CASE 3.2 Ethics, Schmethics-Enrons Code of EthicsIn Jul.docx

CASE 3.2 "Ethics, Schmethics"-Enron's Code of Ethics

In July 2000, Enron Corporation published an internal code of ethics docu-
ment that ran 64 pages in length (see the Appendix 1).Page 12 of the document
proudly announced the company's position on business ethics:

Employees of Enron Corp., its subsidiaries, and its affiliated companies
(collectively the "Company") are charged with conducting their business
affairs in accordance with the highest ethical standards. An employee
shall not conduct himself or herself in a manner which directly or indi-
rectly would be detrimental to the best interests of the Company or in
a manner which would bring to the employee financial gain separately
derived as a direct consequence of his or her employment with the Com-
pany. Moral as well as legal obligations will be fulfilled openly, promptly,
and in a manner which will reflect pride on the Company's name.

Products and services of the Company will be of the highest quality and
as represented. Advertising and promotion will be truthful, not exagger-
ated or misleading.

Agreements, whether contractual or verbal, will be honored. No bribes,
bonuses, kickbacks, lavish entertainment, or gifts will be given or received
. in exchange for special position, price or privilege . . . Relations with
the Company's many publics-customers, stockholders, governments,
employees, suppliers, press, and bankers-will be conducted in honesty,
candor, and fairness." .- ~ ~ ~ -

Subsequent investigations into the inner workings of Enron Corp. revealed that
the only time this code of ethics received formal attention (other than, presum-
ably,when it was created and formally accepted) was when the board of directors
voted to waive key provisions of the code in order to allow the off-balance-sheet
partnerships that Chief Financial Officer Andy Fastow ultimately used to hide
over half a billion dollars of debt from analysts and investors.

A more realistic picture of the apparent flexibility of Enron's ethical culture
can be found in the extreme conflict of interest represented in its relationship
with Arthur Andersen. Andersen provided both consulting and auditing ser-
vices for fees running into millions of dollars-money that became so critical to
Andersen's continued growth that its employees were encouraged to sign off on
off-balance-sheet transactions-transactions that were not shown on Enron's
publicly-reported balance sheet-that stretched the limits of generally accepted
accounting principles (GAAP) to their furthest edges. In addition, Enron hired
former Andersen employees to manage the affairs of their former colleagues,
which further strengthened the conflict of interest in a relationship that was
supposed, at the very least, to be at arm's length, and, at best, above reproach.

1. What is the purpose of a code of ethics?
2. Do you think the employees of Enron Corp. were told about the vote to put

aside key elements of the code of ethics? If not, why not? If they had .

1. CASE 3.2 "Ethics, Schmethics"-Enron's Code of Ethics

In July 2000, Enron Corporation published an internal code of
ethics docu-
ment that ran 64 pages in length (see the Appendix 1).Page 12
of the document
proudly announced the company's position on business ethics:

Employees of Enron Corp., its subsidiaries, and its affiliated
companies
(collectively the "Company") are charged with conducting their
business
affairs in accordance with the highest ethical standards. An
employee
shall not conduct himself or herself in a manner which directly
or indi-
rectly would be detrimental to the best interests of the Company
or in
a manner which would bring to the employee financial gain
separately
derived as a direct consequence of his or her employment with
the Com-
pany. Moral as well as legal obligations will be fulfilled openly,
promptly,
and in a manner which will reflect pride on the Company's
name.

Products and services of the Company will be of the highest
quality and
as represented. Advertising and promotion will be truthful, not
exagger-
ated or misleading.

2. Agreements, whether contractual or verbal, will be honored. No
bribes,
bonuses, kickbacks, lavish entertainment, or gifts will be given
or received
. in exchange for special position, price or privilege . . .
Relations with
the Company's many publics-customers, stockholders,
governments,
employees, suppliers, press, and bankers-will be conducted in
honesty,
candor, and fairness." .- ~ ~ ~ -

Subsequent investigations into the inner workings of Enron
Corp. revealed that
the only time this code of ethics received formal attention
(other than, presum-
ably,when it was created and formally accepted) was when the
board of directors
voted to waive key provisions of the code in order to allow the
off-balance-sheet
partnerships that Chief Financial Officer Andy Fastow
ultimately used to hide
over half a billion dollars of debt from analysts and investors.

