Corporate Crime: A Comparison of Culture at Enron and Satyam
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Corporate Crime: A Comparison of
Culture at Enron and Satyam
Deepti Khedekar
Faculty Mentor: Larry Carstenson
University of Nebraska at Kearney
Abstract: To be able to compare what happened at Enron and Satyam,
one needs to look into the basic functioning of companies. The pertinent
question here is how were these companies able to misrepresent their
assets to such a proportion without the knowledge of anyone within their
organizations? Was it loyalty or fear or both that kept employees in
these organizations from blowing the whistle on the wrongdoers? While
the result of both frauds was an initial rise in stock price and although the
scam in Satyam Computers Services Ltd. is being called ‘The Indian
Enron’, there are several differences between these two episodes. This
paper lays down the differences between Enron and Satyam and explores
the corporate culture prevalent in India and the U.S. to explain the
possible differences in the route the management of the two companies
took to falsify the information.
Key concepts: Nepotism, cronyism, micro-geographies, corporate culture,
cross-cultural studies, Special Purpose Entities, Mark to Market
accounting, corporate governance
Introduction
It is about commitment to values, about
There are several definitions of ethical business conduct and about
corporate governance. The Securities making a distinction between personal
and Exchange Board of India defines it and corporate funds in the management
as “the acceptance by management of of a company.” (Sapovadia & Patel,
the inalienable rights of the 2009)
shareholders as the true owners of the Good corporate governance
corporation and of their own role as works in a well functioning chain of
trustees on behalf of the shareholders. power. To protect the investors’ rights,
Economics & Business Journal:
Inquiries & Perspectives 156 Volume 3 Number 1 October 2010Corporate Crime: Enron & Satyam Khedekar
financiers, auditors, boards of directors here is how were these companies able
and financial analysts work together and to misrepresent their assets to such a
maintain transparency in the system proportion without the knowledge of
(Healy & Palepu, 2003). These anyone within their organizations? Was
governance bodies also act as a check it loyalty or fear or both that kept
on each other. Governmental agencies employees in these organizations from
such as the S.E.C. handle the overall blowing the whistle on the wrongdoers?
functioning of this system. While the result of both frauds was an
The failures of this system and initial rise in stock price and although
the urgent need to improve it have been the scam in Satyam Computers Inc. is
the media’s hottest topic for the past being called ‘The Indian Enron’, there
few months now. The shocking Madoff are several differences between these
Ponzi scheme, the fall of Satyam two episodes. This paper lays down the
Computers and now the fraud charges differences between Enron and Satyam
against Texas banker R. Allen Stanford and explores the corporate culture
have all shaken the confidence of prevalent in India and the U.S. to
investors in an already shaky economy. explain the possible differences in the
Several explanations are being issued as route the management of the two
the corporate world tries to understand companies took to falsify the
why these gross distortions take place, information. The hypothesis is that
and even more incredulously, how they there is high likelihood that the cultural
manage to go unnoticed until it is too set up of different countries may have a
late. The Enron scandal and the major impact on how scams of this type
resulting stringent regulations have are conducted within their
obviously not been successful in organizations, that there may be a
preventing situations of the same type different set of motives and unique
from happening. One of the reasons for irregularities in the system that allow
this could be the fact that these for such crimes to occur.
falsifications often start small and
subsequently become unmanageable. Benefits of effective corporate
This seems to result in an unfortunate governance
series of actions; once started they are
difficult to stop and they consequently When Satyam Computers
blow out of proportion before hitting declared bankruptcy, the economy of
the media. As Mr. Ramalinga Raju, the the country was already in the
founder of Satyam Computers doldrums. The problems at Wall Street
mentioned in his letter to the board of had spread to the rest of the globe,
directors, the fraud ‘was like riding a especially India where a lot of the work
tiger, not knowing how to get off from the U.S. is outsourced. With the
without being eaten’. downfall of the fourth largest company
To be able to compare what the stock market crashed even more,
happened at Enron and Satyam, one dragging the economy lower. It is quite
needs to look into the basic functioning logical to link corporate governance to
of companies. The pertinent question not only the financial system of an
Economics & Business Journal:
Inquiries & Perspectives 157 Volume 3 Number 1 October 2010Corporate Crime: Enron & Satyam Khedekar
organization but to the economy of the the problem with the Indian corporate
whole country (Chakrabarti, 2005). sector is that often the majority
Another straight forward shareholders of the company are also
reasoning for the emphasis on good the top management. Family members
corporate governance is that when a are given preference in important
company follows all the rules it is positions without formal procedures
supposed to follow and keeps its that need to be followed to check their
proceedings transparent, there are low suitability. Unfortunately, the legal
chances of the organization losing its system of the country is also slow and
money over law suits. corruption is prevalent in most sectors
of the government. Court cases drag on
Models of corporate governance for extremely long durations,
sometimes decades, and it becomes
There are two basic structures unfeasible to process anything through
into which corporate governance can be the legal system (Chakrabarti, 2005).
categorized; the market based Anglo-
Saxon pattern followed by countries like Satyam Computers Private Ltd.
the U.S., India and U.K. and the bank
based model that is followed by The Indian corporate structure
companies in Germany and Japan. In has shown promise the past few years.
