Accounting Project Mayukha Govind Ram Question 1 1

Accounting Project

Mayukha Govind Ram

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Question 1

1.1. The unethical behavior in Enron became evident when the mission statement changed from being the best gas company to becoming the world’s leading energy company. Before the change, the company had a good reputation but as soon the as mission of the company changed to an area of business that the company hadn’t ever worked with before, Enron began amending the financial statements so that the financial statements that they showed to the public weren’t actually the real financial statements (the financial statements with the real figures and no alterations with them). Enron never focused on gaining the necessary skills to run a energy company and the entire company ran on strategic planning.

1.2. The unethical behaviour evident in Enron’s treatment of employees is when Kenneth Lay forced his employees to use his sisters travel agency for all corporate travel. His sisters travel agency was more expensive than agencies that had more satisfactory service. Sherron Watkins stated in an interview that she would be stuck in a third world countries where she couldn’t speak the native languages and where she didn’t have a hotel room or with an inadequate for an airplane ticket to go back home even though she might have had paperwork that stated otherwise. When Sherron Watkins attempted to use another travel agency, after one or two reports of the expense of the travel, an email would be send be send to her, reminding her to use Kenneth Lay’s sister’s travel agency. This shows how Enron didn’t follow its value of “Respect” as the company didn’t place the wellbeing of their employees as their top priority. Another value that Enron didn’t follow is “Communication.”, the company wasn’t opening a discussion to talk about what travel agency was the best to use. If someone in the company attempted to discuss about using a different travel agency, the person was rebuffed by the company. Kenneth Lay, himself, just decided what travel agency employees must use for corporate travels.

1.3. A law was passed in 2000, which stated that states in the United States could control the switching on and off of power supply to energy such as electricity to the public. Enron, which was trading electricity, at one stage bought electricity for 250 dollars and sold it for 1200 dollars. This was allowed if the electricity was bought from another state and valid reason was given for the increase in the price of electricity. Enron persuaded the energy regulators to have more power failures and to hike up the prices of electricity. This is unethical, as they were just ripping people off their money. Enron was giving false reports as to why there was an increase in blackouts and the price increase (Enron states that they would be doing maintenance work when they had no maintenance work to do). Enron was not only lying to the public but they were also breaking the law as they weren’t buying the electricity from another state, instead they were buying it from California but they were marking it as an export.

1.4. They used a mark-to-market strategy which is legal and used by business such as banks but Enron was an organization based on energy and this was much more complicated business than banking and thus shouldn’t have used the mark-to-market strategy. Using the mark-to-market strategy meant that they recorded profits that were meant to come from long-term partnerships (i.e. profits from the future) in the present day as actual earnings thus making it seem like the company had actually received at the present day but in reality the company had not received any money. The unethical behaviour evident in Enron wrote down billions of dollars that were losses as profits as they had previously thought they would have received profits from these transactions Enron was able to hide their debt via Special Purposes Entities. An example of this is the deal Enron made with Blockbuster video where they signed a 20- year agreement to launch a new online video games to different cities. Enron estimated profits of 110 million dollars and all the executives were paid large sums of bonuses for the deal. Though after numerous projects- all of them that failed. The company made a loss through the deal, but Enron altered the numbers to make it seem like Enron actually made profits from the deal.

Question 2

2.1.
Jeff Skilling was charismatic which made many people believe his word and trust his leadership of the company. A characteristic such as charisma can be dangerous in a leader- thus in Jeff Skilling’s case as well, as each time Jeff Skilling spoke to his employees, it inspired the employs to follow his word as they trusted him and thus the employees looked up to him and gave good feedback to him and a leader can become addicted to the positive feedback from the employees. Thus this could have caused Jeff Skilling to feel as if he always had to give good news to keep getting the same positive response back as this would give him more confidence.

Greed, he acted in the best interest of the shareholders and not the company. Jeff Skilling wanted to maximize the earnings for the shareholders.

Ambition, he wanted to achieve his goals and dreams no matter what it cost him, the company and the people working for the company.

2.2.

The new mission statement was: To become the world’s leading company. This showed that both, Jeff Skilling and Kenneth Lay were arrogant. They both believed that older, stodgier companies didn’t have a chance against the new, powerful and modern Enron. They both had a lot of pride and they believed that they were more powerful and skillful than they actually were.

