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ENRON - THE BIGGEST CORPORATE FRAUD IN AMERICAN HISTORY

Enron was one of the largest US-based companies, mainly providing wholesale services, retail energy
services, broadband services and transportation (Enron Corp 2001). It was formed through a merger
in 1985 between two energy companies. That’s what Enron was by the way, an energy company. But
it’s a huge simplification because Enron was involved in so many things in complex ways that the
average person didn’t even come close to understand what the company did. The firm was widely
regarded as one of the most innovative, fastest growing, and best managed businesses in United
States. Enron grew wealthy due largely to marketing, promoting power, and its high stock price.
Fortune Magazine selected Enron as “America’s most innovative company” for six straight years from
1996 to 2001. Enron became the seventh largest corporation in America. It all went well for Enron,
until Bethany McLean, a reporter with Fortune Magazine first raised questions about Enron’s financial
condition in her article “Is Enron Overpriced?” published at March 2001. She asked a simple question
that no one could seem to answer, “how exactly does Enron make its money?”. It was since then the
downfall of Enron started to take shape.

For new name the merged company spent $100,000 in focus groups and consulting before
“Enteron” was suggested afterwards it shortened to “Enron” .

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THE RISE OF ENRON :-

Enron was found by Kenneth Lay in 1985 from the merger of Houston Natural Has and Inter-North, a
Nebraska Pipeline company after the federal regulation of natural gas pipelines. When Enron was
formed, it had the second largest gas pipeline system in the United States energy. Due to the process
of merger, Enron incurred massive debt and as a result of deregulation, it no longer had exclusive
rights to its pipeline. In order to survive, a newly hired consultant Jeffrey Skilling developed an
innovative business plan to generate earnings and cash flows - the creation of “gas banks”. Through
this, Enron would buy gas from a network of suppliers and sell it to a network of consumers,
contractually guaranteeing both the supply and the price charging fees for the transactions and
assuming the associated risks. With Skilling’s brilliant idea, the company created new product and
new paradigm for the industry - the energy derivative, which transforms energy into financial
instruments that could be traded like stocks and bonds. The “Gas Bank” programme was launched in
1989. During this period, the firm’s business focus shifted from regulated transportation of natural gas
to unregulated trading markets. Kenneth Lay was so impressed with Jeff Skilling so that he created a
new division in 1990 called Enron Finance Corp. and hired Skilling to run it. Under Skilling’s leadership,
Enron Finance Corp. soon dominated the market for natural gas contracts, with more contracts, more
access to supplies and more customers than any of its competitors. With its market power, Enron
could predict future prices with great accuracy, thereby guaranteeing superior profits.

By 1992, Enron was the largest merchant of natural gas in North America, and the gas trading
business became the second largest contributor to Enron’s net income, with earnings before interest
and taxes of $122 million. Enron continued to diversify beyond the pipeline and natural gas trading
into becoming a financial trader and market maker in electric power, coal, steel, paper and pulp,
water and broadband fiber optic capacity. The trading activities of Enron were reported to be very
innovative. It also extended it’s business globally by setting up electricity plants in developing
countries such as UK, Brazil, Philippines, Indonesia and obviously India also. In 1993, Enron’s
international strategy reaped fruits when Enron’s Teesside power plant in UK commenced operations.
Enron became the first company to construct a new power plant in United Kingdom after the
liberalization of energy market.