the bank based model, a country’s With a majority English speaking
major banks hold the reins of the population, there has been great
companies’ functioning. They are demand for call centers from companies
primarily responsible for the supervision in developed countries, especially the
of the organization and have their U.S. and U.K. The sheer number of
representatives in the body of qualified, talented young people in the
stakeholders. country has made it a haven for Foreign
In the Anglo-Saxon model of Direct Investment (FDI). Besides, the
corporate governance, checks on the country’s banking system has long
management are kept through the supported the advancement of
financial market. The shareholders companies. As a result India has been
display their discontent with the on the global map for Information
management by selling the company Technology (IT) for quite some time
shares. This results in the share prices now. The rapid pace at which the
of the company nose-diving and this country was developing its corporate
makes the company vulnerable to being structure reminded many of the
seized by another. An acquisition of the American capitalist economy. However,
company by another would mean new after a decade or so of spurt in growth,
management, and it is this fear of being the Indian corporate sector is being
seized by another organization, more called to line.
than shareholder action, that makes the Satyam Computers Private Ltd.
management follow regulations. was started in 1987 by its founder Mr.
However, hostile takeovers are Ramalinga Raju in Andra Pradesh, India.
not common in Asian countries. Also, In a short span of time Satyam climbed
Economics & Business Journal:
Inquiries & Perspectives 158 Volume 3 Number 1 October 2010Corporate Crime: Enron & Satyam Khedekar
the corporate ladder to be recognized Saxon model, there are some very
as the fourth largest company in India. important distinctions that need to be
It offers services such as Business made. Culturally speaking, India, like
Process Outsourcing (BPO) and other Asian countries, is notorious for
consultancy in several IT, engineering corruption, cronyism and nepotism (Yu
and management departments. Very & Xu, 2001). Nepotism refers to the
soon prominent Fortune 500 companies hiring of members of the same family to
like Nestle, GE and GM from the U.S. positions in an organization. It is widely
came to be top customers on Satyam’s held to be unfavorable because it is
client list. assumed that people who are given a
On January 7th 2009, Mr. job or promotion because of their
Ramalinga Raju declared that he had relation to the higher-ups are not
been showing nonexistent profits on the qualified for the positions. Nepotism in
company’s books for the past several the corporate sector in India has given
years. This billion dollar fraud episode is rise to a unique set of circumstances,
famously being called ‘India’s Enron’. making its issues different from those
The incident has made the foreign that are encountered in the U.S.
investor question India’s capacity to corporate sector. The presence of
govern its corporate sector and family members in high ranking
maintain high standards of positions has been the crux of many
transparency. After the episode came governance problems in India. In most
to light, Satyam’s shares have gone family owned businesses in India,
down by more than half. In April 2009, relatives and kin form the majority
just four months after Mr. Raju’s shareholders of the company. With
declaration of fraud, the company was family influence in senior management,
finally taken over by Tech Mahindra. decisions often cater to the profit of the
Today, Mr. Ramalinga Raju (ex-chairman family unit instead of the business or
of the company) and his brother Mr. the other stakeholders of the company.
Rama Raju (ex- Managing Director) have As a result of a lethargic legal system
been put into prison in Chanchalguda improper recruitment of this type is not
Central jail in Hyderabad, India. Linked prevented by the government.
to the Satyam fraud is the attempt The view towards nepotism also
made by Mr. Raju to transfer the differs very widely based on geography.
company’s funds to Maytas properties, Cross-cultural studies show that cultural
which is a real estate company owned diversities affect the way people in
by Mr. Raju’s sons. different countries view nepotism along
with its advantages and disadvantages
India: nepotism, cronyism and (Abdalla, Maghrabi & Raggad, 1995). An
corruption example can be given of Indian politics
where nepotism has long been
Although the corporate sector in established as an accepted method of
both India and the U.S. is based on the entry into the system. The country’s
Anglo- first Prime Minister, Jawaharlal Nehru,
his daughter, Indira Gandhi, her son
Economics & Business Journal:
Inquiries & Perspectives 159 Volume 3 Number 1 October 2010Corporate Crime: Enron & Satyam Khedekar
Rajiv and his wife Sonia Gandhi have all control. There is high likelihood for
been active members of the Indian nepotism to occur in “micro-
political system and benefit from the geographies where several external
enthusiastic support of the Indian factors like socio-cultural, economic,
masses, most of who want the country educational, and political structures
to be lead by a ‘Gandhi’. As a result force people to support their close
“the world's most populous democracy relatives or friends” (Arasli & Tumer,
has sometimes looked suspiciously like a 2008). Another reason why family
family business” (The Economist, 2009). members were given priority was to
Legally speaking, even in the encourage and maintain a healthy
U.S., nepotism is a complex issue rapport between the people responsible
because there are no formal, uniform for running a successful business. It has
laws regulating it. Issues related to been widely accepted that this ease in
nepotism have to be decided on a case- relationships creates a homogeneous
to-case basis, according to the laws of work environment as people coming
the state. What makes this issue even into the organization have pre-formed
more complex is the fact that several bonds (Bennett- Alexander & Hartman,
cases related to nepotism clash with 2009).