Question 3

In the tale of Emperor’s New Clothes, the Emperors loves fine clothing. Two con men, arrive in the Emperor’s city professing to be the greatest weavers in the world. The two men claimed that the clothing they weaved was also magical thus the clothing would not be visible to anyone who was foolish. The Emperor was thrilled to hear about the clothing that the two men could make and the Emperor pays the two men a large amount of money to make the magical clothing. The two men, then with needles that had no thread pretended to weave and sew clothing with empty looms. The Emperor sent one of his men to check on the two men who were pretending to weave and sew clothing. When the Emperor’s man checked up and registered the fact that he couldn’t see the clothing, the man doesn’t tell the Emperor that he couldn’t see the clothing as he feared that the Emperor would think the man is foolish. So the man lied to the Emperor and said that the clothing was beautiful. The Emperor kept sending different men to check up on the clothing and all the men lied to the Emperor as all the men couldn’t see the clothing. On the day of a big parade, the clothing is taken to the Emperor. The Emperor, himself couldn’t see the clothing, but he himself doesn’t want to admit that he is foolish as he couldn’t see clothing thus he dresses himself in the invisible clothing and as the Emperor walked in the parade, in front of all his people, everyone in the kingdom see the Emperor without any clothes on but his people are also afraid to say they cannot see the clothing as they would be accused of being called foolish thus they all glorified the Emperor’s clothing. Eventually, a child said, “But he doesn’t have anything on!”. At this point, everyone realized if the innocent child cannot see any clothing, then it must be true. The Emperor, indeed didn’t any clothing on. Everyone started crying out, “He doesn’t have anything on!”. The Emperor then realized that his people were telling the truth and that he indeed didn’t have any clothing on. The Emperor had to complete the parade, with everyone knowing that the Emperor wore nothing but pride.

Like the Emperor, Kenneth Lay didn’t care about kingdom (in Lay’s case, Enron) but rather on his appearance. Just like how in the tale, anyone who was stupid couldn’t see the clothing was considered stupid, Enron used the same technique. Like the con men in the tale, the top executives in Enron used deception to work on people’s securities. In Enron, Andrew Fastow and his team of accountants created very complicated structures. In fact, the structures were made so complex that anyone who couldn’t understand the structure was called stupid. Jeff Skilling in particular used intimidation tactics and for those people who didn’t understand the structure, Skilling accused them of not getting it almost implying that the person wasn’t smart enough. Like in the tale, people stopped asking questions, in fear of being called stupid. Thus no one questioned Enron. A reporter who didn’t know much about finance noticed something in the financial statements and realized that the numbers didn’t add up. She spoke up about the irregularities in the article that she published (Just like how the innocent boy said that the Emperor had no clothes on). When Jeff Skilling addressed the article he explained why the reporter might have said the things she said in the article and Skilling gave a reason as to why the article was published (it was almost like he had too much pride to admit that the article was right), just like in the tale the Emperor has too much pride to admit that he couldn’t see the clothing.
Question 4

Enrons’s auditing firm, legal firm and banks were all complicit in the questionable business operations of Enron as they call knew of the fraud that was occurring and many of them were aiding in the fraud that was occurring at Enron. These firms and banks were funding (they used prepays which are basically loans but Enron included them in cash flow operation) and aiding (not alarming authorities of the irregularities) and benefitting in the side partnership deals that were occurring at Enron. The banks aided Enron to stay afloat as Enron owed the banks billions of dollars and the banks needed Enron to do well so that they could get their money back. During that time, to the public, Enron was one of the biggest companies in the United States and the company was looked up to by people and by working with such a big and powerful company as Enron, banks and these firms could also boost to their other clients about how they work with Enron. Enrons’s auditing firm, legal firm and banks were also supposed to give their opinions on complicated accounting, and legal matters yet, none of them objected to the wrongdoings of Enron.

On 23 October 2001, the day after Enron released a statement stating that it was being inquired by U.S. Securities and Exchange Commission (SEC), the partner in charge of auditing Enron’s financial statements ordered all the documents except for the basic documents of Enron to be destroyed. This is proof that Arthur Anderson was destroying all the documents so that it seemed like there was no proof of fraud that was occurring in Enron. It was further revealed that the auditors from Arthur Anderson had reviewed and approved of documents relating to Enron-related partnerships which later lead to the fall of the company. Thus it can be concluded that the audit firm did know of the fraud occurring at Enron. Arthur Anderson ceased its operations on August 2002 as on June 15, 2002, Arthur Andersen was found guilty of obstruction of justice for destroying documents connected to its audit of Enron.

Question 5

They did Insider Trading. Insider Trading is when people working or that have access to information that isn’t available to the public and trades a public company’s stock or other securities (such as bonds or stock options). It is illegal as it is not fair for investors that don’t have access to the information. Investors without access to the information are at risk of making smaller or less profits from their shares that investors who have access to the information that might have an advantage over them thus they could make larger profits from their shares.

