The Fall of Enron A Stakeholder Failure by Merve Yalaman Ayşegül Güner İris Kastoryano Irmak Kırkağaçlıoğlu Rahmi Mertay Türk

History The Enron Corporation was established through the merger of two gas pipeline companies in 1985. Enron provided products and services related to: -Natural gas -Electricity -Communications for its wholesale and retail customers.

The Work Extension Transportaion of natural gas through pipelines to customers all over the U.S.A Generation of transmitted and distributed electricity to the northwestern U.S.A Gobal marketing of natural gas, electricity and other commodities. Development, construction and operation of power plants, pipelines. Running other energy related projects all over the world; delivery and management of energy to retail customers in both the industrial and commercial business sectors.

Top Executives leading to Enron’s success (1990s) Chairmen: Kenneth Lay Chief Executive Officer (CEO): Jeffery Skilling Chief Financial Officer (CFO): Andrew Fastow Success: Throughout the 1990s, Enron became a $150 billion energy company. From 1998 to 2000; Enron’s revenues grew from about $31 billion to more than $100 billion. 7th largest company of the Fortune 500.

Enron’s Revenue Distribution Wholesales’s energy income: 93% Natural gas and electriciy: 4% Broadband services and exploration: 3% Enron-Online (worldwide Internet trading platform) generating $2.5 billion in business everyday.

Enron’s Bankruptcy Discrepancy in Enron’s stated net income and cash flow. Investors lost confidence. Due to heavy debt, Enron was forced to declare bankruptcy. 5 thousand of employees were laid off Investors lost their retirement savings. Shareholders lost tens of billions of dollars due to stock price decreases.

Enron’s Corporate Culture “Arrogant” or “Prideful” A large banner in the lobby at corporate headquarters: “The World’s Leading Company” The firm employed: Competent, creative and hard working employees chosen among best universities.

The effect of corporate culture on its bankruptcy That focuses on how much money could be made for many executives that shared in a stock option incentive program. Less concern for shareholders. Free-enterprise system that rewarded risk taking. High competition inside the company: - Employee ranking every 6 months which forces out those ranked in the bottom 20%. - “Rank and yank” sytem that creates a rivalry among employees and increases aggressive employee workforce.

Profit focused culture encouraged employees to cover up problems, since delivering bad news could result the death of the messenger. For ex; Problems in the trading operation were covered up insted of being communicated to management. Aggressive and highly profit oriented employees of Enron were pushing the limits and doing whatever it takes to achieve success. Employees were aware of the wrong doing but ignored it.

Social responsability starts from the top management and corporate culture. Since corporate culture was profit oriented there was an aggressive system encouraging employees to meet the targets. This attitude had a great effect on Enron failure; one of the most perfect corporate disasters.

CFO (Andrew Fastow) Fastow pled guilty to two counts of conspiracy, admitting to orchestrating a myriad of schemes to hide Enron debt and inflate profits by enriching himself with millions. He was a key government witness against Lay and Skilling. The federal complaints allege that Fastow defrauded Enron and its shareholders through the off-balance-sheet patnership that made Enron appear more profitable than it actually was.

Lay maintained that Enron found no visible flaws in Fastow’s ethical background before hiring him as CFO and was taken by surprise when Fastow’s personal gains from off balance sheet partnerships were discovered. Fastow alleges that he was hired to arrange the off-balance sheet financing and that Enron’s board of directors, chairman and CEO directed and praised his work.

VINSON&ELKINS Law firm of Enron,%7 of its $450 million revenue comes from Enron. Allegations that Vinson&Elkins helped structure some of Enron’s special-purpose partnerships. Speculations that the law firm had written opinion letters that supported the legality of deals.

VINSON&ELKINS The question is whether or not Vinson&Elkins approved deals that it knew were fraudulent. SEC continues to investigate the advice provided by the firm. Attempt to hold Vinson&Elkins liable for the $40 billion in investor losses resulting from the Enron collapse.

MERRILL LYNCH The brokerage and invesment banking firm faced scrutiny by federal prosecutors and the SEC for its role in Enron’s 1999 sale of Nigerian barges. However, this deal was not among the financial mistakes that pushed Enron into bankruptcy in 2001.

MERRILL LYNCH Prosecutors claimed that it showed Enron was wiiling to employ suspect financial practices to meet lofty earnings targets. 4 former Merrill Lynch executives and 2 former mid-level Enron executives were charged with conspiracy and fraud related to the transaction.

ARTHUR ANDERSEN LLP Auditor of Enron; was responsible for ensuring the accuracy of Enron’s financial statements and internal bookkeeping. Investors expected Andersen’s certifications of accuracy and application of proper accounting procedures were independent and without any conflict of interest.

ARTHUR ANDERSEN LLP However, Andersen’s independency has been called into question. The accounting firm was a major business partner of Enron,with more than 100 employess dedicated to its account, and it sold about $50 million a year in consulting services to Enron. They destroyed auditing docs during SEC investigation and gone out of business.