In 1996, Jeff Skilling became Enron’s Chief Operating Officer (COO). Skilling’s vision was to transform
Enron into a giant, asset-light operation, trading power generally and his next target was trading
electricity. Skilling hired the best and brightest traders, recruited associates from the top MBA schools
in the country and competed with the largest and most prestigious investment banks for talents.
Kenneth Lay was lobbying Washington hard to deregulate electricity supply and in anticipation, he
and Jeff Skilling took Enron into California, buying a power plant on the west coast. In 1997, Enron
acquired electric utility company Portland General Electric Corp. for about $2 billion. By the end of the
year, Skilling developed the division known as Enron Capital and Trade Resources into the nation’s
largest wholesale buyer and seller of natural gas and electricity. Revenue grew from $2 billion to $7
billion and the number of employees grew from 200 to more than 2000. Using the same concept that
had so been successful with the gas bank, Enron was ready to create a market for anything that
anyone was willing to trade. Example, future contracts in coal, paper, steel, water and even weather.
Enron had been the largest corporate contributor to the first presidential campaign of George W.
Bush. In October 1999, Enron introduced the Enron Online (EOL), which was a huge success becoming

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world’s largest web based e-commerce system, by executing 548000 transactions handling $335
billion in the online commodities in 2000.

“Jeff Skilling had a very Darwinian view of how the world worked. He believed that money was the only thing that motivated
the people. Skilling instituted that Performance Review Committee (PRC) which was known as the harshest employee ranking
system in the country. Employees were regularly rated on a scale of 1 to 5, where 5’s usually being fired within six months”

Enron was, in essence, two companies. One was an energy supply company that purchased pipelines
and electrical power plants that provided energy while the other was a financial institution that
functioned as a major dealer in wholesale and derivatives transactions in energy products and some
financial derivatives. The energy supply side of the company had information from energy producers
about production costs and distribution problems. On the dealer side of the company, it had critical
knowledge of order flow as market participants came to them either buy or sell which it could share
directly with its energy-supply operations, thereby providing a major competitive advantage to Enron.

Enron became the nation’s seventh largest corporation, valued almost 70 billion dollars. It was a
fantastic company and very attractive for investors. At that time there were thought of this being one
of the world’s leader in business. Enron was considered as a chief blue chip stock investment
company as it enjoyed high stock positions and market capitalization for years.

Enron’s revenue (in millions) :-

1996 1997 1998 1999 2000

$13,289 $20,273 31,260 $40,112 $100,789

Assume that you’re a financial adviser helping me to decide which stock your clients want to buy. You
have looked over all the numbers and you strongly advise them to invest in Enron, one of the most
fastest growing and respected companies at that time. You’ll just show them a few numbers to
support your advise. As a financial adviser, you’ll look at a company’s revenues, debts and past stock
trends. The above revenues of Enron for clearly shows that the company has grown faster from $13
million to $100 in 5 years. You also have checked out their debts, and its very reasonable compared to
their equity. Their stock growth is solid for years. These information makes you to understand that
the company had very little chances in going bankrupt. So you would definitely advise your clients to
invest in Enron based on the market information you’ve analyzed.

Enron’s Stock Price 1998-2000

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 “Enron was Wall Street’s darling, the company that could never lose and the stock price kept growing year on year”

Enron’s stock rose from the start of 1990’s until year end 1998 by a 311%, a significant increase over
the rate of growth in the Standard & Poor index. The stock increased by 56% in 1999 and a further
87% in 2000, compared to a 20% increase and a decline for the index during the same years. By
December 31, 2000, Enron’s stock was priced at $83.13 and it’s market capitalization exceeded $60
billion, 70 times earnings and six times book value, an indication of the stock market’s high
expectation about future prospects. Shares of Enron stock reached their highest price on August 23 rd,
2000 when shares reached a price of $90.75. In 2000, Enron broke the $100 billion in revenues mark
for the first time. It was on the Fortune’s “100 Best Companies to work for in America” list in 2000.
While reviewing their year 2000 annual report, it was filled with statements straight from Enron
themselves saying how they are expecting tremendous growth and success in future. This makes us to
understand that Enron is well respected, has an incredible revenue growth, low debt, and a solid
history of stock growth. So based on the available information, practically any financial adviser who
knew everything about stock market would advise their clients to invest in Enron. But in 2001, a series
of unimaginable events happened. Enron’s stock price reduced from The company had taken 16 years
to go from about $10 billion of assets to $65 billion of assets. But it took just 24 days for Enron to go
bankrupt. Enron collapsed so quickly and so entirely, it was into bankruptcy within a matter of weeks.
The company just had all the makings of a gigantic scandal.