prevailing policies that regulate As the corporate sector in India
discrimination against marital status, grew, families continued to keep all
sex, age and even racial discrimination. decision-making authority in their
Another reason why nepotism is hands. However, this has not been in
not a good practice is because of the the best interest of the minority
reputation of unprofessionalism that stakeholders of the company. The
gets attached to organizations majority shareholders and higher
practicing this form of employee management make all decisions based
recruitment. A 1965 Harvard Business on what will be most profitable for the
Review article on nepotism states that family. The general trend has been to
more than sixty percent of executives in try and transfer company funds into
their study had a negative attitude to other family owned businesses; the
the practice of hiring relatives into a Maytas incident in the Satyam scandal is
company (Harvard Business Review, a classic example. There have been
1965). While the U.S. has reached a rumors that the problems in Satyam
stage where it does not allow ‘paired were linked to its connection with
employment’ (Padgett & Morris, 2005), Maytas which is a real estate company
India has barely begun to consider the owned by Mr. Raju’s sons
detrimental effects of giving precedence (Ramachandraiah, 2009). Poor and
to family over other qualified unprofessional land valuation
candidates. techniques had resulted in the Maytas
The practice started out when properties, which were owned by the
there was no legal protection for assets Raju family, being valued at a price of
that were handed to a non-family one crore rupees (about twenty
member. As a result, most families tried thousand dollars) per acre when the
to keep all financial matters within their value of the property was actually ten
Economics & Business Journal:
Inquiries & Perspectives 160 Volume 3 Number 1 October 2010Corporate Crime: Enron & Satyam Khedekar
lakh rupees (about two hundred and then sell their shares when stock
thousand dollars) per acre (Sandhir, prices are high, getting rid of it before
2009). When questioned, Mr. Raju the prices drop, thus leaving the
declared that trying to transfer the shareholders to bear the burden of the
funds into Maytas was the last remedy crash (Coffee, 2002).
that he resorted to, to disguise the While Satyam’s contributions to
fictional company assets. Fortunately, the Indian society through charitable
as this move was strongly opposed by programs put it on the radar as one of
the shareholders, the deal did not go the nation’s most coveted companies,
through. However, the action has like other Indian companies, it evidently
nevertheless made foreign investors lacked in basic transparency and
question the tendency of Indian accountability. The scandal has alerted
companies to employ family members foreign investors who are now
in an unqualified manner. Some questioning the credibility of Indian
researchers maintain that nepotism in companies, dealing a severe blow to the
India has created an image of overly Indian corporate sector.
conservative, paternalistic organizations In the past few years family
which have poor succession planning controlled businesses in India have had
and tunnel vision and which are problems related to corporate
rampant with role confusion (Das & governance. Research has revealed that
Gupta, 2008). family based businesses make lower
The corporate scene is not profits and are in higher danger of
similar in western countries. In the U.S. facing crashed stock prices during an
and the U.K. senior management might economic downturn (Sapovadia & Patel,
try to inflate the assets of the company 2009). There is also a very high chance
to obtain better compensation that is of family owned businesses
offered as an incentive and is directly encountering the threat of acquisition
related to the quarterly profits of the by another company or losses because
company. Previously management had of internal rivalry, as can be observed in
to hold their shares for a period of six the Ambani family’s struggle for power.
months to evaluate the steadiness of
stock price in the market before selling The Indian Corporate Sector
them. However, as a result of changes
made to Section (16) of the Securities As a developing nation, India has
Exchange Act of 1934, higher been in the forefront of economic
management is now allowed to sell progress among third world countries.
their shares when the price of company After attaining independence in 1947,
stock goes up, courtesy several Indians inherited a well functioning
‘acceptable’ accounting practices such stock market (Dharmapala & Khanna,
as the validation of accounts receivables 2008). Today almost a million
as ‘cash on hand’. This pattern has been companies are registered in India in a
very convenient for higher corporate sector that has been
management; they increase assets recognized by most of the western
through dubious accounting practices countries to be ‘booming’.
Economics & Business Journal:
Inquiries & Perspectives 161 Volume 3 Number 1 October 2010Corporate Crime: Enron & Satyam Khedekar
The country has also recognized known of how well the rules are being
the importance of setting regulations to followed.
govern the corporate sector which has When the corporate sector of
become increasingly responsible for the the country was in its infant stages in
rapid development of this agrarian the late nineties, the Development
economy. The most important step Finance Institutions of India (DFIs) acted
taken by the Indian government as the main lenders of credit to Indian
towards this is the establishment of the companies. They were also the majority
Securities and Exchange Board of India shareholders of the companies to whom
(SEBI) in 1992. The committee they lent and had their representatives
established by the Confederation of on the company boards. This clearly
Indian Industries (CII) under Mr. Rahul shows the high level of control the DFIs
Bajaj, which developed the Code for could have had in the companies’
Desirable Corporate Governance, was functioning, to the extent that the
another major move. In the years 2000 system seems similar to the bank based
and 2003 the SEBI formed two model of corporate governance.