Question 6

Both the companies- Steinhoff and Enron had charismatic leaders. Having a charismatic leader meant that employees, investors and shareholders were almost drawn to the leader and looked up to the leader thus they believed whatever the leader was telling them- not doubting that the leader might be actually lying. Both Markus Jooste and Jeff Sklling, had aided their respective companies to becoming great companies thus this further reinforces their charismatic characteristics as this meant that the employees, investors and shareholders, looked up to their leaders.

The founder of Enron, Kenneth Lay, was found to be guilty of many things that Markus Jooste and other Steinhoff directors were found to be guilty with. Some of the things they all were found to be guilty of is giving a false report such false financial statements and covering up the increasing levels of debt. Both these companies have corruption occurring at the top levels of the company.

Both the companies- Steinhoff and Enron started to make false reports slowly. Both the companies had short term goals and they didn’t think of the bigger picture. As time went by, more false reports were made and slowly all these false reports that were once small were now so much, that both the companies could no longer hide them anymore.

Both the companies stated that they agreed good, ethical accounting practices. Yet, both the companies’ boards didn’t make to make sure all the ethical standards were met. Steinhoff used the following statement from 2011- 2016,”Steinhoff has not established a formal process for obtaining assurance on ethical awareness and ethical compliance throughout the group.” This shows that the board of Steinhoff didn’t care about making sure the company was meeting all the ethical standards that companies of such great size should be compiling with. With Enron, the board members, suspended Enron’s code of ethics to support and agree with the establishment of the partnerships between Enron and its chief financial officer, Andrew Fastow. https://www.nytimes.com/2002/01/19/business/enron-s-collapse-directors-one-enron-inquiry-suggests-board-played-important.html

Both the companies’ boards had conflicts of interest in the their boards. Enron’s chief financial officer, Andrew Fastow made partnerships which conducted business with Enron (Enron’s code of conduct for its employees clearly prohibited Enron employees from obtaining personal financial gain from a company doing business with Enron. This prohibition could be waived, however, by the CEO upon a finding that a proposed arrangement would ”not adversely affect the best interests of the Company.’ Andrew Fastow was waived by this rule as the board members thought these partnerships would enable the benefit the company but in reality, the partnerships earned money at Enron’s expense. In Steinhoff, three entities that were controlled Christo Wiese, did business with Steinhoff. The entities would loan money from Steinhoff and Steinhoff would instate interest rate on these loans which they recorded as revenue.

Both Steinhoff and Enron abided by all the laws and all of the necessary listings in the areas where they conducted their business. This caused the investor and shareholders to feel like the company was in a good financial position. Thus investors and shareholders continued buying shares and investing more money in Steinhoff and Enron. Steinhoff and Enron just found loopholes in the laws which they used to their advantage.

Question 7

Some advantages of directors receiving shares in their remuneration packages is that this will create a culture of ownership amongst directors in the organization. Owning shares gives the director incentive to manage the organisation in such as way so that the share price increases thus the directors will have the same line of thought/ goals as the shareholders of the organisation. Thus the directors understand the expectations of the shareholders and will continue to pursue goals and objectives set by the board. This will enable the organization to achieve its goals and objectives without any need for continuous supervision from any external shareholders. Disadvantages are that the owners/ promotors’ percentage of ownership will get diluted and the directors may be tempted to achieve goals and objectives of the organization by unfair means by not following the laws or finding loopholes within the laws that already in place. Yes, I am very much in favor for the policy of providing, directors with company shares. There are also laws that prevent the directors from trading when the financial statements is to be released and the directors first need to get permission before they can trade shares, this shows that there are laws in place that prevent the director from insider trading.

Question 8

8.1. An asset management company is a company that invests its customers’ accumulated funds into bonds that corresponds with the stated financial objectives. An asset management company gives investors with a larger variety of investment options than if the investor had attempted to invest by themselves.

8.2. She stated that the financial statements were not clear and the financial items made no sense. She stated how the spurge on acquisitions was not underpinned by any rationality and logical thought and too out of control to be well thought out. She finally stated that the amount of debt the company was is, was out of control.

8.3. In Enron, the numbers were called the black box. Analysts didn’t know where the numbers where coming from but all they knew was the numbers were good. With Steinhoff and Enron, the analysts believed the financial statements. With both the companies, the analysts trusted the financial statements that were published by the companies and the analysts never questioned where the numbers were coming from and the analysts didn’t analyse the financial statements in as much detail as they could have, as the asset managers trusted the companies. For both the companies, the analysts believed that the companies were in good financial condition due to the positive image of the company that was created by the media.