HOW DID THE SCAM HAPPENED IN ENRON?

The main cause for Enron’s failure is the wrongful and fraudulent intent of the top management to
deceive its shareholders, employees and other stakeholders and look out for their personal well-
being. The company’s financial statements were deliberately designed to show it profitable even
when it had millions of dollars in debt and losses. They were presented in such a way that they

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deceive and bewilder their readers and hide the actual cash flows, profits and financial position of the
company. The masterminds behind this were Jeffrey Skilling and Andrew Fastow (CFO), who used
such accounting vehicles which would misinform and mislead anyone who tries to read Enron’s
financial statements. All the revenue numbers Enron provided was just an illusion.

Mark to Market Accounting :-

Enron used the Mark to Market Accounting system for account keeping and reporting with the help of
which its financial statements were deliberately made very complex and not easily understandable.
This is an accounting system which allows its expected future earnings, unrealized earnings to be
included in current earnings whether such future projects would be successful or unsuccessful in
future. Skilling proposed that he should be allowed to use this Mark to Market accounting system.
Enron’s audit firm Arthur Anderson signed off and the SEC (Securities and Exchange Commission)
approved this. This allowed Enron to book potential future profits on the very day a deal was signed.
No matter how little cash actually came in the door, to the outside world Enron’s profit could be
whatever said they were.

In 2000, Enron signed a 20 year contract with Blockbuster, where Enron broadband and Blockbuster
agreed to deliver video on demand. Obviously the contract didn’t work out and it was actually a doom
from the start. It has to do with bandwidth and internet streaming but the technology didn’t work and
the deal with Blockbuster soon collapsed. But with the magic of Mark to Market accounting method,
Enron used future projections to book $53 million in earnings on a deal that didn’t make a penny. Like
this in many aspects, Enron exploited this opportunity and projected illusive large profits in its
statements by including such unrealized gains as its current earnings. A lot of manipulation was done
in this regard under the Mark to Market accounting model to deceive the stakeholders.

“It wasn’t clear before from Enron’s financial statements that there was fraud here. But what was clear that something didn’t add up”

- Bethany McLean, Fortune Magazine Reporter

Special Purpose Entities (SPE) :-

A Special Purpose Entity which is also called as a Special Purpose Vehicle (SPV), is a subsidiary created
by the parent company to isolate financial risk. Its legal status as a separate company makes its
obligations secure even if the parent company goes bankrupt. It may be used to undertake a risky
venture while reducing any negative financial impact on the parent company and its investors.
Alternatively, the SPE may be a holding company for the securitization of debt.

Accounting rule allow a company to exclude a SPE from its own financial statements if an
independent party has control of SPE, and if this independent party owns at least 3% of the SPE.
Enron needed a way to hide their $30 billion debt to keep the stock price up since high debt levels
would lower the investment grade and trigger banks to recall money. Its CFO Andrew Fastow created
hundreds of special companies to prop up Enron’s stock price by making its debts disappear. To
outside investors, it looked like cash was coming in the door. But in reality, Enron was just stashing its
debt in Fastow’s companies where investors couldn’t see it. They buried debt, they buried losses and
yet reported that they were earning profits.

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 Many of the companies had exotic names like Jedi, Chewco, Raptors. LJM was Fastow’s most
ambitious creation. It allowed Fastow to conjure $45 million for himself. Jeff Skilling, Kenneth Lay and
other Enron board had signed off on Fastow’s LJM funds. They saw the benefits of letting Fastow to
do deals with himself. Fastow sold LJM funds to a group of Merrill Lynch bankers. He pitched them on
the benefits of investing in a fund that buys assets only from Enron and guaranteed profits for LJM.
Fastow played dual role as the general partner of LJM and CFO of Enron which involved in a serious
conflict of interst. The LJM partnership existed solely to do business with Enron. Fastow used Enron’s
stock as collateral to do all these things. As a result, 96 individual bankers invested in LJM, and
America’s major banks put up as much as $25 million each. For example, Merrill Lynch assisted Enron
in cooking it’s books by pretending to purchase an existing Enron asset, 3 Nigerian power barges
which has nothing to do with its own business, but was a blatantly an illegal transaction to get them
off from Enron’s books. These were used to balance Enron’s overvalued contracts. Like this, Enron
played on Wall Street’s greed in order to get money out of them.