committees, one under Mr. Kumar However, most often companies did not
Mangalam Birla and the latter under Mr. repay the loans they had taken from the
Narayan Murthy, the former CEO of DFIs and there was nothing that the
Infosys (Sur & Chakraborty, 2006). boards could do. When the net worth
However, although these steps of these companies was completely
have been taken from time to time, depleted, they would be referred by the
Indian corporate past has not been Sick Industrial Companies Act (SICA) to
devoid of scandals. Just previous to the the Board for Industrial and Financial
formation of the SEBI, India had to come Reconstruction (BIFR) which proved to
to terms with the Harshad Mehta Stock be an unsuccessful undertaking.
market scam. Also, as a result of scams Most of India’s problems seem
in the late eighties and early nineties, to root from its legal system. All legal
the London Stock Exchange conducted systems are based on one of the four
an enquiry under Sir Adrian Cadbury systems found in the world- the English
which submitted the famous Cadbury common law, the French civil law, the
Committee report in 1992 to restore the German civil law and the Scandinavian
faith of investors in company auditing civil law. Both the Indian and the U.S.
(Dutta, 2006). legal systems are built on the English
Other regulations that have common law; however there is a world
been passed include the Industrial of difference in the way that law is
Development and Regulation Act implemented in these two countries.
(1951), the Companies Act (1956), the While the de jure protection offered
Industrial Policy Resolution (1956), the seems strong, the de facto protection
Security Contract Act (1956) and the does not come up to the standards of
Accounting standards set forth by the developed countries.
ICAI. While these regulations have all Another interesting aspect of
laid down severe penalties, little is this issue that needs to be considered
from the shareholders’ point of view is
Economics & Business Journal:
Inquiries & Perspectives 162 Volume 3 Number 1 October 2010Corporate Crime: Enron & Satyam Khedekar
the shareholder’s index and the rule of Patel, 2009), companies not following
law index. The shareholder’s index is a the rule are rarely penalized. India
range from 0 to 6 which tries to admittedly has superior financial
determine whether the shareholders transparency as compared to other
rights are protected by a particular legal Asian countries (Chakrabarti, 2005);
system on paper, meaning whether however, legal implementation of
proper rules and regulations have been regulations has a long way to go as
laid down, whether they have been compared to standards in the U.S.
checked for loopholes. The rule of law Consequently, the law that has been
index attempts to understand whether laid down to govern the corporate
the regulations that have been laid sector ends up remaining on paper and
down are being followed to protect the the victims of such flagrant violations,
shareholders of companies under a usually the minority shareholders and
particular legal system. Research has lenders, continue to suffer.
revealed the fact that while the legal
system in India scores well on the Enron
shareholder’s index, it does not do so
according to the rule of law index As compared to the relatively
(Chakrabarti, 2005). recent Satyam scam, Enron has been
A 2006 Ministry of Company very well documented and researched.
affairs statement revealed that nearly Enron, a company that had become one
four hundred companies in the Mumbai of the world’s leading energy dealers,
Stock Exchange face charges related to recruiting more than 22,000 employees,
violation of corporate governance declared bankruptcy in 2001. For
norms (Sapovadia & Patel, 2009). These several years this Houston, Texas based
infringements have been of several company had, through systematic and
types. Often majority stakeholders of willful accounting manipulation, inflated
the company, with no thought to other its assets. Enron’s accounting firm,
investors, try to transfer the company’s Arthur Andersen, recognized as one of
funds to other family projects similar to the best and most coveted accounting
the Maytas deal. Often the auditors of firms in the U.S., crashed because of its
the company are prevented or bribed to involvement in the fraud.
not display the actual financial position At its zenith, Enron was
of the company. As the Boards of considered the company of the twenty
Directors are usually comprised of first century. It was applauded for the
cronies of the majority shareholder, measures it took to strengthen
who also has his people in the senior employee security through benefits and
management positions of the company, compensation. The media was bursting
most of these breaches are watched by with stories of its philanthropy and
mute spectators who are nominal contributions to sustainability. After the
authorities in the company. Although 1988 deregulation of electrical power
the Companies Act makes the filing of markets (Sims & Brinkmann, 2003), the
annual returns and submitting of company was given free rein to operate.
balance sheets mandatory (Sapovadia & It began linking itself with several
Economics & Business Journal:
Inquiries & Perspectives 163 Volume 3 Number 1 October 2010Corporate Crime: Enron & Satyam Khedekar
contracts, many of which were million dollars in profit from the
extremely complicated in nature. These transaction (Tonge, Greer & Lawton,
contracts and operations were often 2003). Other such contracts included
international and involved intricate names like Compaq, IBM, Saks
transactions that were difficult to Incorporated, and Blockbuster. In the
account for (Healy and Palepu, 2003). example of Blockbuster Video, a
Eventually, Enron began using several transaction was signed in which Enron
questionable accounting techniques, agreed to supply several U.S. cities with
such as mark to market accounting, to entertainment. Projects were set up in
keep these operations running. The several cities to supply homes with
company also created many Special entertainment and plans were made to
Purpose Entities (SPEs). These were ‘encode and stream the entertainment
established to look like a ‘legitimate’ over its global broadband network’. So
segment of the company and regularly far so good. However, there were
received funds, thus concealing the doubts about the technical workability
losses of the company. of this project and whether it would
Mark to market accounting has have market demand in the future.
