Awa TraoreBenih HartantiIrwan Arfandi

Group 3

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Business Ethics Case

Masters of Management Gadjah Mada UniversityYogyakarta - Indonesia

Enron Company Profile

• Formed in 1985 by Kenneth Lay from a merger of Houston Natural Gas and Internorth The first nationwide natural gas pipeline network in Houston, Texas

• Enron pursued a diversification strategy by expanded pipeline business involved natural gas trading

Timeline of Enron’s CollapseDate Event

20 Feb, 2001 Fortune Magazine story calls Enron a highly impenetrable Co. and stock was overpriced.

14 Aug, 2001 Jeff Skilling resigned as CEO, citing personal reasons. Kenneth Lay became CEO once again.

12 Oct, 2001 Arthur Anderson legal counsel instructs workers who audit Enron’s books to destroy all but the most basic documents.

16 Oct, 2001 Enron reports a third quarter loss of $618 million.

24 Oct 2001 CFO Andrew Fastow who ran some of the controversial SPE’s is replaced

Timeline of Enron’s CollapseDate Event

8 Nov 2001 The company took the highly unusual move of restating its profits for the past four years. It admitted accounting errors, inflating income by $586 million since 1997. It effectively admittedthat it had inflated its profits by concealing debts in the complicated partnership arrangements.

2 Dec,2001 Enron filed for Chapter 11 bankruptcy protection and on the same day hit Dynegy Corp. with a$10 billion breach-of-contract lawsuit.

12 Dec 2001 Anderson CEO Jo Berardino testifies that his firm discovered possible illegal acts committed by Enron.

9 Jan 2002 U.S. Justice department launches criminal investigation.

Enron’s Accounting Fraud DiagramEnron

Profit

Understated

Forecasted Future Price

COMPARE

Mark To Market Method

Seller Buyer

Overstated

Debt

Special Purpose Entity

Debt&

FailingInvestment

Sales Revenue

Original Price

paid for the contract

Ethical Point Of View

The Systemic Issues

• White collar crime done by the vital executive in an organization (Enron and Arthur Andersen)

• The crime is included not only as the crime in Law point of view but also as the organizational fraud which effect the whole shareholder of the organization.

Corporate Issues

In EnronThe Enron deception was practicing the accounting fraud by creating the SPS (Special Purpose Entity) which exchange the debt and failing investment into sales revenue in financial statement.

This Fraud is done by the cooperation of Enron CFO, few of Enron people and Andersen’s chief auditor for Enron

In Arthur Andersen Public AccountantAs an organization of public accountant Arthur Andersen violated the regulation of the Public Accountant practices because Andersen was not only as the internal auditor but also as the external auditor of Enron.

Individual Issues

• Moral Hazard conducted by several individual in a important role of an organization (CFO and Chief Auditor)

• Whistle blowing done by Sherron Watkins (Vice CFO)

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Suppose : Enron Acc. Practice allowed by GAAP and the stock was not fall

• This action still considered as an unethical behavior in business, because the basic intention for conducting this action is fraudulence.

• If, this action is allowed by the GAAP and no one have the intention for conducting an any fraudulence action, so the unethical behavior would be the Whistle Blowing, because the related person basically has no right to share the company information to other without the authority of the company itself

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The Guilty PartiesAndrew Fastow and with Arthur Andersen’s Assistance set up a series of “limited Partnership” called special purpose entities

Oct 2, 2002 : Andrew Fastow is arrested on charges of fraud and money laundering. He would eventuallyface 98 charges

Jan 14, 2004 :Former Enron CFO Andrew Fastow agrees to a plea agreement and a 10-year prisonsentence. He pleads guilty to one count of conspiracy to commit wire fraud and one count of conspiracy to commit securitiesfraud. He also agrees to co-operate withfederal prosecutors.

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Enron’s Former CFO, Andrew Fastow

The Guilty Parties

• Jan. 10, 2002: Arthur Andersen says its employees destroyed a "significant but undetermined“ number of Enron documents

• David Duncan were cited as the responsible managers in this scandal as they had given the order to shred relevant documents

• On April 9, 2002 he pleaded guilty; the maximum sentence for his crimes is ten years, but since he pleaded guilty and became a witness for the prosecution he would have presumably received a

much smaller sentence.

Lead Partner for Enron Account, David Duncan

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Conclusion• Enron was a massive failure, partly because of its size, partly because of its

complexity, partly because the controls to protect the integrity of capital markets failed, and especially because of the massive greed and collusion of key participants. Management failed, auditors failed, analysts failed, creditors/bankers failed, and regulators failed. The intersection of multiple failures sent a signal of structural problems. Suddenly, the consequence of deceptive financial data resulting from structural failure in the capital markets was not merely a hypothetical possibility. The speed with which the system responded indicates the importance of fairly presented financial information.

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