“Andy, in many ways, was someone we all knew didn’t have a strong moral compass. It’s almost like Jeff Skilling said, ‘okay
we’re hitting some troubled times, let’s set up Andy Fastow so we can fill the earnings’ holes when we need to’, knowing that
Andy would probably skim a little bit of each transaction for himself”.

- Sherron Watkins, Ex-Vice President, Enron Corp.

Arthur Andersen :-

Arthur Andersen, one of the “Big Five” accounting firms in United States was Enron’s auditing firm. It
had served as Enron’s auditor for 16 years. This means that Arthur Andersen’s job was to that the
company’s accounts were a fair reflection of what was really going on. As such, Andersen should have
been the first line of defense in the case of deception or any fraud. Arguments about conflict of
interest had been thrown at Andersen since they acted as both consultants and auditors to Enron. In
2000, Enron paid Arthur Andersen $52 million, including $27 million for consulting services. According
to court documents, Enron and Arthur Andersen had improperly categorized hundred millions of
dollars as increases in shareholder equity, thereby misrepresenting the true value of the corporation.
And Arthur Andersen also did not follow the Generally Accepted Accounting Principles (GAAP) when it
considered Enron’s dealings with related partnerships. These dealings helped Enron to conceal some
of its losses.

Role of Enron in California Energy Crises :-

The California electricity crisis, also known as the Western U.S. Energy Crisis of 2000 and 2001, was a
situation in which the state of California had a shortage of electricity supply caused by market
manipulations, illegal shutdowns of pipelines by Texas energy consortium Enron, and capped retail
electricity prices. The state, which is the world’s sixth largest economy, suffered from multiple large
scale blackouts. One of the state’s largest energy companies collapsed, and the economy fallout
greatly harmed Governor Gray Davis’s standing. Drought, delays in approval of new power plants and
market manipulation decreased supply. This caused an 800% increase in wholesale prices from April
2000 to December 2000. In addition, rolling blackouts adversely affected many businesses dependent
upon a reliable supply of electricity, and inconvenienced a large number of retail consumers.

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California had an installed generating capacity of 45 GW. But the demand was 28 GW at the time of
the blackout. A demand supply gap was created by energy companies, mainly Enron, to create an
artificial shortage. Energy traders took power plants offline for maintenance in days of peak demand
to increase the price. Thus traders were able to sell power at premium prices, sometimes up to a
factor of 20 times its normal value. Because the state government had a cap on retail electricity
charges, this market manipulation squeezed the industry’s revenue margins, causing the bankruptcy
of Pacific Gas and Electric Company and near bankruptcy of Southern California Edison in early 2001.

In 1996, under pressure from energy companies, Governor Pete Wilson and the Californian legislature
passed a bill allowing for the deregulation of electricity. Enron took advantage of this deregulation
and was involved in economic withholding and inflated price bidding in California’s spot markets. The
crisis cost between $40 to $45 billion. The California energy market allowed for energy companies to
charge higher prices for electricity produced out of state. It was therefore advantageous to make it
appear that electricity was being generated somewhere other than California.

In the midst of the energy shortages, Enron’s traders started to export power out of the state. When
prices soared, they brought it back in. Traders soon discovered that by shutting down power plants,
they could create artificial shortages that would push prices even higher. These strategies made some
money for Enron. But the real money was made by betting that the price of energy would go up. It
did, and the west coast traders nearly made $2 billion for Enron. And the Enron traders never seemed
to step back, instead they sought out every loophole they could in order to profit from California’s
misery.

