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Pajarillaga, Pamela Camille E.

BSA H3-2D

ENRON
Enrons heyday has long ended. But its lessons will long endure. The global business community
is now watching a painful new chapter is this saga one where its former high-riding chief executive
officer, Jeff Skilling, is getting a decade shaved off of his prison term that should now end in 2017.
The companys failure in 2001 represents the biggest business bankruptcy ever while also
spotlighting corporate Americas moral failings. Its a stark reminder of the implications of being seduced
by charismatic leaders, or more specifically, those who sought excess at the expense of their communities
and their employees. In the end, those misplaced morals killed the company while it injured all of those
who had gone along for the ride.
Just as character matters in people, it matters in organizations, says Justin Schultz, a corporate
psychologist in Denver.
Surely, if there are profits to be made, some type of scheme that attempts to skirt the law or even
cross boundaries will occur. Its been that way throughout history. But with each passing scandal, new
rules and codes emerge that surpass those of the past. And while Enron wont be the last case of corporate
malfeasance, its tumultuous tale did initiate a new age in business ethics.
Enron, once a sleepy natural gas pipeline company, grew to become the nations seventh largest
publicly-held corporation. But its shoddy business practices, aided by bankers and advisors feeding from
the gravy train, brought down the company in December 2001.
Altogether, 16 former Enron execs including Skilling had been sentenced to prison. Its former
chairman, Ken Lay, was also convicted but because he passed away before his guilty verdict could be
appealed, that case was thrown out. Now, though, an appeals court has reduced Skillings sentencing
because it said that the trial court had miscalculated the codified penalty.
A lot of people have suffered, not the least of whom are the shareholders and pensioners who lost
it all. It was a sad ending to what had appeared to be a promising beginning to the New Economy in
which the internet age would spread wealth and create jobs throughout the social spectrum. While Enron
may be the crown jewel of corporate prosecutions, it was preceded by guilty verdicts for top execs at
Adelphia Communications, Tyco International and WorldCom.
Punishment serves as a deterrent. But a clear-cut mission and a corporate code of ethics is crucial.
Its the foundation to which boards, managers and workers rely when they reach a fork in the road. Its
the principles they use when deciding whether to emphasize short-term gain or long-term stability.
Economist Milton Friedman has argued that it is the social responsibility of corporations to
increase profits thereby putting more people to work and paying more taxes to support programs that
benefit the general public. But business ethicists caution against a myopic pursuit toward earnings. The
quarterly reporting syndrome that pressures companies to meet earnings expectations promotes
temptation that can push some to distort the truth.
But the desire to satisfy shareholders must be balanced with the need to service all corporate
constituents all of whom contribute to a companys worth. That structure must be reinforced with
values that build trust, as well as by more cognizant oversight and notable penalties for egregious acts.
So, even if you cant really regulate ethics, the fact that more people are more closely scrutinizing board
behavior encourages directors to be more responsible, says Mary Driscoll, an analyst with Standard &
Poors. But, there is no panacea, and I think we will continue to see abuses and excesses but
hopefully fewer.
Certainly, ethical dilemmas are not always black and white. And the situations that can lead to
hard choices can be as complex as the options themselves. Some companies therefore struggle with how
to manage and measure ethics and particularly in cases where they have worldwide offices that operate in
diverse cultures. Those decisions have a direct bearing on their public identities and will affect their share
prices.
Unethical companies will eventually get exposed: Witness Enron. Companies that live and
breathe their missions, by contrast, will get recognized by both the retail and capital markets. Stock
values, of course, are a function of multiple factors. But solid principles are good for business, and
ultimately good for corporation valuations.
Corporate codes are not charades. They are practical approaches to everyday situations.
Meaningful cultures will implore workers to do the right thing. That means individuals are encouraged to
come forward with their concerns and know they will be heard and acted upon. Such a system allows
management to address and handle issues in a holistic way to ensure strong ethical health.
Ethics and integrity are at the core of sustainable long term success, says Richard Rudden,
managing partner at Target Rock Advisors in New York State. Without them, no strategy can work and,
as Enron has demonstrated, enterprises will fail. Thats despite having some of the smartest guys in the
room.
Most individuals are raised with a sense of ethics that begin in their families values that have
been driven home through their schools and religious institutions. Honesty and decency have
typically been applied in interpersonal communications. But such characteristics can get lost during
business dealings. Enron is the poster child for such distorted behavior.
But the companys demise is not the end of self-indulgence. Its simply a milestone. And while
lying and deceit will always exist, there is a heightened awareness on the part of boards and investors.
Without a doubt, corporate cultures must reward ethical conduct and penalize wrongdoing at every turn.
Values matter: Ignoring trouble spots or blaming underlings is unacceptable.
The key to creating a just and ethical corporate culture is to breed fair and lasting business
principles. Indeed, companies will be measured by the traditions they build and the way in which they
manage their relationships with shareholders, communities and employees.
WORLDCOM
WorldCom, plagued by the rapid erosion of its profits and an accounting scandal that created
billions in illusory earnings, last night submitted the largest bankruptcy filing in United States history.
The bankruptcy is expected to shake an already wobbling telecommunications industry, but is unlikely to
have an immediate impact on customers, including the 20 million users of its MCI long-distance service.
The WorldCom filing listed more than $107 billion in assets, far surpassing those of Enron,
which filed for bankruptcy last December. The WorldCom filing had been anticipated since the company
disclosed in late June that it had improperly accounted for more than $3.8 billion of expenses.
Few experts or officials expect WorldCom's service to deteriorate noticeably, at least in the near
term. ''I want to assure the public that we do not believe this bankruptcy filing will lead to an immediate
disruption of service to consumers,'' Michael K. Powell, chairman of the Federal Communciations
Commission, said last night.
But industry consultants said they could not imagine how the belt-tightening expected in
bankruptcy would improve service that is already, in some respects, sloppy. [Page A12.]
WorldCom's collapse has already reverberated through jittery financial markets, and is likely to be felt in
the wider economy, with banks, suppliers and other telephone companies devising strategies to contain
their exposure.
WorldCom, built through rapid acquisitions, accumulated $41 billion in debts. Founded in 1983
as LDDS Communications, it became the nation's second-largest long-distance company and the largest
handler of Internet data.
Company executives said they intended to remain in business, and have been promised new
financing from banks to do so. ''We are going to aggressively go forward and restructure our operations,''
John W. Sidgmore, WorldCom's chief executive, said in an interview last night. ''I think ultimately we
will emerge as a stronger company.''
While WorldCom has already cut its work force significantly, Mr. Sidgmore said last night that
he did not expect further layoffs for the time being. He said he would remain WorldCom's chief but
would be joined by a chief restructuring officer brought in by creditors.
Some creditors, however, have questioned whether Mr. Sidgmore, who has served on
WorldCom's board for years, should remain in charge. Mr. Sidgmore took over as chief executive in late
April after the board ousted Bernard J. Ebbers, one of the company's founders.
Shareholders, who owned what was once one of the world's most valuable companies, worth
more than $100 billion at its peak, are expected to be virtually wiped out. With the bankruptcy filing,
control passes instead to the banks and bondholders who financed WorldCom's growth.
Besides its own overambitious strategies and flawed accounting, WorldCom also fell victim to a
glut of telecommunications capacity.
Cheap and plentiful financing allowed companies rapidly to build transcontinental and
transoceanic fiber optic networks in the 1990's. The additional capacity resulted in lower prices for
WorldCom's services, which include basic phone service and the transmission of Internet data for large
companies.
Mr. Sidgmore said last night that he was opposed to breaking up WorldCom and selling its
pieces, aside from an effort already under way to part with peripheral units like businesses in Latin
America and some other operations. This approach would rule out selling UUNet, a large Internet
backbone operation, or MCI.
But once the company reorganizes, and investors gain a better understanding of its twisted
finances, WorldCom could become an attractive acquisition target, analysts say.

