CATEGORY: EXPENSIVE COMPENSATION CASE STUDY: DEBACLE AT ENRON

Background
Enron pioneered a successful energy futures trading strategy in the 1990s after industry deregulation in the 1980s.Enron became the seventh-largest company in the US, with 101 $billions in revenue and 20,000 employees. At its height, Enron controlled a quarter of all gas business, and soon expanded into myriad energy-related products. ENRON BOARD Enron’s Board had 15 members, including several outside directors. The Board had 5 committees, including an Audit and Compliance Committee and a Compensation committee. Arthur Andersen was Enron’s external auditor.

Unfolding of Events
From 1999 -Enron created a number of special purpose vehicles that resulted in the transfer of $25b debt. Enron diversified into many businesses. Oct 2001-Mr. Lay said in the news release that the company was “very confident in our strong earnings outlook.” Dec 2001-Enron declared bankruptcy.

Overview of CG Failures
1) Excessive Compensation 2) High-Risk Accounting 3) Extensive Undisclosed Activities

the significance of CEO Skilling’s resignation in August . Compensation levels were gauged not according to company interest but to keep ahead of competitor’s pay. Transactions carrying obvious conflicts of interest. some with the CFO’s personal involvement. Director compensation was higher than in comparable listed companies. Off-the-book activities. In early 2001. The Board may have been misled by Enron’s management and. For instance. by the Auditor. which he could repay with company stock ($81m)—a practice that amounts to undisclosed stock sale. The Board and the Compensation Committee essentially failed in their oversight and. the Board approved company loans to the CEO. and lavish compensation policies. knowingly approved lavish compensation practices. in some cases. a figure close to Enron’s 2000 net income of $975m. Ken Lay’s compensation exceeded $140m. However. It allowed Enron to engage in: High-risk accounting. In 2000. Fiduciary Failure Enron's Board clearly in its fiduciary duties to safeguard shareholders' interest. not until November 2001 did the Board recognizes red flags such as: Waiving the code of ethics to allow personal transactions.4) Conflicts of Interest 5) Fiduciary Failure 6) Ethical Procedures Breakdown Excessive Compensation Enron had excessive compensation plans that resulted in a major cash drain: One executive accumulated enough stock options to leave the company in 2000 with $265m in cash. the company paid $750m in bonuses for 2000. in some cases. Incorrect understanding of the role of the Compensation Committee: Enron’s stated philosophy was to attract talent and reward them generously.

An incredible number of related entities—3. Extensive Undisclosed Activities The Board knowingly: Allowed Enron to carry out major off-the. Nearly 50% of assets ($27b) were moved off the balance sheet. High-Risk Accounting Enron’s Audit Committee failed not only to guarantee the independence of the external Auditor but also to maintain proper accounting practices in accordance with the interest of the shareholders.2001. a number of special purpose entities (SPEs). The Audit Committee missed many red flags: Signals from Andersen about the risk of non-compliance carried by some of Enron’s novel accounting practices. from 1999. Their techniques involved: Buying Enron's assets with borrowed money (calling into question the role of the banks). and a highly complex accounting construct that was destined to collapse. Enron assumed increased company risk and liabilities.books transactions. Enron created. Using Enron’s stock as collateral.” . Powers Report 2002: Enron would…“use the value of Enron stock to offset losses in its investment portfolio.000—of which 800 were organized in tax havens. Failed to guarantee proper disclosure while off-the-book operations made Enron’s financial statements appear much better than they were. without proper disclosure. Communication from Andersen that Enron was“pushing the limits” as early as 1999. Information about major problems provided by employees in October 2001. managed by Enron's personnel and dealing exclusively with Enron. It approved structured transactions designed to hide debt and overstate revenues rather than outcomes based on economic objectives.

ted by: Submit . Enron engaged in large-scale gift giving that resulted in many potential conflicts of interest. Waiving a code of ethics is unusual Corporate culture did not allow dissent nor open or transparent debate. The Board also waived the code of ethics to circumvent the rule preventing employees from engaging in private deals with the company. The corporate culture must be committed to integrity and proper compliance procedures. Fiduciary duties must not be neglected. the Board failed to exercise its proper mandate. The accounting and auditing profession must act competently. Related-party transactions carry high risks. Other market players. Bought Enron’s assets at a discount—in one case.000. an 80% discount. such as banks and analysts. a misconception of Enron social responsibility resulted in excessive and sometimes unethical donations. Conflict of interests need to be monitored closely. and controls. whose school received $252. Ethical Procedures Breakdown The Board waived Enron code of ethics twice to allow the CFO to participate in Special Purpose Entities. The Board must be independent from the corporation and its management. For example. Enron gave to the prominent outside director Dean Powers.Conflict of Interest An even more unusual case of SPE and related party transactions involved the LJM private equity funds: Operated and partly owned by the CFO himself (2000). Some Board members expressed doubt about the nature of the operation and tried to inquire properly into the CFO’s compensation. Overall. must play their own proper roles free of conflicts of interests. In the end. External auditors must be independent. purportedly to protect Enron from losses. Lessons Learned from Enron Debacle The lessons of Enron can be summarized as failures of diligence. ethics. despite doubts about transactions and the CFO’s compensation.