A more realistic picture of the apparent flexibility of Enron's
ethical culture
can be found in the extreme conflict of interest represented in
its relationship
with Arthur Andersen. Andersen provided both consulting and
auditing ser-
vices for fees running into millions of dollars-money that
became so critical to
Andersen's continued growth that its employees were
encouraged to sign off on
off-balance-sheet transactions-transactions that were not shown

3. on Enron's
publicly-reported balance sheet-that stretched the limits of
generally accepted
accounting principles (GAAP) to their furthest edges. In
addition, Enron hired
former Andersen employees to manage the affairs of their
former colleagues,
which further strengthened the conflict of interest in a
relationship that was
supposed, at the very least, to be at arm's length, and, at best,
above reproach.

1. What is the purpose of a code of ethics?
2. Do you think the employees of Enron Corp. were told about
the vote to put

aside key elements of the code of ethics? If not, why not? If
they had been
told about the decision, what do you think their reaction would
have been?

3. Do you think that the employees of Enron Corp. were
planning to
defraud investors all along? If not, why not?

4. Explain the conflict of interest in Enron's relationship with
Arthur Andersen.
Source: Enron Code of Ethics, www.smokinggun.com .

.~.




o thenewstribe.com
http://www.thenewstribe.com/20 13/05/09/us- reaches-deal- to -

4. reduce- fo rm er-enro n- ceo -jeff-s killing-s entenceJ

US reaches deal to reduce former Enron CEO Jeff Skilling
sentence

NEW YORK: The prison sentence of disgraced former Enron
chief executive Jeff Skilling will be cut
by as much as 10 years under a deal announced Wednesday by
federal criminal prosecutors.

Currently in prison on a 24 year sentence for for securities
fraud, false statements and other charges, Skilling
will see his jail term reduced to between 14 years and 17 and a
half years under the agreement that will end his
long battle against conviction.

Judge Sim Lake, who presided over Skilling's trial in 2006, set
his new sentencing for June 21,2013.

Under the deal set Wednesday, Skilling agreed to allow $40
million of his forfeited assets to be distributed to
victims of his crimes.

He also agreed to stop appealing his conviction and sentence,
drawing a close to a legal struggle that began
with the spectacular collapse of the high-flying Texas energy
and trading conglomerate in 2001.

The government has invested "extraordinary resources" in the
Skilling case, the agreement revealed
Wednesday said. "In the absence of this agreement, the parties
anticipate substantial ongoing litigation."



Justice Department spokesman Peter Carr said the agreement

5. "ensures that Mr. Skilling will be appropriately
punished for his crimes and that victims will finally receive the
restitution they deserve."

Enron victims will have a chance to speak at Skilling's June
sentencing hearing, said his attorney Daniel
Petrocelli.

"The proposed agreement brings certainty and finality to a long
painful process," Petrocelli said.

"Although the recommended sentence for Jeff would still be
more than double any other Enron defendant, all
of whom have long been out of prison, Jeff will at least have the
chance to get back a meaningful part of his
life."

Thousands of people lost their jobs and life savings when Enron
collapsed. The ensuing scandal undermined
faith in corporate America and fed a massive stock market sell-
off.

Skilling and Enron founder Ken Lay were convicted of massive
fraud in 2006, with Skilling sentenced to 24
years and three months in federal prison. Lay died of a heart
attack before he was sentenced.

The Enron case became a symbol of a period of US corporate
scandals in the early 2000s that also included
firms like Worldcom and Tyco.ln Enron's case, Skilling was
convicted for his role in in hiding company losses
and hyping the value of Enron stock while selling his own
shares.

Enron also engaged in considerable accounting fraud involving
elaborate off-balance sheet transactions.

