Group 2

By:
Acot-acot, Keirlyn
Alburo, Elmarian Jane Joy
Aldaba, Kaya
Aliman, Frank Dominic
Candido, Lou Bernadette
Cardejon, Ma. Kelly Anne
Julaton, Khaila Shane
Labonite, Kristine Angelika
Lacbayo, Alliah Mae
Mahinay, Neil Bryan
Maringal, Quennie
Panimdim, Francis Ivan
Pontalba, Jenyl
Secadron, Maylan
 Enron: The Smartest Guys in the Room

Enron Corporation was the nation's seventh-largest corporation and valued almost 70 billion
dollars. It had taken Enron 16 years to go from about 10 billion of assets to 65 billion of assets and it took
24 days to go bankrupt. It collapsed quickly because of arrogance, intolerance, and greed. This scandal
become the America’s largest corporate bankruptcy that has affected over thirty thousand employees
and numerous investors who trusted Enron Corporation along with the founder and executives.

Here are some relevant issues and topics surrounding the Enron scandal:

1. Corporate fraud and accounting manipulation

 Lack of ethical procedures- the Enron crisis entailed widespread accounting fraud and the use of
complicated financial instruments to conceal debt and exaggerate earnings. Before Jeffrey
Skilling join Enron, he made a condition which is to use a certain kind of accounting which is
called Mark-to-Market and the accounting firm, Arthur Andersen signed off and SEC approved it.
This allowed Enron to book future profits on the very day the deal was signed which left open for
manipulation.
 Enronomics- Enron executives used a technique to hide losses, toxic assets, and massive
amounts of debt from shareholder. It was proven that Louis Borget taken 3 million dollars of
corporate funds and put it to his personal account and the auditor told Lay that he and his
traders were manipulating earnings and destroying daily trading records but Lay chose to not fire
or even disciplined them because he value more the money that they were making for Enron.
 Arbitrage opportunity- this is known as any opportunity to make abnormal profit and the
returns was beyond the norm. Ricochet, is one of the new strategies that Enron had to create to
make some numbers. In the midst of power shortages in California, Enron's traders started to
export power out of the state and when the prices soared, they brought it back in. By shutting
down power plants, it would create shortages that would push stock process even higher.

2. Leadership and Corporate Culture

 Ethical erosion – individuals compromising their values in response to pressure from authority
or corporate culture (explained in early 1960s Milgram Experiment). The Performance Review
Committee (Rank and Yank) has encouraged the company to engage in aggressive and unethical
practices to achieve high rankings.
 Image Over Substance – the company prioritized short-term gains and instant financial rewards
and made substantial investments in marketing, branding, and public relations to be viewed as
innovative and successful despite the deficiencies in the underlying business operations. Enron
teamed up with Blockbuster to deliver movies that are on demand. Due to this, the stock price
soared 34% in 2days but it soon collapsed because the technology did not work. When ENRON
and Blockbuster's alliance failed, ENRON, on the other hand, used the magic of mark-to-market
to record millions in profits from the agreement that didn't even generate any.
  Lack of Risk Assessment - underestimating or disregarding the negative outcomes of the wide
range of complex and high-risk business ventures they are engaged in, such as energy trading,
broadband services, and international markets. In India, ENRON built a substantial power plant.
Even though ENRON was aware that all investors were wary of investing in India, it persisted to
do so despite the enormous risk involved. After making the careless choice, the enterprise lost a
billion dollars, but they continued to pay the executives with fictitious earnings.

3. Regulatory oversight and corporate governance:

 Auditor Independence- Arthur Anderson is both the external auditor and the consultant to
Enron. The financial benefits Andersen received from consulting services created a conflict that
compromised its ability to provide objective and independent audits.
 Conflicts Of Interests- Enron was losing money on cash basis yet it was still reporting profits.
Structure Finance was the idea of Andrew Fastow to keep the stock price up while hiding that
fact that Enron was in 30 million dollars in debt. He created hundreds of special companies
including LJM wherein he was the general partner and at the same time the Chief Finance
Officer of Enron which leads to a conflict of interest. The allegations of insider trading by Enron
insiders who sold their stock before the company's financial troubles shows a conflict between
insider knowledge and the duty to provide accurate and timely information to shareholders.
 Lack of transparency-Enron intentionally employed practices that concealed its true financial
position and business activities, thereby perpetuating a fraudulent narrative of profitability and
success. Bethany McLean's investigative reporting on Enron played a crucial role in highlighting
the lack of transparency and the financial irregularities within the company.
 Regulatory Loopholes And Gaps In Accounting Standards- Enron’s financial structure and
transactions were so complex that it was hard for outside parties to get a full picture of the
company’s operations. Accounting standards didn’t provide enough guidance on accounting for
these complex structures and transactions. The accounting standards did not require companies
to provide sufficient disclosures about their complex financial structures and transactions.

4. Investor Trust and Market Manipulation

 Fake Transactions - fraudulent transactions and deceptive accounting practices misled investors
and analysts into trusting that Enron was a profitable and fast-growing company. Circular Trades,
Mark-to-Market Accounting and Special Purpose Entities (SPEs) are some of these transactions.
 The Western US Energy Crisis of 2000 and 2001 – the company intentionally withheld power
supply and created an artificial scarcity in electricity which led to inflated prices due to high
demand and limited supply. California was selected by Enron to experiment with this new
concept of deregulated electricity.
5. Employee Impact

 Employee Welfare vs. Shareholder Profits – instead of looking out for the well-being of their
employees, Enron's leaders were more focused on making money for themselves and their
shareholders. Bankcruptcy fact: 20,000 employees lost their jobs and medical insurance while
top executives were paid bonuses totaling S50 million, employees lost S1.2 billion in retirement
funds, retirees lost S1 billion in pension funds, while Enron’s top executives cashed in S116
million is stock.
 Pension and Retirement Funds Manipulation – Enron's employees relied on the company's
pension and retirement funds, which they believed would provide them with long-term financial
security upon retirement. Unfortunately, the company's conduct, including the handling of these
funds, led to substantial losses for employees who relied on these funds for their future
prosperity.
 Whistleblower Protection - despite the efforts of Sherron Watkins to bring the financial
irregularities to the attention of Enron's management, the leadership of the company did not
take the necessary steps to rectify the situation or provide the necessary level of disclosure to
interested parties. As a result, the unethical practices persisted, ultimately resulting in the
bankruptcy of Enron. The Enron Corporation scandal highlighted the significance of providing an
atmosphere in which employees can feel secure and encouraged to report any instances of
unethical or illegal conduct.

6. Government Response

 Presidential bet- Enron had been the largest corporate contributor to the first presidential
campaign of George W. Bush. But in the midst of energy crisis, Bush became the president of
America and Ken Lay did have an easy access to this administration having the power to
manipulate and control some government officials. Even the governor of California, Gray Davis,
doesn’t have the power to stop this critical situation. The Federal Energy Regulatory
Commission, led by their president, Pat Wood, which regulates energy in America, refuse to
intervene.