Enron Tutorial One

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AFD Tutorial 1 prep

People
Andrew
Max
Jackson

1. How is Enron’s culture characterized? What was it like as a place to work?

 Dynamic fast paced intellectually stimulating

 Clear difference between the culture that Ken Lay proposed and the culture that
Skilling enforced
o Communication – We have an obligation to communicate.
o Respect – We treat others as we would like to be treated.
o Integrity – We work with customers and prospects openly, honestly, and
sincerely.
o Excellence– We are satisfied with nothing less than the very best in
everything we do. (Enron, Annual Report, 2000, p. 29).

 “loose-tight” in Skilling’s words he felt that the fast paced unpredictable culture of
the trading roles was justified by the effective RAC controls

 Work Hard Play Hard – Rebecca Marks entering party on motorbike

 Dirt bike tour reinforced risk taking

 Leadership Taylorism

2. What was ‘Rank and Yank’? What was the rationale behind it? How did it work in
practice?

 Rating of 1-5 from supervisors and co-workers

 bottom 20% of the underperformers were always pushed out of the company

 In theory would promote competition and excellence

 It made the employees compete against each other and this fierce competition gave
rise to an environment of total distrust

 Became political where friendly co-workers would do each other’s reports

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 Contributing factor to the increasing reluctance to consider risk/checks and balances

 Smartest Guys in the Room – If a moderator in RAC challenged and irritated an


originator of

3. How did the off-balance sheet special purpose vehicles work?

 Separate company will be set up with Enron Board member in charge but not
enough of an ownership to qualify as Enron’s company

 They would borrow money from a bank and then “purchase” goods off Enron for the
borrowed sum

 As a result Enron would have cash without debt

4. How did Enron use mark-to-market accounting?

 They would declare the value of a deal as income on the year that it was signed
rather than completed

 This meant that that the onus was on them to determine the value of a deal by
forecasting prices

 They would often go for either optimistic or deluded figures depending on how you
view it

 This helped them guarantee a continuous growth that supported their Wall Street
value

5. Why did Arthur Andersen not highlight the frauds that were taking place?

 approved for the structure of Special Purpose Entities (SPEs) which generate
false profits, hide losses and valuable information from Enron’s consolidated
statements
 also failed to meet the required outsider 3% equity at risk; and decision control
criteria for non consolidation
 Enron account often given to younger professionals who were swayed from due
diligence by glamourous rewards

6. To what extent was the collapse of Enron inevitable? Do you think the collapse could have
been avoided?

 Three groups could have made Enron avoid its collapse

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 The first was management, which could have adopted better accounting practices.
Unfortunately, once management has bought into the belief that the function of a
corporation is to reward upper management, rather than to maximize the profit of
the company’s owners (i.e., the shareholders), it is unlikely that they will behave
with total propriety.

 The second group that might have stepped in was the independent auditors.
However, the independent auditors made much more money from consulting than
they did from the audit, and we suspect there was a great deal of internal pressure
to preserve the revenue stream, rather than endanger it through petty propriety. In
a word, they were not independent.

 The third group was Congress, in its role as regulator. In 2000, Arthur Levitt, then
chairman of the Securities and Exchange Commission, proposed an SEC rule that
would bar accountants from also acting as consultants, because he felt it created a
conflict of interest. That proposal was rejected after 46 members of Congress called
or wrote personal letters to Levitt questioning the proposed rule and some
lawmakers reportedly threatened to withdraw funding from the SEC

 Enron’s methods behind its rise made its fall guaranteed it was built on a foundation
of riskiness and excess that meant that its culture was too far gone before there was
a sense of anything going wrong

7. What are the lessons that can be learned from the Enron debacle?

 Accountants shouldn’t act as consultants

 Companies which run on risk cannot necessarily be trusted to monitor its own risk

 An effective set of checks and balances are needed in a publicly traded company

 Mark to Market accounting should not be used in such a way that it is down to the
optimism of traders
 Company employees should be especially cautious about buying their employer's
stock. It's tempting to invest in a business you know well, but if something goes
wrong, you risk both losing your primary source of income and taking a big hit in
your investment portfolio at the same time.

 Wall Street should be more sceptical of constant growth

8. Outline the central features of the ‘commercialisation of the accountancy profession’


thesis (Hanlon, 1996). Does it explain why Arthur Andersen failed to prevent the accounting
fraud at Enron?

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 Done whilst studying PHD in Ireland
 As soon as the “big six” start making huge amounts of money they are unable to be
relied on to act as auditors they consequently occupy an uneasy space in capitalism
 Overlap between auditing and accounting
 The practice of ‘low-balling’ .On the basis of his empirical data, Hanlon claims that
‘because of constraints upon profitability’ ‘the senior’ responsible for overseeing the
audit ‘is not completely free to check a company’s accounts and ensure that the public
interest is being served as he or she is accountable to a superior...’
 Control is a key issue – the choices of entry level recruits being middle class more
likely
 Emigration is another control mechanism used by the 'Big Six', and the importance
attached to international experience has led to the movement of workers to 'global
cities' such as London, New York and Tokyo
 However, 'a spell abroad' has little to do with developing technical skills; rather, it is
symbolic of one's commitment and identification with the values and beliefs in
commercialism and profitability of those at the 'economic heartland
 Not only does this explain AA but also recent troubles with other firms

Possible group questions


1. Split into groups over whether individuals or Organisational culture was to blame
2. Has Enron changed your view on the responsibility of accountants and the role
they should fulfil ( morals or profits)
3. Was Enron a result of a flawed system or a flawed company
4. Would people have honestly said anything if they knew
5. Should the practises that Enron used be illegal?

Exam Notes
 Show extra reading
 Structured answers
 Author Date citations look great
 Be clear in language – strong statement
 1 author not 5
 Summarise Enron – American set up 1985
 Why is Enron important – most extreme example of corporate irresponsibility
 2000 111 Billion dollars revnue 2000 with ½ the employees of most comapines
with any where enar as many employees
 The Enron Schemes ; Mark to Market (Blockbuster) , SPEs, California energy
pricing, Performance review co
 Show critical analysis
 Conclusion – Implications and consequences
 Use names of leadership Ken Lay Jeff Skilling< Andy Fastow
 Think outside of the company – Media attention Fortune “Most Innovative
Company” , Athur Andersen, G Bush junior and senior friends with Lay, Economic
pressure for deregulation
 Sarbanes Oxley Act 2002 – MUST INCLUDE

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 Still have 3% rules on Special Vehicles

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