6. A reduction in Skilling's sentence was required bya 2009 US
Court of Appeals ruling that determined his original
sentence was excessive.

In April 2012 the US Supreme Court turned down an appeal by
Skilling to review his conviction on conspiracy
charges.

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MGMT 3123 Business Ethics
Ch. 5 Corporate Governance


Definitions

The officers of a corporation, who are responsible for its daily
business operations, are hired by and report to the Board of
Directors. The Board of Directors is usually headed by a
Chairman of the Board.

The top-level officers of a corporation often include:

· Chief Executive Officer (CEO) – The highest-ranking
executive in the corporation’s management structure. He or she
is responsible for leading the company in the achievement of
key performance measures – market share, revenue, profits, and
share price.

· Chief Financial Officer (CFO) – Senior executive responsible
for overseeing the financial performance of the organization.
This includes management of the internal financial processes,
all recordkeeping, and the production and communication of all
financial reports.

7. · Chief Operating Officer (COO) – Senior executive responsible
for managing the day-to-day operations of the organization. He
or she is tasked with implementing the company’s strategic plan
and usually reports to the CEO.


Conflict of Interest –
· A situation in which one relationship or obligation places a
person in direct conflict with an existing relationship or
obligation. (p. 58)
· A person holds a position of trust that requires him/her to
exercise good judgment on behalf of another party (such as a
corporation or a client), but his/her personal interests conflict
with the best interests of that party.

MGMT 3123 Business Ethics


The Fall of Enron

Read Chapter 5 in the textbook and the following Additional
Reading Materials on Blackboard
· Corporate Governance Definitions
· “Ethics, Schmethics”
· “US Reaches Deal to Reduce Former Enron CEO Jeff Skilling
Sentence”

Watch “Enron: The Smartest Guys in the Room” documentary
available at
http://freedocumentaries.org/documentary/enron-the-smartest-
guys-in-the-room

NOTE – This documentary contains ADULT MATERIAL.
Please let me know if you have any questions or concerns
before viewing it.

8. · Offensive Language – The persons featured sometimes quote
former Enron employees, including any offensive language that
was used by these employees. I have chosen to include this
documentary as part of our case study of Enron because it
portrays the corporate culture of Enron and the attitudes of
Enron’s executives, which ultimately led to the company’s
downfall.
· Nudity – Although one section of this documentary contains
nudity, you do NOT have to actually watch this section if you
prefer to avoid such material. The section containing nudity
begins with a discussion of former Enron executive Lu Pi.
When the documentary starts talking about Mr. Pi, you may
blank out the screen on your computer while leaving the sound
on. At the end of this section, the documentary talks about Mr.
Pi leaving Enron with over $300 million. At this point, bring the
video back up on screen. This is the method that I use when
showing this documentary in a classroom setting, and it will
allow you to hear all of the relevant information without
viewing any nudity. The audio (sound) portion of this section
does not contain any explicit or sexual material.

Instructions:
· Explain your answers to the following questions thoroughly,
using complete sentences with correct grammar and spelling.
· To receive substantial credit for this assignment, you must
engage in a thorough and thoughtful examination of the issues,
using examples from the reading materials and the documentary.
· These questions cannot be fully explained in just one or two
sentences, and papers will be graded accordingly.


1. How would you describe Enron’s corporate culture? What
behaviors did its employees engage in that gave you this
opinion?

9. 2. What was “Mark-to-Market” accounting? What is the
potential ethical problem with this system? Do you think that
the executives at Enron were aware of this problem?


3. Who was Enron’s CEO? CFO? Chairman of the Board?
What roles did they play in Enron’s fraudulent scheme?


4. Were there any “red flags” or clues that should have alerted
Enron’s Board of Directors that the company’s financial
situation was not as strong as Skilling and Lay reported it to be?


5. At what point do you think the Enron Board of Directors
should have stepped in? What actions could they have taken?


6. Identify three groups of stakeholders who were affected by
the unethical conduct of the leaders of Enron. Discuss how
each group was affected.