8.4. She is challenging asset managers who are being paid large service fees (due to their high level of skills) to use their skills and to invest in safe and sound investments that are long-lasting and investments that investors will not lose their money in. I do not agree with her as these asset managers can only make decisions based on the information that is made available to them. The asset managers cannot know if the information given to them isn’t accurate as by analyzing the financial statements, the asset managers can make sense of the information given to them.

Question 9

9.1.1.The Public Investment Corporation (PIC), was founded in 1911 and it is a public asset management firm that is completely owned by the South African government, and the Finance Minister of South Africa is the sole shareholder which represents the government. Two of their major clients are Government Employees Pension Fund and The Unemployment Insurance Fund (UIF).

9.1.2. R78,55 × 360 597 881 shares = R28 324 963 550

9.1.3. R1,25 × 360 597 881 shares = R4 507 473 151,30

9.1.4. (R28 324 963 550 ? R4 507 473 151,30) ÷ R28 324 963 550 × 100= 84,09%

9.1.5. The investment company will lose their money completely. And the people who invested their money in the public investment corporation will also lose their money. Therefore people who invested money in their pension funds and unemployment funds will be affected as if their investments will have decreased a lot in value. Many people who believed that they had a good pension fund for when they retired will no be worried as they wouldn’t have the same amount of money for when they retire. People’s unemployment fund also decreased in value thus now people will now also become worried about not getting money when in between jobs, or if they suddenly get ill or if they suddenly die, the family won’t have a lot of money to live on.

9.2. Alliance Capital was Enron’s largest shareholder, with 43 million shares. Janus Capital, was Enron’s second largest shareholder, with 41.4 million shares. Both of them would have been the most effected as the both of them were the largest shareholders as they would invested lots of money and their investment is worth very little now.

Question 10

You get the impression that Marcus Jooste is self-confident. This personal value is clearly reflected in the way he conducted his business transactions. Jooste was clearly confident that he wasn’t going to get caught about all the transactions and things he did illegally. Markus Jooste comes off as a charismatic man and this is further reinforced with the examples given by the author of the article such as the amount of properties he owns and his obsession with his horses. Maintaining horses is quite expensive and the author emphasis how his horses that were living in various parts of the world raced across the world thus showing the great expensive of this and thus the image of a wealthy man is created via the examples and this further emphasis the image of a charismatic man. Jooste was a charismatic man at work as well, as his employees and the shareholders trusted him to expand the company and to create positive outcomes. This amount of stress could have Jooste to take business transactions that weren’t legal, to keep the shareholders and investors happy with the business thus his charismatic nature that is emphasis by the author are reflected in his business decisions. Jooste comes off as a man with pride. Jooste clearly values himself over others as he isn’t allowing people to pass over his beach and this is clearly shown in the way he conducts business as he valued his self being over Steinhoff’s self being. Markus Jooste has a lot of pride and this is clearly seen as he enjoys watching his horses (his possessions) winning races (this almost makes it seem like it’s an achievement for him). Markus Jooste lacks the value of responsibility. Jooste made an agreement to his neighbour that there would be a setback line of 20m yet Jooste disobeyed the agreement.

Question 11

By Marcus Jooste attending the parliamentary hearing, his pride would ‘be going away’ as he would be loosing his self-esteem and thus this would affect the self-confidence he has in himself. By attending the parliamentary hearing, he would almost be admitting to doing something wrong, the image of a charismatic man is damaged. Jooste doesn’t value integrity. He isn’t being honest about what he did, instead he is shying away from people finding about the truth. Jooste isn’t loyal. The reason his lawyers gave for him not attending the parliamentary hearing was that as he was no longer part of Steinhoff, he was not required to attend the hearing. This shows that Markus Jooste doesn’t value loyalty for a company he lead for many years. Markus Jooste doesn’t show responsibility for his actions by not coming to the reviews.

References

http://farzanalibaloch.blogspot.com/2008/08/enron-downfall-unethical-behaviour.html
https://www.inc.com/brian-evje/three-dangers-of-charismatic-leadership.html

https://www.businesslive.co.za/bd/opinion/2017-12-23-what-steinhoff-shows-us-about-the-dangers-of-exchange-controls/

Extra:
Values

Respect: We treat others as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment. Ruthlessness, callousness and arrogance don’t belong here.

Integrity: We work with customers and prospects openly, honestly and sincerely. When we say we will do something, we will do it; when we say we cannot or will not do something, then we won’t do it.

Communication: We have an obligation to communicate. Here, we take the time to talk with one another…and to listen. We believe that information is meant to move and that information moves people.

