ENRON CASE STUDY

The first thing that came into my mind when I started reading about the Enrons case is Satyam Computer Services scandal in India. Most people in India regarded Satyam as "India's Enron," the case that was an accounting fraud beyond imagination and an embarrassing and shocking episode in Indian corporate governance. It was like riding a tiger, not knowing how to get off without being eaten.
[1]

That is how Mr. Ramalinga

Raju, until recently the chairman of Satyam Computer Services, described how the Indian outsourcing company inflated profits for years. Without digressing more from the subject topic that is ENRON, I would like to share my views on this case.

Enron Corporation was founded in 1985 with its headquarters in Houston, Texas. It grew to the seventh highest revenue grossing company in USA. Jeffrey Skilling, held many positions in Enron Corporation and resigned from the post of CEO in August 2001. A few months after he resigned, the stock price of Enron fell sharply and the company went bankrupt [2]. Upon investigation by the government authorities, they found that in order to increase the stock prices of Enron, the firm had overstated its financial status in the yearend financial statements. It is not very unusual for businesses to fail as a result of market conditions or due to some bad investments and wrong decisions. What turned the Enron case into a major financial scandal was the companys response to its problems. Rather than disclosing the true condition of the company to its public investors, as the law requires, Enron falsified its accounts for years
[3].

They cooked false numbers in the

financial statement until the margin of error became too big to hide. The story began on

16th October 2001 when Enron Corporation disclosed that it had made a massive loss of 638 million dollars in just a quarter of that year. By the end of that year in December, it declared bankruptcy. Investigations led the grand jury to indict Jeffrey Skilling, Kenneth Lay and Richard Causey on the grounds of cheating investors i.e. the Enron shareholders by providing them false information about the companys financial status in the year-end financial statements. [2]

Skilling was charged with the count of conspiracy to commit honest services wire fraud and securities fraud. He was charged for a total of about 25 counts of securities fraud, wire fraud, insider trading and presenting false information to the shareholders and Enrons auditors. In November 2004, Skilling requested for a change of venue citing the pretrial publicity about the fall of Enron and hostility towards him poisoned potential jurors in Houston as reasons. With the help of few media experts he submitted reports detailing Enrons downfall and negative attitude in the community towards him. [2] With all these reasons Skilling claimed that he might not get a fair trial in Houston. But the court rejected his petition saying that what all information was shown by the media is true and the facts of the case shown are neither heinous nor sensational.
[2]

However, the

court decided that an effective voir dire would detect juror bias. Therefore, months before the start of the trial the court asked both the parties to submit questions that may be helpful in detecting juror bias. Finally, the court modified Skillings questionnaire into a 77 question, 14-page document and asked these questions to 400 potential jurors to know if they are influenced by the media reports. Almost all of them replied. [2]

In December 2005, Richard Causey, one of the accused pleaded guilty. Then Skillings lawyers immediately asked for continuance and the court delayed the hearing. Mean while, Skilling modified his request for a change of venue stating that, the questionnaire used to detect juror bias revealed pervasive bias and since Causey had pleaded guilty it might create a beforehand opinion in the minds of the jurors. Skilling further urged that the court and counsel should question the potential jurors before they are put on jury. The court denied his request for attorney led voir dire but accepted that the jury members be examined personally regarding the pretrial publicity. After the voir dire the court had selected 38 prospective jurors.
[2]

After a 4 month trial, the jury found Skilling guilty of

19 accounts including honest services fraud and not guilty of 9 insider trading accounts. The district court sentenced Skilling to 292 months imprisonment; $45 million fine and 3 years supervised release. Skilling thought that the trial was unfair and therefore appealed to the court on the verdict, especially against the charges of honest services fraud and the unfair trial. He gave examples of cases like the Rideau V Louisiana case, 373 U.S 723, Estes V Texas, 381 U.S 532, 538 (1965), Sheppard V Maxwell, 384 U.S 333 (1966) where the case was transferred to an other state.
[2]

