisis,
George Bush became the president that is why
Ken Lay had an easy access to its
administration. And even the governor of
California does not have the capability to stop
it. The Democratic Senate forces the zzFERC
to impose regional price caps. Pat wood, the
chairman of PERC was the man Ken Lay had
personally recommended for the job.
Cash on Hand: Enron Corporation