Ken Lay understood that Enron itself was a house of cards. And if the deregulation were to collapse,
then Enron itself would collapse. In the midst of the energy crisis, Kenneth Lay’s friend George Bush
became the US President. When the tidal wave of public anger started to grow, Kenneth Lay met with
the Vice President and strongly argued against the imposition of Federal Price caps in California.
George Bush’s view was that the Federal Government really shouldn’t get involve in this problem.
Because this is California’s problem. FERC, the Federal Agency which regulates energy in America,
refused to intervene. The Chairman of FERC was Pat Wood, the man Kenneth Lay personally
recommended for that job. So it was easy for FERC to do Enron’s bidding because all it had to do was
to do nothing which they did very well. But a Democratic Senate forced FERC to impose regional price
caps. That ended the energy crisis but not the political one.

“I remember the conversation I had with Ken. At the end of it he says, ‘Well Dave, old buddy, let me just tell you. It doesn’t
matter really to us what kooky rules you Californians put in place. I got really a bunch of smart people down here who will
figure out how to make money anyhow’….”

- David Freeman, Former Adviser to Governor Gray Davis

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THE FALL OF ENRON :-

Enron had vast natural gas operations all over the world. They had cost billions to build and most
were performing terribly. They built the Dabhol power plant in India which nobody else would do that
at the time they were terrified of investing at India. Enron did it in a big way. But it failed to see
something basic, India couldn’t afford to pay for the power that Enron’s plant produced. So Dabhol
became a ruin. Though it lost a billion dollars in that project, Enron paid out multi-million dollar
bonuses to executives based on imaginary profits that never arrived. Like this, Enron’s many projects
failed to work which resulted in huge losses. With the magic of Mark to Market system and SPEs,
Enron was soaring in papers but in reality, profits weren’t going up. Instead, they headed at the
opposite direction.

In February 2001, Kenneth Lay announced his retirement and named Jeff Skilling as President and CEO
of Enron. Skilling held the company’s annual conference with analysts, bragging that the stock should
be trading at $126 which was valued around $80 at present. The fortune magazine published an
article “Is Enron Overpriced” by Bethany McLean. As doubts began to surface about the company and
its erratic behaviour of the CEO, Enron’s stock began to fall. By the end, the traders ran Enron. It
sounded like the insane inmates had taken control over the asylum. In August 14 th 2001, Jeff Skilling
announced that he was stepping down as the CEO for personal reasons. After Skilling resigned,
Enron’s Chairman Kenneth Lay took over as CEO. He addressed to the employees that business was
doing great and assured that the stock price will rise soon while it was valued at $36.25 per share at
present.

The day after Skilling resigned, Sherron Watkins, the Vice President of Enron sent a letter to Kenneth
Lay, describing her reservations about the lack of disclosure of the substance of the related party
transactions with the SPEs ran by Fastow. Kenneth Lay notified the company’s attorneys, Vinson &
Elkins, as well as the audit partner at Enron’s auditing firm, Arthur Andersen, so that the issue could
be investigated further. On October 16th 2001, Enron reported a $618 million third-quarter loss and
declares a $1.01 billion non-recurring charge against its balance sheet, partly related to “structured
finance” operations ran by Andrew Fastow. In the analyst conference call that day, Kenneth Lay also
announced a $1.2 billion cut in shareholder equity. And also, the Wall Street journal wrote an article
about some of the Andrew Fastow’s murky dealings.

At October 23rd, 2001, Enron’s stock fell to $19 share. But Kenneth Lay still assured the employees
that the company’s underlying fundamentals of businesses were very strong. At the very moment
Kenneth Lay was making all kinds of statements reassuring the employees and investors, only a few
blocks away, Enron’s accounting firm Arthur Andersen was destroying its Enron files. On October 23 rd,
Arthur Andersen shredded more than 1 ton of paper. When SEC was conducting their investigation
informally, Kenneth Lay also assured the employees that Andrew Fastow has operated in the most
ethical and appropriate manner possible. But the next day, Andrew Fastow was fired when the Enron
board discovered that he had made more than $45 million from his LJM partnerships. On October
31st, Enron announced that the SEC enquiry has been upgraded to a formal investigation.

