Muhammad Shoaib Farooq

sshoaibfarooq2@yahoo.com
www.shoaibfarooq.co.cc

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 Intro
• Enron was founded in Omaha, Nebraska in 1985 with the merger of
Houston Natural Gas and Internorth.
• The company headquarters were originally in Omaha but moved to
Houston by Kenneth Lay, the new CEO of Enron. Enron was one of the
worlds leading electricity, natural gas, pulp and paper, and communication
companies.
• Originally Enron was involved in transmitting and distributing electricity
and natural gas through the U.S. then as the company developed they
built and operated power plants and pipelines.
• Enron’s wealth grew due to its marketing and its high stock prices. In
August 2000 the value of the stock hit its all time high of $90. From1996 to
2001 they were named “Americas Most Innovative Company” by Fortune
magazine as well as “100 Best Companies to Work for in America” in 2001.
By Aug. 2001 the stock prices fell to $42 and continued to fall and in Oct. it
closed at $15 a stock. Then in Dec. 2001 Enron filed for bankruptcy.

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Early History: Domestic Markets

• By 1994 Enron became the largest seller of electricity in the

United States
• In 1997 Zond Corporation became subsidiary of newly formed
Enron Renewable Energy Corporation
• May 2000, Enron and its new investors, IBM and America
Online, launched the New Power Company

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The Enron Scandal: One of the largest bankruptcies in United States history

Decline and Fall

• Mainly stemmed from false profit reporting
• Enron was able to obscure its losses for almost
five years

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The Enron Scandal: One of the largest bankruptcies in United States history

Enron
• “America’s Most Innovative Company” for six
consecutive years
-Fortune Magazine

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The Enron Scandal: One of the largest bankruptcies in United States history

Legislation
• Scandal resulted in a lot of new legislation
that:
-reformed accounting practices
-heightened the ability of the SEC to
investigate accounting fraud
• Example: Public Company Accounting Reform
and Investor Protection Act (2002)

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The Enron Scandal: One of the largest bankruptcies in United States history

Business as Usual
“Politicians… received millions of dollars in
campaign donations from Enron during the
period when the federal government
deregulated the energy industry…”
-Diane Lindstrom

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The Enron Scandal: One of the largest bankruptcies in United States history

April 2001:
Enron reveals that it is owed more than five
hundred million dollars by bankrupt California
energy companies
October 2001:
On the 16th, Enron reports a third-quarter loss
of 618 million dollars.
The next day, Enron reveals that due to an error
in accounting it had “overstated” the
company’s worth by a billion dollars.
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The Enron Scandal: One of the largest bankruptcies in United States history

November 2001
Enron restates its earnings for the past 4 years,
saying its profits were 568 million dollars less
than it had announced previously.
December 2001
Enron files for Chapter 11 bankruptcy on
December 2nd
Experts don’t expect the company to “survive
bankruptcy intact.”

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Recovery

To date Estate has returned total

$21.428 Billion
October 1, 2008

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Organizational Ethics: 4 «bottom lines»
Economic Scandal: False Profitability

 Between 1 and 2 M$ in hidden debts

 Artificial increase of stock value
 Dec 2000: top executives were paid 750 million $
in bonuses whereas the declared net profit was
975 million $
 Political Scandal: Lack of Equity

 29 top executives : 1M $ in stock options before

bankruptcy whereas employees were forbidden to sell
their options
 CEO alone : sold 67m $ worth of options
 4 500 employees were laid-off. Severance package:
13 500 $ per employee
 63% of the 21,000 employees lost all their pension plan
(plan 401K)
Response of Social Actors : to Ethical Issues

 Enron : denial; legal attack for breach of contract; lobbying;

corruption; intimidation; etc.
 Financial analysts: no investigation of allegations, nor of “note
16”
 Monitoring bodies ineffectual
 Media: a few articles on tensions in India; no field investigations,
no images
 Still today: the Enron scandal: a financial scandal for most
people
Lay/ Skilling Fastow
 Lessons to learn from the Case

 Ethics cannot be fragmented

 Company governance must integrate
the active participation of all
stakeholders who affect the
organization's activities or who are
affected by these activities
 And in all four domains : profitability,
equity, dignity and viability
Thank you