WHY DID RAJU UNFOLD THE SCAM HIMSELFThere are two sets of serious questions which still desperately require answers. Ramalinga Raju. Arthur Anderson. has become a villain in the corporate world for valid reasons. ICAI. a company created by him and run by his son Teja Raju. what were regulators and watch dogs like SEBI.Shashi Minchael(2k92a38) Praveen K Singh(2k92a17) CATEGORY : Bad corporate Governance CASE STUDY : Satyam Failure of Corporate Governance Satyam fraud is unfolding and so are the inherent weaknesses of Corporate Governance in India. He committed this fraud and tried to hush up it by an abortive bid to purchase Maytas infra. The move was opposed by some of the directors and thus last attempt of Raju to cover up the scam was thwarted. which he could have easily done? Why was this fudging done and for what? Secondly. Price Waterhouse cooper. accept the guilt? Why did he choose to surrender before Police and not run away from India. once a posture boy of India’s growing software sector who could find a seat beside Bill Clinton on the dais. This scam is being equated with Enron of USA because here also the scam was orchestrated by its Auditor.. and independent directors doing? . His emotionally charged four and half page letter of startling revelations shook the entire corporate world when he admitted of cooking the account and inflating the figure by Rupees 5040 crore. Why did Raju. This is the story in brief which all of us know. the mastermind of the entire fraud. in Satyam.

or he was simply unable to hush up the matter which was increasing day by day assuming insurmountable proportions? No simply not. Similarly by 2008 Raju had pledged almost all his shares and had thus siphoned off most of his shares. Raju started diverting the cash from Satyam into Maytas and many other companies which he had formed either in his own name or benami like Godavari bio. In 2001 its share was listed in NYSE and in 2004 it made its place in European stock market. Godavari agro etc. According to company’s statement. In fact such practices are very common and prevalent in many Indian companies and it would not be a matter of surprise it similar frauds are unravelled more in future. Like many fathers. well strategized blended with legal opinion and well thought move to unfold the story and surrender before the police. diminished to 3.14.6% in January. Satyam computers had made a name for itself on the globe and had emerged as the 4th largest software in the country. A. In fact according to information retrieved from NSE. They do it for simple reasons.83. Raju too wanted to create two separate empires for his sons. to help establish their kiths and kin. The fudging of account had started when the Maytas were formed. Raju inflated the account for increasing the price of shares so that . It was a well calculated. V. 3.Murthy.6500.Srinivas. not only Raju but CFO V.S. Murli etc has sold shares of 3. 1. Maytas infra got the ambitious Metro projects and bagged many tenders including one of construction of Technology Park. 2009. This ‘drain of wealth theory’ is substantiated by the fact that the share of Promoters in the company which was 25.000 respectively. its revenue exceeds to 2 bn USD in 2008. The meteoric rise of the company can be substantiated by the fact that it was established in 1987 as private company and got listed by BSE in 1991. Teja Raju and Rama Raju jr.The question remained unanswered that whether this fraud shook the conscience of Raju and he unraveled the truth out of sagacity. Similarly Raju’s son’s companies also were moving with leaps and bound. It is in this perspective. He subsequently formed Maytas infra and Maytas info for Teja and Rama respectively.000.6% in 2001. the question that everyone is willing to ask is that when everything was fit and fine then why did Raju fudge the account of the company and commit countries biggest fraud. By the end of the 20th century.

409. The continuous inflating and cooking of accounts. when he made a desperate but unsuccessful bid to purchase his son’s Maytas.he and his accomplices get maximum profits. These suits are called Class law suits and the compensation awarded under this is huge. the Satyam’s share was soaring. CID has claimed that Raju had inflated the numbers of the employees also. he subsequently resigned. that too on such a big scale was going unnoticed and unchecked by the auditors and the Bankers sounds absurd. It is this scam which ruined hundreds of Cooperative Banks across Nation and plummeted Unit-64 a popular mutual fund scheme of the UTI.As per the accounting practice the Bank accounts are presented before the Auditors of the company by the CFO after its verification. 1956 and can undergo imprisonment up to more than 7 years.465.a very pertinent question arises but surprisingly a very few is asking as to if Raju was aware of the magnitude of his crime as well as quantum of its punishment then why did he not escape and choose to surrender before the police. the possibility of a connivance of bankers and the auditors cannot be ruled out. etc of IPC and section 628 of Company Act. WHY DID RAJU SURRENDER AND NOT ESCAPE?. He. Thus the entire game plan of Raju was shattered. therefore. Global trust Bank scam is still under the . he fully understood the loopholes in the Indian Criminal Justice system which hardly punishes white collar criminals. Later this nexus might have widened after possible inclusion of auditors and the Bankers. India’s largest mutual fund company. The day this news broke. He therefore. He was fully aware of it but at the same time he also knew that he would be sued in USA under provisions of Security and Exchange Commission Regulation rule 10-5 B. 2008. the involvement of Banks would be proved beyond a shadow of doubt. if it goes true. by now had come to know that he is not going to succeed in his plan. Reasons are not far to search. in which he succeeded also. He wanted to hush up the matter in December. It was vehemently opposed by one of the independent directors Mangalam Srinivas. wrote an emotional letter and confessed him fraud. On the other hand. Harshad Mehta died without being finally convicted.420. The crime he has committed would attract sections 406. It seems that the fraud was initially connived by Raju and CFO Vadalamani Srinivas. Raju knew it and thought that his entire earnings and his family would be taken away and would be left with naught. Ketan Parikh scam still is sub-Judice and is expected to go years and years.471. How did he do it? .