been held as one of the main Despite these misgivings, Enron
techniques used by Enron’s senior proceeded to calculate a profit of 110
management to drive up the profits of million dollars from this deal (Healy &
the company on the books. This Palepu, 2003).
ingenious calculation consisted of Enron Enron also relied on Special
taking into account revenues that the Purpose Entities and other forms of so-
company was supposed to receive, but called ‘structured finance’ (Deakin &
which it had not yet received, and Konzelmann, 2004) methods to portray
computing the profit the company a picture of profit without showing the
would accumulate from increased losses. Often these SPEs were off-shore
energy prices and interest rates in the entities that had been vaguely
future based on these revenues (Healy documented in the company. Funds
& Palepu, 2003). In a steady market and were often transferred to these projects
a stable economy, these predictions for developmental and other purposes
would have come true. This is probably to “move some 1.27 billion dollars of
why the GAAP in the U.S. requires assets off the Enron balance sheet,
companies to make use of Fair Value delay reporting losses, hide debt, inflate
Accounting. However, Enron’s profit and revenues and enrich some of
calculations of profit went too far ahead the executives who ran them” (Tonge,
into the future. In 2001, Enron had Greer & Lawton, 2003). The
made deals with Quaker Oats to provide transactions that were carried out to
its plants with energy. Enron Energy account for these entities were
Services signed an agreement that was complex, intricate and very difficult to
to last for ten years. It had not even understand, a fact which served the
begun supplying Quaker with the people who were running them very
promised energy and staff but had well. The misuse of these accounting
already calculated a profit of 23.4 techniques may have started small, but
Economics & Business Journal:
Inquiries & Perspectives 164 Volume 3 Number 1 October 2010Corporate Crime: Enron & Satyam Khedekar
soon grew out of control until the ‘the spirit of law’ (Duska, 2005). An
company had to declare bankruptcy. external auditor’s primary responsibility
The ability to keep the transactions of lies to the shareholders of a company;
these SPEs away from the parent the people who have bought shares and
company enabled Enron to falsify its who rely on auditors like themselves for
exact status on the balance sheets. an accurate picture of the company’s
Enron had managed to convince the SEC financial position. The SEC requires
that the SPEs were not its subsidiaries; public listed companies to present
as a result its transactions were not audited financial reports in order to
intensely scrutinized (Sims & make sure that there are no
Brinkmann, 2003). The fact that irregularities in their functioning and to
external vendors were allowed to invest alert shareholders of any that might
in these transactions (Deakin & emerge (Stabus, 2005). After Enron
Konzelmann, 2004) and therefore declared bankruptcy, Arthur Andersen
legitimately demand a certain share of was held responsible for not blowing
the profits added to the complexity of the whistle on the fraud that was taking
the situation. place there and ultimately lost all
An example can be given of the standing in the market. Andersen
Raptors SPEs which were a group of initially approved the SPE transactions
projects that worked based on the that Enron was conducting and although
sponsorship they received from other the unconventionality of the financial
projects. As a result of this external and accounting methods used to
funding, Enron was able to use creative conduct these deals was briefly
accounting techniques to keep losses discussed, not much resistance was
from being shown on its financial shown. The demerits of the auditing
statements although the company had firm acting as consultants to Enron have
provided most of the funding for their been argued widely among experts;
functioning (Benston & Hartgraves, most hold the opinion that these two
2002). There were hundreds of such services could have created conflicting
entities started by Enron by the late interests and as a result prevented
1990s. While some were used to fund Andersen from being good auditors.
the purchase of contracts to supply gas, Many others believe that the Andersen
several were formed with the main case could easily be an example of
objective to manipulate assets to bribery; the fees that the firm received
further the company’s attempts in from Enron accounted for 27 percent of
acquiring stakes in other companies and its total auditing fees (Healy & Palepu,
joint ventures (Healy & Palepu, 2004). 2004). The firm seemed to have
Enron’s risk-spreading included the struggled with trying to provide ethically
practice of entering into SPE consistent advice as auditors and
transactions with non-existent investors suggestions as consultants that may not
(example Chewco). have borne too much weight on right or
Enron’s auditors, Arthur wrong. Whatever the case was, Enron
Andersen, have been blamed for having and other corporate scandals are clearly
met the letter of the law but violating affected by inefficiency and “decline in
Economics & Business Journal:
Inquiries & Perspectives 165 Volume 3 Number 1 October 2010Corporate Crime: Enron & Satyam Khedekar
the professional standards of the legal competitiveness and allowed it, but
and accounting gatekeepers” (Coffee, there came a time when Enron could no
2002). longer continue the façade. Even when
Be it Enron or Satyam, the ability the executives realized that the fraud
to swindle the investors was created could not be hidden for too long, they
due to the failure of the regulators and tried everything in their means to
auditors. These ‘gatekeepers’ are the persuade the investors to keep holding
ones who the investor traditionally on to and even buy more shares. The
depends on to get information on how Enron failure in this sense can be called
the company is doing. Although there is a leadership failure, as the very leaders
always a possibility of charismatic of the company directed their workers
management influencing shareholders towards taking unethical actions. This
(which in the case of Enron was founder resulted in the rest of the employees
Kenneth Lay), when the financial following suit because ‘if the boss
position of a company is kept thought it was OK, then it probably was
transparent by auditors there are lower OK’. When the company started failing