Excellence: We are satisfied with nothing less than the very best in everything we do. We will continue to raise the bar for everyone. The great fun here will be for all of us to discover just how good we can really be.
https://www.csus.edu/indiv/m/merlinos/enron.html

Jeff Skilling and Kenneth Lay both don’t value being faithful and trustworthy. As even though they released a mission statement that states that communication is important and integral part of business, yet in Enron, all the departments worked separately and didn’t know what the other department was doing thus there was a lack of communication between the departments, thus they didn’t know what the other departments were doing which meant that the employees didn’t know what was happening in the rest of Enron’s business transaction. Jeff Skilling and Kenneth Lay, both don’t respect their employees as they didn’t treat the employees they would have liked to be treated and they weren’t fair to their employees. They both didn’t respect the new mission statement.

In the boardroom strategy, one of the key issues was the mission moved from being the best in gas to becoming the world’s leading energy company, they had no skill set in all energy only gas which meant that they had to become highly innovative. They did this through energy trading rather than through the development of energy. This being a fundamental shift in the company’s strategy. This was unethical in their reporting of their financial statements as they traded off their good reputation which had been built up when they were previously focusing on gas. They never developed energy skills, it was all strategy.

Jeff Skilling began a system called “rank and yank”. This system was checked by a Performance Review Committee (PCR) and it was intended for traders to compete against each other and the traders that brought in the most money to the company stayed and the traders who brought the least amount of money were fired. This shows how Skilling didn’t care about the employees feelings and the way they worked and it shows how all Skilling was worried about was maximizing profits. Since many of the managerial positions were now not filled, many of these traders didn’t have a boss that they reported to and thus they worked independently. With the pressure to bring in as much money as possible, the traders may have made side deals or unethical deals (this is due to the fact that there was no boss to reinforce ethical behavior). At the end of every year, Enron fired 15%-20% of its employees who brought in the least money. An example of this…

customers. This scattered supply increased the price, and Enron traders were thus able to sell power at premium prices, sometimes up to a factor of 20x its normal peak value.

Enron’s culture had a lot of focus on reminding the employees on how good Enron was doing and as the culture was becoming apparent, Fortune magazine published an article stating to the public how Enron was the most innovative corporation in the United States of America, the employees then really felt good about themselves (just like how each of the Emperor’s men and his people convinced themselves that the Emperor was wearing clothing, it was just that they couldn’t see the clothing). Enron was also named, sixth year in row, the most admired company by a survey conducted by Fortune magazine, and when Kenneth Lay talks about the above article he says, “Well deserved, well deserved.” This almost emphasis how the top directors were creating a culture that focused on reminding the employees on how good Enron was doing (In the tale, all of the Emperor’s men lied to the Emperor, thus the Emperor, thought that he was the only person not seeing the clothing and lied to himself about there being no clothing, as he believed his men and all of his men had said that the clothing was beautiful). In the same way, the directors at Enron kept on lying to the employees, stating how well the company was doing when in reality they were lying. One investor saw something in Enron’s numbers that the stock analysts had missed. By in-large the analysts had admitted that Enron’s numbers were a black box, thus referring to them not knowing where the numbers where coming from but the numbers were always good. (In the tale, all of the Emperor’s men lied to the Emperor, thus the Emperor, thought that he was the only person not seeing the clothing and lied to himself about there being no clothing, as he believed his men and all of his men had said that the clothing was beautiful). A reporter who didn’t know much about finance noticed something in the financial statements and realized that the numbers didn’t add up. She spoke up about the irregularities in the article that she published (Just like how the innocent boy said that the Emperor had no clothes on). When Jeff Skilling addressed the article he explained why the reporter might have said the things she said in the article and Skilling gave a reason as to why the article was published (it was almost like he had too much pride to admit that the article was right), just like in the tale the Emperor has too much pride to admit that he couldn’t see the clothing. Many of the people didn’t challenge Enron as they were very powerful just like how no one challenged the Emperor.

Markus Jooste is unempathetic, as he bulldozed an old restaurant and built a fence to keep the homeless people out so that he could build on that land. Jooste could have helped the homeless people by providing shelter for them but he chose not to. Jooste

The unethical behaviour evident in the suppliers was the fact the suppliers picked to work with Enron weren’t based on how satisfactory the company could provide its service/ goods but rather on nepotism. Many of the suppliers picked to work with company were friends or family of the board of directors. An example of this is the travel agency used by the company. All of Enron’s employees were forced to use Kenneth Lay’s sister’s travel agency for all corporate travels. Another example of this is Andrew Fastow (the CFO) of Enron who owned a trading company called LJM partnerships that worked with Enron closely which results in a conflict of interest.