There is a retrospection everywhere that some concrete steps with respect to it should be done. It is apprehended therefore that the auditing firms out source unqualified or semiqualified commerce graduates of Post graduates to do the auditing in the companies. the auditors say that they approved the accounts because of Raju’s ‘towering presence’ suggests how ridiculously the auditing was being done. Independent Directors. They have the vast statutory powers but without any responsibilities. it would be crystal clear that all the constituents either failed or did not act as was required. Over a period of time so many extra constitutional authorities have come up in India and have . Regulators and Finally the Board including CEO itself. The number of CAs passing every year is hopelessly small.Bhave. The scam has raised many doubts about the class of corporate governance in India. While speaking at a seminar on corporate governance organised by CII. results are same.B. Institute of Chartered Accountants of India (ICAI) constituted under Charter Accountants Act. He therefore preferred to surrender than to face class law suits in USA. If we examine these constituents one by one. the Auditing firm of Satyam has been dealt. In fact if we look at the functioning of institutions like ICAI. The prestigious firms get the assignment by virtue of their name and fame which they recklessly sell in the market by out sourcing the auditors at a very low remuneration. Examples are many. the man who was supposed to do audit was incidentally executive member in ICAI. Thus if Scam occurred. C. In a startling revelation. 1949 is the regulatory body of all the accounting and auditing firms across the countries. The role of Price waterhouse Coopers(PwC). IS CORPORATE GOVERNANCE IN INDIA NOT WORLD CLASS? Interestingly Satyam has bagged Golden Peacock award for best corporate governance by World Council for Corporate Governance only a few years ago. 2009 that the corporate governance is an ongoing process. There are few important elements of corporate governance namely Auditing. the onus would undoubtedly go on the firm. we would come to know that they are in a way hijacked by a group of people. According to a report there is acute shortage of qualified chartered accountants and auditors in India and around the world also. the chairman of SEBI said on 6th February. Ministry of Company affairs and National foundation of corporate governance. In case of Satyam. The kind of attitude which is adopted here in India in doing auditing is certainly not in congruent with the standard of world class corporate governance.labyrinth of law.

Raju had pledged almost all his shares so did many of the promoters. they are appointed by the Companies themselves and pay hefty salaries and perks for virtually doing nothing. a howl SEBI failed to listen to and it inflicted heavily on Satyam. The newly appointed CEO Murthy is also said to have sold about 3. moreover when Company’s high official who were on share selling spree must had the idea of what was going in the company.14 lakhs shares including 40. What is the need of such Independent Directors if they cannot do anything in this matter? One unpalatable justification is given that the Independent Directors participate in the meeting and are not concerned with autonomy of the company. These are the insider trading. When the profits of this company were registering abnormal growth. Under this circumstance is it thinkable that these Independent directors would dare to peep into the affairs of the company against the wishes of the CEOs? There are only two possibilities in Satyam with respect to Independent directors.Prasad. a women independent director. 1956 provides for appointment of Independent Directors in the Companies for protecting the rights of public at large in general and shareholders in particular. the SEBI and Ministry of Company Affairs too have failed in their assigned jobs. Although insider trading per se is not illegal but it is unethical. thereby the prices of the shares were soaring.R. It should be bone in mind the Enron scam was exposed by Sherron Watkins. what were these guys doing? There has been a lot of hue and cry with respect to insider trading. Either they connive with Raju and knew everything that was going on. Thirdly. This needs to be changed. the independent directors have also failed to discharge their duties properly. This is the need of hour. Secondly. or they did not know. SEBI is the highest regulator and keeps eagle eye on the activities of the capital markets. In both the cases they failed miserably to discharge their duties.000 in December itself belonging to him and his family members. the retired Cabinet Secretary Govt of India was one of the directors. All such transactions are needed to be probed. It speaks a lot about the procedure of appointment of independent directors. In the case of Satyam T. What kinds of people are being appointed in the company? Moreover.taken up the State’s role and act as per their own framed regulations. . Section 49 of SEBI Act and section 229 A of Company Act.

he would not have fudged it to this scale. The ministry of Finance must deliberate upon the entire gamut of issues related to tax heaven provisions.As a matter of fact the tax holidays for the IT-BPO companies also needs to be said goodbye. Had Raju to pay the I.Tax according to the profits shown in the accounts. Submitted By: Pulkit Thakral(2k92a20) Rohit Srigyan(2k92a29) Umesh Gupta(2k92a47) .