ETHICS & CORPORATE GOVERNANCE

The fall of Enron

SUBMITTED BY: Section B: Group B4 Aditya Dutta Ankit Jha Kunal Parmar Saket Singh Shubham Agnihotri Sunny Kohli 2012066 2012070 2012085 2012103 2012108 2012117

Breach of Governance
Enrons Board of Director was well aware of flawed accounting practices, lax auditing by Arthur Anderson, lack of control over CFO and CEO, lack of stricter and clear rules and regulations from the government. The rules for Special Purpose Entities (SPE) mandated that an independent third party should own at least 3% equity stake of SPEs capital structure. When this rule is violated, it was to be consolidated in the Enrons Balance Sheet. However, this rule was not followed in many cases and it resulted in inflated figures. Even with the breach of corporate governance, Enron managed to attract large sum of capital. Accounting and financing manoeuvring led to increase in the value of stock but it was not sustainable due to factors already mentioned above. Other reasons that led to downfall were Stock options as a part of remuneration, incentives for the employee linked to stock price, bonuses for achieving targets, employees were made to invest their retirement savings in company stocks.

Key learnings
The management should never try to fudge accounts in order to show profits. The organizational and employee goals needed to be aligned. Enrons employees valued and preferred their self-interest to that of the interest of stockholders and stakeholders The incorrect and illegal techniques used to fudge accounts can only be profitable in the short run. However, it proves to be disastrous in the long run. Management should always follow the code of organizational ethics. Should never try to bend the rules for any employee. The rules must apply to every employee and to the same extent. One should never engage in unethical practises in order to retain customers or to gain profits for the firm. Greed can make you cut ethical corners. Enron's ethical drift was further motivated by a desire to manage the credit rating and to manage the need for cash and earnings volatility, in violation of GAPP and SEC rules.

Could the events have been prevented

SPEs formed for temporary solutions of cash flow but they borrowed capital from outside and never shown debt in balance sheet of Enron Before First write off announced, investment community and advisors must have taken some action Senior management must set high moral and ethical standards, and intolerant for any kind of unethical practice Effective communication and taking measures at an appropriate time