Reference: http://www.nytimes.com/2002/07/22/us/worldcom-s-collapse-the-overview-worldcom-files-
for-bankruptcy-largest-us-case.html

TYCO
Tyco International has operations in over 100 countries and claims to be the world's largest maker
and servicer of electrical and electronic components; the largest designer and maker of undersea
telecommunications systems; the larger maker of fire protection systems and electronic security services;
the largest maker of specialty valves; and a major player in the disposable medical products, plastics, and
adhesives markets. Since 1986, Tyco has claimed over 40 major acquisitions as well as many minor
acquisitions.
According to the Tyco Fraud Information Center, an internal investigation concluded that there
were accounting errors, but that there was no systematic fraud problem at Tyco. So, what did happen?
Tyco's former CEO Dennis Koslowski, former CFO Mark Swartz, and former General Counsel Mark
Belnick were accused of giving themselves interest-free or very low interest loans (sometimes disguised
as bonuses) that were never approved by the Tyco board or repaid. Some of these "loans" were part of a
"Key Employee Loan" program the company offered. They were also accused of selling their company
stock without telling investors, which is a requirement under SEC rules. Koslowski, Swartz, and Belnick
stole $600 million dollars from Tyco International through their unapproved bonuses, loans, and
extravagant "company" spending. Rumors of a $6,000 shower curtain, $2,000 trash can, and a $2 million
dollar birthday party for Koslowski's wife in Italy are just a few examples of the misuse of company
funds. As many as 40 Tyco executives took loans that were later "forgiven" as part of Tyco's loan-
forgiveness program, although it was said that many did not know they were doing anything wrong. Hush
money was also paid to those the company feared would "rat out" Kozlowski.
Essentially, they concealed their illegal actions by keeping them out of the accounting books and away
from the eyes of shareholders and board members.
In 1999 the SEC began an investigation after an analyst reported questionable accounting
practices. This investigation took place from 1999 to 2000 and centered on accounting practices for the
company's many acquisitions, including a practice known as "spring-loading." In "spring-loading," the
pre-acquisition earnings of an acquired company are underreported, giving the merged company the
appearance of an earnings boost afterwards. The investigation ended with the SEC deciding to take no
action.
In January 2002, the accuracy of Tyco's bookkeeping and accounting again came under question
after a tip drew attention to a $20 million payment made to Tyco director Frank Walsh, Jr. That payment
was later explained as a finder's fee for the Tyco acquisition of CIT. In June 2002, Kozlowski was being
investigated for tax evasion because he failed to pay sales tax on $13 million in artwork that he had
purchased in New York with company funds. At the same time, Kozlowski resigned from Tyco "for
personal reasons" and was replaced by John Fort. By September of 2002, all three (Kozlowski, Swartz,
and Belnick) were gone and charges were filed against them for failure to disclose information on their
multimillion dollar loans to shareholders.
The SEC asked Kozlowski, Swartz, and Belnick to restore the funds that they took from Tyco in
the form of undisclosed loans and compensations.
Kozlowski and Swartz were found guilty in 2005 of taking bonuses worth more than $120 million
without the approval of Tyco's directors, abusing an employee loan program, and misrepresenting the
company's financial condition to investors to boost the stock price, while selling $575 million in stock.
Both are serving 8 1/3-to-25-year prison sentences. Belnick paid a $100,000 civil penalty for his role.
Since replacing its Board Members and several executives, Tyco International has remained strong.

Reference: http://money.howstuffworks.com/cooking-books10.htm