chances of deception. Unfortunately, publicly, the supposed leaders engaged
the investor can still be hoodwinked if in finger pointing and raced to save
the gatekeepers are bribed into silence. their own skin, giving no thought to the
The recent case of financer R. Allen hundreds of shareholders whose savings
Stanford is another unfortunate they had wiped out. There is also
example where the Texas banker paid evidence of senior executives being
an Antigua banking regulator around a responsible for destroying documents
hundred thousand dollars for his help to that could have been used to prove
keep the S.E.C. away. Enron’s illegal dealings. Employees
One needs to understand that have stated that those who noticed and
the above mentioned incidents were all wanted to report irregularities were
part of the corporate culture that the concerned about getting fired. A lot can
company had created. In the search for be said about the culture that the
perfection and to maintain their leaders at Enron created. They set the
standing in the business world, Enron wrong role models, rewarded risky rule
developed and encouraged a culture of breaking and created a ‘win-at-all-cost’
finding loopholes in the ethical and legal system (Sims & Brinkmann, 2003). All in
system. Their goal in some sense all, it was HR techniques of motivation
seemed to be to “circumvent systems gone awry. The company gave the term
that were designed to protect the competitive advantage a dangerous
company and the shareholders” twist. Their performance appraisal
(Berenbeim, 2002). ‘Minor’ rule system has been called the ‘rank and
breaking was considered acceptable for yank’ system; employees who followed
the achievement of the higher goals of the culture set by leaders and raked in
the company. Everything was driven profits were awarded bonuses while the
based on the bottom-line. The Enron ones who did not were fired (Tonge,
executives of the time seemed to have Greer & Lawton, 2003).
assumed that this came under healthy
Economics & Business Journal:
Inquiries & Perspectives 166 Volume 3 Number 1 October 2010Corporate Crime: Enron & Satyam Khedekar
Discussion openly this is done. In a country where
giving and taking bribes is
While both Enron and Satyam commonplace, legislators will have to
were involved in corporate crimes pay more emphasis on drawing future
where the senior management of the regulations that help avoid such a
companies inflated assets, they used situation to spread to the corporate
very unique means to accomplish the sector of the country. The U.S.
ends. The first clear difference is the attempted to achieve a goal of stricter
transfer of funds to other entities in regulation by passing the Sarbanes-
order to separate those transactions Oxley; India is in the process of
from the parent company. In the case strengthening accountability in higher
of Enron, mark to market accounting management and auditors by making
and reliance on SPEs enabled the amendments to Clause 49 of the Listings
company to achieve the purpose. Also, Agreement.
Enron was unique in the sense that the There’s also something to be
company had placed enormous powers said about corruption and familial
in the hands of its CFO to carry out connections within a company. It is
transactions which were not scrutinized common knowledge that lack of
by the board (Coffee, 2002). Andrew evidence regarding the involvement of
Fastow and his management team board of directors in a fraud, both in the
skillfully created hundreds of special U.S. and in India, is frustrating for
purpose entities before their investors. Most people feel certain that
declaration of bankruptcy in 2001. crimes of such high magnitude cannot
While the management at Satyam tried be conducted without the knowledge of
to accomplish something of the same those people who are closely related to
kind through the Maytas deal, the the functioning of the company. This
differentiating angle here is the fact that line of thought takes on more meaning
Maytas was a family holding. Enron when we consider the degree of
found loopholes in the legal system and nepotism in the Indian corporate sector.
was eventually successful in maintaining As mentioned previously, in many
the pretense of the fake off-shore companies where the majority
entities and duping the public, but it had shareholder is a family, relatives are
to find those loopholes. The scene in directly allotted positions of power.
India seems to be a little different. Even This has been an unquestioned practice
though regulations in both the countries for several years. Family members
are almost the same on paper, Indian expect to be given senior positions and
companies in general seem to find not doing so can sometimes be
bending the law, openly and quite construed as being a traitor to the
directly, easier than U.S. firms. community. The practice is so widely
Although the Maytas deal was not accepted that not much is done in the
allowed to go through due to investor form of following anti-discrimination
resistance, there is plenty of evidence to policies. However, while this practice is
show the ease with which companies in discriminatory and against the principles
India disregard regulation and how of employment law, it bears even
Economics & Business Journal:
Inquiries & Perspectives 167 Volume 3 Number 1 October 2010Corporate Crime: Enron & Satyam Khedekar
greater consequences when corporate culture which respects community
crimes of this kind become easier. With norms. Studies have shown that while
the whole family involved in the Americans tend to use words like ‘best’,
company there’s often the attitude of ‘achievement’ and ‘success’, Asians tend
wanting the company to earn profits for to use words like ‘growth’, ‘endure’ and
the family as opposed to benefiting all ‘advancement’ (Baillie, Dunn & Zheng,
the stakeholders. There’s high 2004). One might assume that America
probability of the family being in has reached a stage where the culture
cahoots while conducting bogus expects people to achieve even when it
transactions and this risk can be might be injurious to them and people
eliminated by a stricter adherence to around them in the long run. A lot can
anti-nepotism policies. While recruiting be said about the harmful effects of
family is not always a bad thing, cultural expectation; in the case of the
especially when worthy heirs are tested U.S., the very culture of competition
for their merit before being allowed to seems to have lead to the downfall of
hold a position (Brendan, 2004), the Enron.
