Enron Tutorial One
Enron Tutorial One
Enron Tutorial One
People
Andrew
Max
Jackson
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
Leadership Taylorism
2. What was ‘Rank and Yank’? What was the rationale behind it? How did it work in
practice?
bottom 20% of the underperformers were always pushed out of the company
It made the employees compete against each other and this fierce competition gave
rise to an environment of total distrust
CE 2019
Contributing factor to the increasing reluctance to consider risk/checks and balances
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
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?
CE 2019
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?
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.
CE 2019
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
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
CE 2019
Still have 3% rules on Special Vehicles
CE 2019
Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.
Alternative Proxies: