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Enron Case Study De La Salle University - Graduate

School of Business
Ramon V. del Rosario College of Business
De La Salle University, Manila
Case Analysis on
Enron

Submitted by
ADUA!A, "ene Rose D.
D#RAD#, Earl D.
MA!C$A, S%ott
M#!&ER#, Reymond 'atri%(
BUS)*+M
La Sallian Business Leaders,i-, Et,i%s, and
Cor-orate So%ial Res-onsibility
".B
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Enron Case Study De La Salle University - Graduate
School of Business
.ABLE #& C#!.E!.S
Content Page
I. Background of the Case
A. Rationale
Company Profle
II. Case Narrative
A. Statement of the Prolem
B. !"ectives of the Case
III. Case Analysis
A. #heoretical $rame%orks
B. &ecision Criteria and 'eights
C. Alternative Courses of Action
&. (valuation of the ACAs
(. Best Solution
$. Implementation Steps
I). References
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Enron Case Study De La Salle University - Graduate
School of Business
$. BAC/"R#U!D #& .0E CASE
A. Rationale
(nron Corp. 5the 6Company78 is a 9ouston,ased energy and commodities trading
holding company currently under $ederal ankruptcy reorgani:ation protection.
#hrough appro;imately -<.44 domestic and foreign susidiaries and a=liates< the
Company conducted usiness diverse markets and industries< including %holesale
merchant and commodity market usiness.
#hroughout the late 3224s< (nron %as almost universally considered one of the
country>s most innovative companies ,, a ne%,economy maverick that forsook musty<
old industries %ith their cumersome hard assets in favor of the free%heeling %orld
of e,commerce. #he company continued to uild po%er plants and operate gas lines<
ut it ecame etter kno%n for its uni?ue trading usinesses. Besides uying and
selling gas and electricity futures< it created %hole ne% markets for such oddall
@commodities@ as roadcast time for advertisers< %eather futures< and Internet
and%idth.
'hen AeBrey Skilling %as hired as the Chief (;ecutive !=cer of the Company< he
developed a staB of e;ecutives that< through the uses of accounting loopholes<
special purpose entitles< and poof fnancial reporting< %ere ale to hide illions in
det from failed deals and pro"ects. Chief $inancial !=cer Andre% $asto% and other
e;ecutives %ere ale to mislead (nronCs oard of directors and audit committee of
high,risk accounting issues as %ell as pressure Andersen to ignore the issues.
#he (nron scandal< revealed in !ctoer +443< eventually led to the ankruptcy of the
(nron Corporation< an American energy company ased in 9ouston< #e;as< and the
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Enron Case Study De La Salle University - Graduate
School of Business
dissolution of Arthur Andersen< %hich %as one of the fve largest audit and
accountancy partnerships in the %orld.
In addition to eing the largest ankruptcy reorgani:ation in American history at that
time< (nron undoutedly is the iggest audit failure. It is ever the most famous
company in the %orld< ut it also is one of companies %hich fell do%n too fast.
Company Profle
(nron Corp. %as formed in 321. from a merger to form the DSCs largest natural gas
pipeline distriutor. By the mid 3224s< (nron %as estalishing po%er generation
ventures oth in the DS and internationally. Core eBorts are as the D.S. largest
natural gas and electricity uyer and seller< as %ell as a giant in the %ater and %aste
%ater management industry 5entered %ater market in 32218. Eaining %ide praise
throughout usiness circles for its ma"or strategic move into the Fne% economyC< %ith
its vast ne% online operations.
Vision and Mission
#ake respectG >>'e treat others as %e %ould like to e treated ourselves.>>
>>'e do not tolerate ausive or disrespectful treatment. Ruthlessness< callousness
and arrogance don>t elong here.>>
(nron intends to conduct itself in accord %ith four capital valuesG
3. Respect
+. Integrity
-. Communication
H. (;cellence
(nron stands on the foundation of its vision and values. (very employee is educated
aout the Company>s vision and values and is e;pected to conduct usiness %ith
other employees< partners< contractors< suppliers< vendors< and customers keeping in
mind respect< integrity< communication< and e;cellence. (verything %e do evolves
from (nron>s vision and values statements.
H
Enron Case Study De La Salle University - Graduate
School of Business
$$. CASE !ARRA.$VE
In 322+< AeB Skilling persuaded the federal regulators to let (nron use an accounting
method kno%n as 6marked to market7. Iarked to market method are used y
rokerage and trading companies and this method allo%s (nron to make the
pro"ected earnings as a current income. #he use of the method %ill make it hard to
sho% ho% (nron %ould make more money. #he income ooks in (nron is still rising.
#his let the company to make more profts %ithout paying high ta;es.
(nron %ent uying other usiness. #he frm %ent on a usiness venture y trying its
success to other felds like Internet and%idth. #his move %ould e a mistake since
these usinesses did not make profts rather they ecame losses. So the e;ecutives
hid the losses rather than declaring it.
Andre% $asto% %ho ecame the C$! of the company came up %ith a plan to hide the
large det of (nron y use Special Purpose (ntity 5SP(8. #hese SP(s are used to hide
the dets %hile the assets are stated making look like (nron is making more profts.
#his plan made the investors to elieve that (nron is making more money ecause its
stocks are rising %hile the det are not %hile in fact the dets of (nron are %ell
hidden in these SP(s.
By the year +443< Skilling resign after ecoming the C(! of the company for si;
months. 9e %ants to e out of the company immediately. #he top e;ecutives of
company started selling their stocks y the time Skilling resigned from the company.
(nron declared huge losses in the -rd ?uarter of the year amounting to /-1 million
dollars.
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Enron Case Study De La Salle University - Graduate
School of Business
As the time %ent y< the stocks of (nron %ent falling do%n. It even %ent elo% a
dollar. #hen (nron fled ankruptcy on &ecemer +< +443.
A. Statement of t,e 'roblem
9o% can (nron and its e;ecutives compensate the losses that resulted from its fallJ
B. #b1e%tives of t,e Case
In the conte;t of usiness ethics and organi:ational ehaviour< this case study on
(nron Corp. aims toG
&etermine the signifcant issues that had incorporated inside the structural
organi:ation of the management.
(stalish a recommendation as regards to the failures (nron Corp. to serve as
a lesson for all estalished companies.
Provide the est alternative that aims to minimi:e the losses resulting from
the CompanyCs do%nfall taking into consideration the CompanyCs corporate
social responsiility to the society.
$$$. CASE A!AL2S$S
A. .,eoreti%al &rame3or(s
#o e ale to meet the o"ectives of the case< the group decided to use the follo%ing
frame%orks to decide %hich is the est alternative course of action to takeG
3. #he Kasallian Business Keadership $rame%ork
+. Corporate Social Responsiility Pyramid +.4
4. .,e Lasallian Business Leaders,i- &rame3or(
A Kasallian usiness leader should al%ays e guided y the follo%ing principles in
making usiness decisions to attain the est eBect on its triple ottomline 5proft<
people< planet8G
a. Higher purpose
/
Enron Case Study De La Salle University - Graduate
School of Business
Company executives should be reminded that businesses are not only created to gain
profit but also to provide value to the community. Business leaders must always incorporate the
life values of St. John Baptiste De La Salle in conducting business transactions as it is not an
entity separate from the society but also a fundamental part of it and therefore also accountable
to the growth and value of the community as a whole.
b. Demands of national and global imperatives
At the very least all businesses should abide by all laws and consider all norms in the
community where it is doing business. !he Company should never interfere with the practices of
the community and should never degrade the "uality of life of the people interacting with it.
c. Family and resource foundation
A business entity should always consider the families affected by them as the case of
their employees. #xecutives must never forget that they are not only accountable to their
employees but also to the families of these people since they also rely on the Company$s ability
to provide the needs of the family.
d. Management decisions and action
%inally all of the three principles should be integrated to all management decisions and
actions to be able to exhibit the Lasallian values in every business transactions. Doing so will
improve the "uality of decision ma&ing that the executives will do and will also address all aspects
of the business from attaining profits to providing value to the society.
