ENRON Case Study

BUSI NESS E TH ICS

Does
anybo dy real ly care abo ut it?

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 About ENRON
q The Enron Corporation was created out of the merger of
2 major gas pipeline companies in 1985.
q Provided natural gas, electricity and communications
services
q In 2000 Enron’s annual revenues reached $100 billion
and was ranked 6th largest Energy Co. in the world.
q From 1998 to 2000 alone, Enron’s revenues grew from
about $31 billion to more than $100 billion, making it 7th
largest Co of the Fortune 500.

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Key Men involved in the scandal
Kenneth Lay
Chairman
Jeffrey Skilling
Chief Executive Officer
Andrew Fastow
Chief Financial Officer

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 About the scandal
v Enron’s case was a clear picture of high level accounting
fraud through which the Co’s top level officials profited
personally through illegal transfer of funds.
v In 2001 Enron filed for bankruptcy
v It collapsed under a mountain of debt which had been
concealed through a complex scheme of “off-balance-
sheet partnerships.”
v Enron used “special-purpose entities”(SPE’s), to conceal
losses.
v Enron had established the SPE’s to move assets and
debt off its balance sheet & to increase cash flow by
showing that funds were flowing through its books when
it sold assets.
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Enron’s Partners in the Scandal
n Vinson & Elkins
Legal firm which supported all of Enron’s
illegal activities.
n Merrill Lynch

Investment banking firm

n Arthur Andersen LLP

Audit firm which helped Enron in all its

accounting frauds.
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 The Impact/Effect of Enron’s Scandal

n Caused tens of billions of dollars of investor

losses
n Collapse of electricity-trading markets
n Global loss of confidence in corporate integrity
n 4000 employees struggling to find jobs
n 1 senior Enron executive committed suicide
n Many retirees were forced to return to work in a
bleak job market as their Enron-heavy
retirement portfolios were wiped out

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 Consequences
n Enron faces many law actions
n Arthur Andersen faces some 40 shareholder
lawsuits for damages more than $32 billion
n In July 2003 Enron announced its intention to
restructure & plan to pay off its creditors
n Most creditors would receive b/w 14.4 cents &
18.3 cents for each dollar they owed
n The most important result Enron’s scandal was
the passage of the Sarbanes-Oxyley Act of
2002.
n This Act prescribes the internal control
requirements for publicly traded companies
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