The Fifth circuit agreed that the

negative reports by the media and the acceptance of guilt by Causey might have created presumption of prejudice among the potential jurors. However, the appeals court rejected his plea stating few reasons. For example, in the case of Rideau V Louisiana, the video showing the confession of Rideau during the interrogation was broadcasted on television by a news channel which may have created a before hand impression in the minds of the jurors and the public whose population was less (approx. 150,000 people). On the other hand in Skillings case, there was no such confession video broadcasted in Houston

where the population is more (roughly 4.5 million eligible jurors). The media just reported facts about the case. Therefore, the possibility of the public being negatively influenced by the media reports was negligible. The court said that just because there is coverage of the case on news channels does not give grounds of prejudice among jurors and public. Also, the possibility of not getting 12 impartial jurors out of 4.5 million jurors was hard to believe. The district court had acquitted Skilling on 9 insider-trading cases and therefore the appeals court believed that if the jury had been biased then they would not have relieved him in these 9 cases. However, the court disagreed with the Honest Services fraud ruling given by the Fifth circuit court. They said that the honest services fraud applies to people who have taken bribes or kickbacks at work. But Skilling had neither taken a bribe nor a kickback so he should not be charged on this account. [2] Many judges found that the honest services statute law was vague and not mentioned clearly in the constitution. Since this case, there have been 3 bills introduced in the congress to correct the flaws in the honest services statute law.

Enron collapsed because of the unethical behavior by the top people of the management. They should not have been selfish in giving false financial statements to the investors and shareholders just to increase the price of their companys shares. Enron violated few categories of ethical dilemma, which is Saying things you know are not true, Giving or allowing false impressions, Hiding or divulging information etc. In my opinion, the one, which stands out among all these violations, is Giving or allowing false impressions. Though the top executives knew they committed an unethical and illegal act of preparing and submitting false financial statements, they did not bother about the

consequences. Because of their heinous act, many families lost their loved ones and several others became bankrupt. Arrogance gave way to recklessness, which in turn opened the door to criminality [4]. I find it very hard to believe how the external auditors could not find the mistakes in the falsified financial statements. Also, I fail to understand how the employees and shareholders were ignorant of all the troubles the company had. Perhaps, as long as the checks kept coming in and the stock price kept going up, it was easy to look the other way and ignore the obvious clues that there were problems accumulating with time.
[4]

Attention to the mundane details was completely ignored.

Because everybody was just concerned about the money, the profits, which people were making because of the falsified statements. The focus was centered on marketing the image, not only of the company, but also of its senior executives.
[4]

I would definitely

say that the top senior executives had a major role in the companys collapse, but it is just not them who are to be held responsible. Everyone who had knowledge of what was going wrong in the company is equally guilty, from the companys accountants to the members of the board management. Without team effort this illegal act could never be possible. If at least one honest and sincere person could stand up and raise his voice against this wrongdoing, we would not see such a disaster take place in the history of American Corporate World. It is sad that there was just not one person who could stand up against this.

Finally, I would like to mention few suggestions and inputs about the case. I have read that there have been proposals to change financial auditors for the company regularly. It is a good idea in order to eliminate potential accounting flaws. But with large

organizations, where the structure is so complex, changing financial auditors regularly would make the reporting process highly inefficient.
[5]

I think there should be stricter

rules and guidelines to check the financial statements of firms. The public accountants who prepare the financial statements of the firms should be honest, sincere, responsible and morally grounded. Before we think more and establish new reforms, we need to realize that it is not the number of rules that count, but how sincerely people follow these rules is what matters most.

References: 1) Dealbook, Talk of Indias Enron as Satyam shares plunge by Dealbook, January 7, 2009.
http://dealbook.nytimes.com/2009/01/07/talk-of-indias-enron-as-satyam-shares-plunge/

2) Supreme court of the United States, Skilling Vs. United States, Case No: 08-1394. 3) CRS report for congress, The Enron Collapse: An overview of financial issues by Mark Jickling (Coordinator, Specialist in Public Finance, Government and Finance division), Order code RS21135, January 30, 2003.
http://www.royce.house.gov/UploadedFiles/RS21135.pdf

4) The New York Times, News Analysis: In Enron case, a verdict on an era, by Kurt Eichenwald, May 26, 2006.
http://www.nytimes.com/2006/05/26/business/businessspecial3/26verdict.html

5) Santa Clara University, What really went wrong with Enron? A culture of evil? by Martin Calkins, S.J., March 5, 2002.
http://www.scu.edu/ethics/publications/ethicalperspectives/enronpanel.html