trade-offs of this policy have to be kept
in mind and emphasis should be placed Suggestions for future research
on developing a system of checks to
avoid any concentration of power once The Satyam fraud came to light
the company starts trading in public on the 21st January, 2009; as a result,
securities. there is very limited research data
In Enron, crime was possible as a available on it. Future research can
result of cooperation among senior focus on newer data that may be
management and an unhealthy published subsequent to this paper to
emphasis on aggressive competition. add the latest dimension. Corporate
Western culture, and especially the U.S., culture and the effect it could have on
is celebrated for its focus on employees, independent auditors and
individualism and goal- directed boards of directors has been the main
behavior. The ability to work hard, be focus of this paper. It emphasizes on
competitive and reach the pinnacle of how certain forms of behavior are
success is admired. This has been true tolerated due to some accepted norms.
to such an extent that people from In a country where familial relations are
eastern countries come to the U.S. to held in high deference, certain ways of
try to achieve the ‘American Dream’. A functioning that might not be tolerated
clarification that needs to be made here in some other countries are endured.
is that Asian cultures also have a This throws light on the importance of
competitive culture. However, in these the human resources division of every
countries the kind of competition that is company and the urgent need for laws
encouraged differs. In Asian countries that prevent this manner of functioning
competition does not take the from being considered ‘OK’. The U.S.
aggressive form of driving out has diversity training due to its stringent
competition but focuses more on anti-discrimination laws; it is time
improving oneself. It is a more inclusive Indians became wary of the issues that
Economics & Business Journal:
Inquiries & Perspectives 168 Volume 3 Number 1 October 2010Corporate Crime: Enron & Satyam Khedekar
could arise as a result of a politically 07/22/09 from
incorrect approach to corporate culture. http://bbs.cenet.org.cn/uploadimages/
200311294124115529.pdf
However, the points mentioned Berenbeim (2002). ‘The Enron Ethics
in this paper that differentiate Enron Breakdown’, The Conference Board:
from Satyam are not restricted to Executive Action, No. 15 Retrieved on
corporate culture. There are 07/22/09 from
innumerable differences in these two http://www.infoedge.com/samples/CB
-EA15free.pdf
frauds from other angles that the paper Brendan (2004). ‘The New Nepotism’, Public
does not talk about. A study of Enron Interest 154, 130(6). Retrieved on
and Satyam from those dimensions will 07/27/09 from http://0-
reveal a clearer picture of the find.galegroup.com.rosi.unk.edu:80/itx
differences in these two scandals and, /start.do?prodId=AONE
Chakrabarti (2005). ‘Corporate Governance in
ultimately, corporate governance in India: Evolution and Challenges’.
these two countries. Georgia Institute of
Technology.Retrieved on 06/01/09
References from
http://papers.ssrn.com/sol3/papers.cf
m?abstract_id=649857
Coffee (2002). ‘Understanding Enron: It’s about
Abdalla, Maghrabi & Raggad (1998). ‘Assessing the Gatekeepers, Stupid’, Columbia Law
the perceptions of human resource School. Retrieved on 06/02/09 from
managers toward nepotism: A cross- http://papers.ssrn.com/sol3/papers.cf
cultural study’, International Journal of m?abstract_id=325240
Manpower, Volume: 19, Issue: 8, Page: Das & Gupta (2008). ‘Sustaining
554 – 570.Retrieved on 07/09/09 from Entrepreneurship in Family Business’,
http://0- presented at the ISB, Hyderabad
www.emeraldinsight.com.rosi.unk.edu/ Conference. Retrieved on 07/12/09
Insight from
Arasli & Tumer ((Oct 2008). ‘Nepotism, http://www.isb.edu/FamilyBusinessCo
favoritism and cronyism: a study of nference/SustainingEntrepreneurship.p
their effects on job stress and job df
satisfaction in the banking industry of Deakin & Konzelmann (2004). ‘Learning from
North Cyprus’, Social Behavior and Enron’, Corporate Governance: An
Personality: An International International Review, Vol. 12, No. 2, pp.
