Name: Rahul Soni

Section Number: 2

Enroll no.: AU1811108

Course Title and Code: Business Ethics

(MGT161)

Reflection 6

Topic: Enron Scam

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Note: The scam which was presented by my group was 2G scam.

What is Enron Scam?

Enron came to life in 1986 with the deregulation of the Natural Gas. Ken Lay, the
founder of Enron, saw the deregulation of Natural Gas as a potential business and with
the help of certain consultants and their knowledge of finances, using those models to
this business idea; they started Enron. Enron was basically an intermediary for gas
supply offering reliability and productivity with competitive prices and amazing
logistics. With time, Enron extended its branches all-round the globe. After seeing this
boom, Ken Lay wanted to do the same with electricity and once, he was made the Chief
Operating Officer, it gave him a platform to channel his vision. Unfortunately, these
experiments failed and so Enron bought a UK based Water Company so as to maintain
the position of global visionary businessmen. As Enron invested all its funds on
expansion, it had a deficit for funds. Here, it is also important to know that Enron was
using a special technique known as Mark to Market accounting which under the
Securities and Exchange Commission (SEC) gives the right to a firm to display the fair
values in the statements. Enron misused this accounting technique to overinflate its
profits and estimations in turn misleading the current and potential investors. The funds
then were transferred to the Special Purpose Entities (SPE’s) which are basically
limited liability partnerships with preferably a third party. Most companies used SPE’s
to dispose their assets off while Enron used it as a dump yard for its faulty assets.
Transferring these assets to the SPE’s eventually displayed the losses less severe. In
fact, a lot of these firms were owned by Fastow. Later, in 2001, through a public report,
there was sensed some type of glitch in the financial statements and in no time there
was an investigation going on in the firm.

Ethical dilemmas:

 Honesty and Integrity: Enron was extremely competitive. A company which

was known for its perfection and achieving success in a cut throat competitive
environment. Enron’s work culture created an environment of deception.
Employees of Enron had to perform well and if they did not they would be fired.

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  Whistleblower: Enron’s Vice President of Corporate Development Sherron
Watkins brought the corruption taking place in Enron to the notice of the CEO.
She found irregularities in the financial reports in August 2001. She reported
the wrongdoings happening in the company. She could have kept quiet and
acted as if she knew nothing about this. She might have faced a dilemma
between protecting her job and disclosing the truth. But she decided to speak up
knowing that she was putting her job on the line. She decided to disclose the
truth to protect the interests of the majority at the cost of jeopardizing her future.
 Loyalty vs. Truth: Sharron Watkins, the whistleblower in Enron’s case sold
her stocks worth almost $50000. She decided to reveal the truth regarding the
irregularities in the accounts of Enron to everyone.

Ethical Failures:

 Lack of Integrity: The people associated with the company hid the truth in
order to make sure they were shielded and continued to benefit from the position
they held.
 Fraud: Potential investors were not told about the fact that the company was
not financially sound. Information was held from them deliberately.
 Misusing Accounting Provisions: It used fraudulent methods to show a better
image to the potential investors, existing shareholders.

Observations and Learning:

A healthy corporate culture goes a long way in the stability and success of the firm.
For Enron, this factor played a major role in its downfall. The Top level management
always believed that Enron had to be the nothing but the best in any sector they
operated in. The shareholders of the board, the ones not involved in the scandal, too
were very optimistic about the performance. Whenever a situation of a big loss or a

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failure arose, rather than trying to take measures to correct it in future, the firm looked
to cover up those losses and save their reputation. Thus, the “being-too-good” attitude
should be taken care by all the stakeholders of any firm.

Conclusion:

The employees at the top level misused their authority as well as privileges. They
displayed incorrect and manipulative figures in their books to influence the present as
well as the prospective shareholders. These officials put their selfish interests on top
of their own employees and the public at large. They failed to take up the
responsibility for such a major ethical disaster. It also lead to the corporations’
reputation in the US getting damaged and subsequently, the Congress passed a law
which made officials criminally liable for wrong presentation of accounts in their
books. This particular scandal played a major part in moving the power away from the
corporate boards to the investors and shareholders.