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On November 8th, Enron files its documents with SEC revising its financial statements for past five
years to account for $586 million in losses. The company started negotiations to sell itself to Dynegy, a
small rival company, to head off bankruptcy. On November 9th, Dynegy agreed to buy Enron for about
$9 billion in stock and cash. But on November 29th, Dynegy withdraws the deal, stating on the basis
of Enron’s lack of full disclosure of its off-balance-sheet debt, downgrading Enron’s rating to junk
status. On November 30th, the stock closed at an astonishing 26 cents a share. Finally, the company
declared bankruptcy on December 2nd, 2001.

I remember it was just a strange kind of surreal day. We learned around 9.30 about the bankruptcy and that we were all being
let go. We all felt like we were on the Titanic, and the last lifeboats had long gone, and we were just now on the sinking ship.
We had thirty minutes to leave the building and at that point it was no longer like being on the Titanic. It was kind of like being
on the Lusitania, the torpedo had hit, and there’s twenty minutes to get out”
- Max Eberts, Ex Public Relations, Enron Energy Services

Enron’s Stock Price 1998-2001 :-

THE AFTERMATH

Kenneth Lay resigned on January 23rd, 2002. He was charged and found guilty on 10 counts. He was
supposed to serve 5 to 10 years for each count but he died on July 5 th, 2006 awaiting sentence. Jeffrey
Skilling, the mastermind behind Enron, was charged and found guilty on 28 counts, fined $45 million
and sentenced to 24 years behind bars. But he only served 12 years of his 24 year sentence and was

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released at early 2019. Andrew Fastow, although convicted on 78 counts of fraud, money laundering
and conspiracy, pled guilty to only 2 counts. He ratted out and cut himself a deal to testify against
other Enron executives. He was sentenced to 10 years but only served 6 years and paid $23 million in
fines. Cliff Baxter, a trader of Enron, cashed in $30 million from the company. After being called to
testify in court, Baxter committed suicide. Enron’s accounting firm Arthur Andersen was convicted of
obstructing justice. It collapsed due to the loss of reputation, and nearly 29,000 employees lost their
jobs. On August 31st 2002, it surrendered its license and rights to practice. As an effect of Enron scam,
the U.S. Government passed a new law called Sarbanes-Oxly Act of 2002, popularly known as SOX
Audit, which in order to have better visibility over all the transactions.

As Enron declared bankruptcy, 20,000 employees lost their jobs and medical insurance. Top
executives were paid bonuses totaling $55 million. In 2001, employees lost $1.2 billion in retirement
funds and retirees lost $2 billion in pension funds. But Enron’s top executives cashed in $116 million in
stock. Before the collapse of Enron, the executives sold their stock. Kenneth Lay sold $300 million,
Jeffrey Skilling sold $200 million, Cliff Baxter sold $35 million. These all happened when Jeffrey Skilling
unloaded his own stock and made employees to buy stock. At the end, the employees who worked
hard for Enron, became the losers. They lost their jobs, their retirement and pension funds of 401(k)
which was invested in Enron’s stock. At last, they stood losing everything, while the top executives
gained millions of dollars through insider trading.

“Oh at one time, things were really rosy for us. And we all had some really nice looking 401(k)s and pensions and then it peaked
and then it just started going down, and it went lower and lower and lower. At the peak I had about $348 thousand and I sold it
for $1200 , was what I got for when it was done”

- A Former Enron Employee

THE RISE OF SATYAM

Satyam was founded in 1987 by Ramalinga Raju. It started in a rented house employing 10 engineers,
the made its way to the 4th fastest growing IT in India. Debuted in 1991 in Bombay stock exchange
with IPO after a decade listed on NYSE where the revenue is around 1 billion USD over a years crossed
8 billion USD.