5. Cor-orate Sustainability and Res-onsibility 5.+
According to 'isser there is a new era that connects business and society that will shift
businesses from Corporate Social Responsibility (CSR 1.0) to Corporate Sustainability and
Responsibility (CSR .0). 'isser explains that due to global challenges li&e climate change and
poverty companies that still practice CS( ).* will not have the capacity to handle these
challenges and therefore be left by sta&eholders to shift to CS( +.* which will continue to
innovate and face the challenges head on. ,e describes CS( +.* using the following-
a. !eing defined by "global commons#$ "innovative partners%ips# and "sta&e%older
involvement#
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Enron Case Study De La Salle University - Graduate
School of Business
b. Mec%anisms include diverse sta&e%older panels$ real'time transparent reporting and
ne('(ave social entrepreneurs%ip
c. Recogni)ing a s%ift in po(er from centrali)ed to decentrali)ed* a c%ange in scale from
fe( and big to many and small* and a c%ange in application from single and e+clusive to multiple
and s%ared.
CS( +.* not only provides a more collaborative approach to the responsibilities of the
companies to the society but it also encourages businesses to thin& more of the long.term effects
of their decisions and actions as their roles become more evident to the society in general.
B. De%ision Criteria and 6eig,ts
#he comination of the aove frame%orks led to the follo%ing decision
criteriaG
De%ision Criteria 6eig,ts
3. Proft .L
+. People
a. Social Responsiility H4L
. Kegal Responsiility H4L
-. Planet 3.L
#he 6Proft< People and Planet7 criteria are ased on the 6#riple Bottomline7 of
the Kasallian Business Keadership $rame%ork. 9o%ever< the 6People7 part can e
sudivided into the Social and Kegal Responsiilities ased on CSR +.4. #he 6Social
Responsiility7 criterion is ased on the 6gloal commons< innovative partnerships<
and stakeholder involvement7 parts of CSR +.4. #he 6Kegal Responsiility7 criterion
is ased on the 6&emands of national and gloal imperatives7 principle of the
Kasallian Business Keadership $rame%ork.
#he other aspects of the frame%orks %ill not e applicale in this list of
criteria ecause %e are analy:ing the case %ith (nron already undergoing ankruptcy
proceedings.
C. Alternative Courses of A%tion 7ACAs8
#he follo%ing are our alternative courses of action ased on the statement of
the prolemG
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Enron Case Study De La Salle University - Graduate
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3. (nron Corp. and its e;ecutives must clearly disclose and take the risks of
compensating all the aBected areas not "ust the employees ut all of its suppliers and
investors M In this ACA< the (nronCs Board of &irectors %ill share the remaining
company assets 5after their creditors have een paid8 to all of the employees<
suppliers< and investors. (nron might not e ale to fully compensate them ut at
least they should e given a share after the companyCs %rongdoings.
+. Select not one ut t%o ne% e;ternal auditors 5other than Arthur Andersen8
approved y the Board of &irectors M #he Board of &irectors may hire additional other
auditors "ust to ensure that the assets of the company had done have een
accounted for prior to completing ankruptcy proceedings. If only one auditor %as
hired< the community %ill most likely elieve that it %ill do similar actions as Arthur
Andersen. #herefore< t%o auditors must e hired.
-. Issue a pulic apology and contact all aBected persons to agree on the amount of
damages to e given to all parties aggrieved M this is similar to the frst Alternative
Course of Action. #he diBerence is that there is a further statement of apology done
y (nron in addition to compensation of damages to employees< suppliers< and
investors.
H. Issue a pulic apology and hope that everyone accepts it and move on M (nron and
its Board of &irectors shall simply issue a pulic apology %hile letting the DS Austice
&epartment e;ecute its ankruptcy proceedings.
