CASE DIGEST:

Gather Information on the Ethical and

Governance Issues of Enron Corporation

A-338

Bondoc, Christine Joy

Cuevas, Aramis Joy
De Jesus, Jhalynaida
Divino, Shammah
Tendero, Vyn
 CASE DIGEST

I. Title: Gather Information on the Ethical and Governance Issues of Enron Corporation

II. Scenario/Information:

In October of 2011 a corporate scandal was revealed that led to the bankruptcy of Enron
Corporation, an energy company based in Houston, Texas. Considered one of Americas most
innovative companies in the late 1990s, Enrons collapse came as a shock to the public. In
addition to being the largest bankruptcy reorganization in American history at that time, Enron
was cited as the biggest audit failure. It was also referred as a paragon of corporate responsibility
and ethics.

Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and
InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff of
executives that, by the use of accounting loopholes, special purpose entities, and poor financial
reporting, were able to hide billions of dollars in debt from failed deals and projects. Chief
Financial Officer Andrew Fastow and other executives not only misled Enron's board of
directors and audit committee on high-risk accounting practices, but also pressured Arthur
Andersen, the companys outside auditor to ignore the issues.

The Enron executives engaged in a broad scheme to inflate the companys earnings,
which in turn increased the companys stock price. The scheme was aimed at showing that Enron
was steadily growing and meeting analysts earnings expectations. In reality, Enron was making
bad investments and recognizing non-existent revenue.

The schemes hid the fact that the companys cash flow was terrible and did not deserve
an investment-grade credit rating. Ultimately, the manipulation of the financial statements helped
Enrons stock price to grow from $30 per share in early 1998 to more than $80 per share in early
2001. Even when the stock price started to fall, executives slowed the fall by continuing to
manipulate the financials.

Enron shareholders filed a $40 billion lawsuit after the company's stock price. Enrons
stock price began a dramatic slide, dropping from $90.75 in August 2000 to $0.26 by closing on
November 30, 2001. Its credit rating went to junk status, which caused the share price to collapse
and banks refused further finance, suppliers refused to supply and customers stopped buying.

The U.S. Securities and Exchange Commission (SEC) began an investigation, and rival
Houston competitor Dynegy offered to purchase the company at a very low price. The deal
failed, and on December 2, 2001, Enron filed for bankruptcy under Chapter 11 of the United
States Bankruptcy Code. Representatives said that the public deserves honesty and integrity by
public companies, and Enron executives mislead analysts and investors. Enron's $63.4 billion in
assets made it one of the largest corporate bankruptcies in U.S. history.
III. Problem:

Enron Corporations reported financial condition was sustained by institutionalized,

systematic, and creatively planned accounting fraud. Its executives engaged in a broad scheme to
inflate the companys earnings, which in turn increased the companys stock price. The scheme
was aimed at showing that Enron was steadily growing and meeting analysts earnings
expectations. This is also known since as the Enron scandal.

IV. Possible Solution:

This scandal clearly illustrates the need for transparency and thorough auditing within
organizations. Executive management may have rationalized their decisions as serving the best
interest of the company but it is clear that their motives were not aimed exclusively towards
benefiting the organization.

The auditing system that the company had in place failed to serve its purpose in the
detection of fraudulent activity which shows a need for more comprehensive accountability. An
organization is not an individual but a collection of individuals working towards a common goal.
Because of this, companies need transparency as well as the means at all levels to be able to
report unethical activity on behalf of any held position regardless of hierarchical status. A
companys ethics program should not be assessed based solely on how it looks on paper, but
rather how it is integrated into the culture of the organization and the amount of transparency and
ethical autonomy that is granted at all positional levels of the company.

On that basis, new accounting regulations were made, such as the Sarbanes-Oxley Act of
2002, companies have had an opportunity to reevaluate their processes and their controls over
financial reporting to certify that firms statements are accurate. Companies have been forced to
improve the controls surrounding their accounting systems, and certainly this helps make
financial information more reliable.