Journal 36.9: Pg.1237(14). Retrieved on 134-142. Retrieved on 06/01/09 from
07/09/09 from http://0- http://www.tkyd.org/files/downloads/
find.galegroup.com.rosi.unk.edu/itx/ret Learning_From_Enron.pdf
rieve.do? Dharmapala & Khanna (2008). ‘Corporate
Baillie, Dunn & Zheng, (2004). ‘Travelling Facts’, Governance, Enforcement and Firm
Campus Verlag, pgs. 139-140 Retrieved Value: Evidence from India’, U of
on 07/27/09 from Michigan Law and Economics, Olin
http://books.google.com/books rd
Working Paper No. 08-005, 3 Annual
Bennett-Alexander, D. D., & Hartman, L P. Conference on Empirical Legal Studies
(2009). Employment law for business paper. Retrieved on 06/01/09 from
(6th ed.). New York: McGraw- http://papers.ssrn.com/sol3/papers.cf
Hill/Irwin. Pgs. 120-126 & 130. m?abstract_id=1105732
Benston & Hartgraves (2002). ‘Enron: What Dutta (2006). ‘Corporate Governance: Codes and
Happened and What We Can Learn Ethics’, Growth, Volume 33, No. 4
From It’, Journal of Accounting and Retrieved on 07/20/09 from
Public Policy. Pgs. 105-127Retrieved on
Economics & Business Journal:
Inquiries & Perspectives 169 Volume 3 Number 1 October 2010Corporate Crime: Enron & Satyam Khedekar
http://www.sail.co.in/Growth_Jan_200 Sapovadia & Patel (2009). ‘Is Blood Thicker than
6.pdf#page=10 Water? Appraising Adequacy of Indian
Duska (2005). ‘The Good Auditor- Skeptic or Corporate Governance Framework For
Wealth Accumulator? Ethical Lessons Family Based Companies: A Case Study
Learnt from the Arthur Andersen on Satyam Computers’. Retrieved on
Debacle’, Journal of Business Ethics. 06/01/09 from
Pgs. 17-29 Retrieved on 07/22/09 from http://papers.ssrn.com/sol3/papers.cf
http://0- m?abstract_id=1347868
www.jstor.org.rosi.unk.edu/stable/251 Sims & Brinkmann (2003). Enron Ethics (Or:
23451 Culture Matters more than Codes), The
Harvard Business Review (1965). ‘Is Nepotism So Journal of Business Ethics, pgs. 243-256
Bad?’, Harvard Business Review, 43 (1), Retrieved on 06/12/09 from http://0-
pg. 23 Retrieved on 07/22/09 from www.jstor.org.rosi.unk.edu/stable/250
http://0- 75069
web.ebscohost.com.rosi.unk.edu/ehost Stabus (2005). ‘Ethics Failures in Corporate
Healy & Palepu (2003). ‘The Fall of Enron’, Financial Reporting’, Journal of
Journal of Economic Perspectives, Business Ethics, pgs. 5-15 Retrieved on
Volume 17, number 2: pgs. 3 to 26 06/12/09 from http://0-
Retrieved on 06/01/09 from www.jstor.org.rosi.unk.edu/stable/251
http://www- 23450
personal.umich.edu/~kathrynd/JEP.Fall Sur & Chakraborty (2006). ‘Corporate
ofEnron.pdf Governance in India: An Appraisal’,
‘India keeps it in the family’, The Economist Growth, Volume 33, No. 4 Retrieved on
(US) 329.n7841 (Dec 11, 07/20/09 from
1993): 35(1). Retrieved on 07/09/09 http://www.sail.co.in/Growth_Jan_200
from http://0- 6.pdf#page=22
find.galegroup.com.rosi.unk.edu/itx/ret Tonge, Greer & Lawton (2003). ‘The Enron Story:
rieve.do? you can fool some of the people some
Padgett & Morris (2005). ‘Keeping it "all in the of the time…’, Business Ethics: A
family:" does nepotism in the hiring European Review, pgs. 4-22 Retrieved
process really benefit the beneficiary?’, on 07/22/09 from
Journal of Leadership & Organizational http://www3.interscience.wiley.com/c
Studies: p34(12) Retrieved on 07/09/09 gi-bin/fulltext/118890698/PDFSTART
from http://0- Yu & Xu (Editors) (2001). ‘From Crisis to
find.galegroup.com.rosi.unk.edu/itx/sta Recovery: East Asia Rising Again?’,
rt.do?prodId=AONE Retrieved on 07/18/09 from
Ramachandraiah (2009). ‘Maytas, Hydrabad http://www.worldscibooks.com/econo
Metro and the Politics of Real Estate’, mics/4534.html
Economic and Political Weekly.
Retrieved on 07/20/09 from
http://www.diary.viveksanghi.com/wp-
content/uploads/2009/02/Maytas-
Article.pdf
Sandhir (2009). ‘Need for Global Valuations in
the Real Estate Sector of India vis-à-vis
the Current Scenario’, Royal Institution
of Chartered Surveyors. Retrieved on
07/20/09 from
http://www.rics.org/NR/rdonlyres/A66
ADCF9-285E-4C2D-9446-
92792725FFFD/0/RICSFeatures22May.
pdf
Economics & Business Journal:
Inquiries & Perspectives 170 Volume 3 Number 1 October 2010Corporate Crime: Enron & Satyam Khedekar
Acknowledgements
Several people are responsible for this
paper becoming a reality. All the
researchers who wrote articles on Enron
and Satyam, and from whom I have
integrated essential information, are
truly the ones who should get credit for
this paper. I would like to thank the
University of Nebraska- Kearney’s
Summer Student Research Program,
especially Dr. Falconer and Ms.
Holcomb, for giving me the opportunity
to work on this paper. I would also like
to thank my mentor, Dr. Larry
Carstenson, without whose guidance I
would have floundered trying to make
sense of the enormous amount of
material that is present on corporate
governance. I thank him for helping me
focus and find what I was looking for.
While they have not contributed directly
for this paper, credit also goes to my
family and friends for their constant
support.
Economics & Business Journal:
Inquiries & Perspectives 171 Volume 3 Number 1 October 2010You can also read