.. Perform no actions 5&o Nothing8 M (nron shall not do further actions %hile letting
the DS Austice &epartment e;ecute its ankruptcy proceedings.
D. Evaluation of t,e ACAs
Based on the decision criteria< the group individually made their o%n scores on each
of the Alternative Courses of Action and the resulting tale sho%s the resultsG
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Enron Case Study De La Salle University - Graduate School of Business
#he result of the evaluation of ACACs in accordance to the decision criteria sho%s that ACA N- position to the closest to the perfect
%eight of each decision criterion.
9
ACA 3
(nron Corp. and
its e;ecutives
must clearly
disclose and take
the risks of
compensating all
the aBected areas
not "ust the
employees ut all
of its suppliers
and investors.
ACA +
Select not one ut
ne% t%o e;ternal
auditors 5other
than Arthur
Andersen8
approved y the
oard of directors
ACA -
Issue a pulic
apology and contact
all aBected persons
to agree on the
amount of damages
to e given to all
parties aggrieved.
ACA H
Issue a pulic
apology and hope
that everyone
accepts it and
move on.
ACA .
&o Nothing
De%ision
Criteria
6t S%ore S%ore S%ore S%ore S%ore
Proft
.L 3.+. + 4.+. H.. .
People
a. Social
Responsiili
ty
H4L --.0. +4 H4 3. 4
. Kegal
Responsiili
ty
H4L -/.+. +0.. H4 34 3.+.

Planet
3.L 3+.+. 2.. 3. 2.0. /.+.
.#.AL 4++9 :;.) )< <).5) ;<.5) 45.)
Enron Case Study De La Salle University - Graduate
School of Business
E. Best Solution
After the (nron Corp. failure< it is est for the Company to adopt the solution to Issue
a public apology and contact all afected persons to agree on the amount of
damages to be given to all parties aggrieved.
Iaye usiness ethics is the most thesis point people doing usiness should focus
on. As a loyal agent of the employer< the manager has a duty to serve the employer
in %hatever %ays %ill advance the employer>s self,interest. In this case< they violated
the principle to e loyal to the agency of their (NR!N. (specially for accountants<
keeping a fnancial statement disclosed %ith true profts and losses information is the
asic responsiility that they should follo%.
#his solution %ill give idea to the people aBected from the scandal that the Company
never neglected its responsiility. It %ill at least maintain the reputation of the
Company that they never left their people ehind %ithout anything. In addition<
(nronCs fall also had strikingly ad inOuence on the %hole D.S. economy. Iaye the
government also should make etter regulations or rules in the economy.
&. $m-lementation Ste-s
#he follo%ing are the proposed steps for implementationG
Step 3. Ackno%ledge the %rong doings of the company. #he company should make a
pulic apology %hich also states that they %ill contact and have an agreement to all
parties aggrieved.
Step +. #he Company should do some things that %ould sho% its sincerity in its
apology.
Step -. Iake a committee that %ould determine and contact all the aggrieved parties
that are involved in the scandal. #his group %ould e the one handling the matters
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Enron Case Study De La Salle University - Graduate
School of Business
on giving the right amount to the parties involved. #he settlement should e in favor
of the victims since the scandal %as y their top e;ecutives.
$V. RE&ERE!CES
Nelson PP< Price RA< Q Rountree BR. 5+4418. #he market reaction to Arthur
Andersen>s role in the (nron scandalG Koss of reputation or confounding
eBectsJ. Journal of Accounting & Economics H/5+,-8G +02,+2-. 5&ecemer
+4418
9e Ruefei. 5+4418. #he Responsiility of $alse Accounting and Eovernance. Journal of
!entral "outh #niversity of $orestry & %echnology &"ocial "ciences'+5H8G /2,
0+.
Ho( "tuf )or*s 5n.d8 Retrieved from
http GSSmoney.ho%stuB%orks.comScooking,ooks0.htm
Enron %imeline +,,- 5n.d8 Retrived from
httpGSS%%%.ps.orgSindependentlensSenronStimeline+443.html
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