The company had a very clear structure over the years with around 10% market share and employed
53 thousand before the black day. As soon as the heat hits up its peak everything startled to fall.

In 2008, Satyam’s share price was valued at Rs.541. Exactly an year later, in January 2009 Satyam’s
share price has fallen to Rs.11.50 IN the BSE and Rs.6.50 in the NSE.

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The BLACK DAY (Enron’s glint)

The ultimate dilemma came to picture and the black day obviously meant for the employees where
investors (NYSE through Izard noble law firm) demanded Indian government to come up the solution
to their invests. Let us see in a brief timeline before and after the black day.

In December 2008, Acquisition call for the Maytas infra with a full stake at task lead the rebel among
the investors and triggered opposition on the acquisition.

In turn, The World Bank walled Satyam out of its contracts book for a period of eight years. This is one
such incident led to the drop in the value of stock 13% for every time the company faced such low
price over five years.

The main issue for walled out is failing in documentation of sub-contracts and making benefits to
the bank staff.

However, the company didnt honor the charges made by World Bank in the following day lead
the resigning of one of the directors in Satyam. The following resignation of three more directors
leads to the devastating shake of the stocks from 8.64% to 5.13% and to the great fall of 3.6%.

Thus the Black day came to picture in January 2009, when Ramalinga Raju step up as the company
have inflated the profits and parried the bank statements to 5 million INR, which tackled the
NASSCOM to defend the sector.

The Indian government placed a new board to take care of this issue and salve any from the
company to make it sail again. The board addressed the tripe-A rated clients to seek for the
nourishment.

THE AFTERMATH

The reason Raju unveiled the great cape is that the fudged figures expanded over a year and the gap
between profit and expense could not be resolved as long as he gets an acquisition of Maytas and do
the fictitious figures by his sons.

Law framework in US and India have its own defect as the US investors demanded the fair for
the loss the government has no way to deal it other than compensation as the judiciary in India uplifts
the Liability rule and have an empowered right to the minority shareholders.

Although the US got 37% stake they merely depend on the high volatility where Indian investors
changed the track. In India however, the Managerial criteria haven’t been followed as the founding
members have the power to turn the wheel which of course bought the conflict of interest in the
company that lead to the voyage stable at one side and unstable at another side.

This is the main reason for which the company couldn’t patch up itself as the conflict of interest
made the top officials go unaware about the figures as there is no profit to anyone and fall in the
stocks for years.

V Srinivasan the CFO had his statement that the figures been manipulated so that the company
could have siphoned profits as well as competitive in the market.

Apart from the figures in the balance sheet, the salaries of 13000 workers were also plunged This
is a clear cut of the framework of the company structure, the ignorance of audits and bribes to the
top officials which can be easily done in a country like India.

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 The regulation and law of the company act paved way for the Scam like this and the very soon
judiciary came to picture with pressure from US clients and thus made the ship stable a little and lead
to the Merging with Tech Mahindra. Thus, the merged entity is known as the Mahindra Satyam.

The prosecuted long Bribing and tackling the politicians by Raju came to an end of the course
which is due to getting listed on the NASDAQ which got the conflict of interest in US investors which
started the rebel over the acquisition and thus no other way to the fill gap lead to the fall of the cape
of Raju. However, Raju got his bail and case filed again by India’s enforcement directorate made the
verdict to found guilty of former partners and Raju fined 5crore INR and sentenced 32 months jail.

Finally, the SEBI demanded Raju 1849crore INR as fine and barred him from the capital markets

COMPARISIONS BETWEEN THE SCAMS OF ENRON AND SATYAM

To conclude, the Enron scam was a great human tragedy. The company’s top executives Kenneth Lay,
Jeffrey Skilling has betrayed thousands of their own employees and investors by providing false
information. The company’s employees had lost their career and savings money, and they left Enron
only with sufferings, while the greedy top executives made money at the end. But in the Satyam scam,
the promoters made money at the end through self-dealings while the small investors stood as losers.
So, the Enron scam is a case of agency cost and the Satyam scam is a case of tunneling cost.

The Enron scam takes to the debate of morality in business and earning profits. Enron’s Traders were
making money in California despite not bothering about the sufferings of California’s people. Instead,
they enjoyed the misery of those people so that the price of electricity would rise high. The Enron
Traders didn’t realize that whatever they were doing weren’t ethical. But they kept in mind that they
were doing all these for Enron to earn and grow. These cruelty acts of traders during the California
Energy Crisis makes sense that Enron has exploited the darker side of human behavior.

The Board of Directors should have played their role effectively. The board has to be independent and
active. Instead they believed whatever the top executives of Enron said. If the board had checked the
company transactions in detail, then they should have noticed the sham transactions made through
the SPEs. Unlike in United States, The board of directors in India have major controlling power. When
they smelled that something was happening wrong in the company, they didn’t argue against the top
executives. Instead, there were a series of resignations in the board.

In each case, Arthur Andersen has initially approved the deals instead of checking these sham
transactions and briefing the company directors about the dangers related to it. But those auditors
neglected these acts to create a wrong impression in the market. In the Satyam case too, the auditors
ignored the controversial bank statements and balance sheets.

Enron transferred its debts and assets to the SPEs created by Fastow, to show that they have lower
debts and higher returns, while in Satyam, the company bought assets from their SPEs with cash
payments. Because in the Enron case, it didn’t matter who owned the stakes but in Satyam, it
mattered because the stakes of the promoters so that they can earn money through tunneling.

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The smart Enron executives with corrupt mindset influenced the Government to have complete
deregulation with no government interference. No caps on electricity prices and the elimination of
the corporate alternative minimum taxes. These approvals created a perfect environment for the
unethical games to play. So Enron was not the only bad apple, but the government as well. Like the
Enron’s case, the executives of Satyam bribed the bankers to provide false bank statements.

The U.S. Government didn’t interfere in the issue of Enron, instead it stood and watched as common
people did. There were many political reasons, like Enron’s involvement in California crisis, criticisms
over the relationship between the President and Enron’s Chairman, etc, so the government remained
silent. But in the case of Satyam, government interfered and took some initiatives from preventing
the company to sink. It formed a new board and addressed the triple-A rated clients to make
investments and uplift the company. Thus Satyam survived with the support of government’s
interference and Enron sank without the support of government.

Moreover, a bizzare coincidence has been present in both the Enron and Satyam scams. Enron had
huge losses in the Dabhol project in India. It couldn’t cover up the losses, but hided it with illegal
accounting practices. Satyam after getting listed in NASDAQ, started to fall when investors reacted
negatively for the acquisition of Maytas, which brought down the price of Satyam shares. Thus, an
American company’s activity in India became the starting point of its downfall, and an Indian
company’s activity in America became the starting point of its downfall.

A simple short and sweet moral that an investor could learn from the Enron’s case is

If you can’t understand the financial condition of a company from its public records, be careful.

You are buying a guess.

CONCLUSION: Thus the fear of Raju which the company could be taken over as their stake as
promoters are low there is no way but to sign in for the Maytas acquisition and also couldn’t fill the
gap and step up for the merging triggered the tunneling in the company which unveiled everything
happened so far in the company. However, if they had high stakes in and had done merging also lead
to the doubt insider trading which also reduced the interest in investors and value of the stocks,
therefore this is how India’s Enron came to fall with no exit. The Turn of the wheel by founders from
IT to a Real Estate Company as Enron from energy to structure is the same reason and also the Board
power for the former and Managerial power to the lateral. The law framework may be different for
both the companies but the simple Agent cost in Enron and the tunnel effect in Satyam had their
voyage hit a great Ice Berg.

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