Enron, Ethics and Finance - Spring 2008 – Course Syllabus

University of Houston MBA Program – FINA 7397

Stephen V. Arbogast, Executive Professor of Finance

This course aims to use the lessons of Enron to teach a practical approach to corporate ethics. Students
can expect to be trained both to identify important ethical issues and in how to handle such issues
within a corporate structure. Considerable attention is given to the development of tactical plans that
allow ethics issues to be raised with the greatest probability of an ethical outcome.

The course is case study-based, with a special focus on financial matters. Guest speakers from Enron
will share their insights into the ethical dilemmas they faced.

The first two thirds of the course will follow the trajectory of Enron’s ethical decomposition.
Beginning with case studies from 1987, students will follow Enron through its downgrading of internal
financial control, the adoption and abuse of mark-to-market accounting, its steadily more aggressive
use of off-balance sheet financing via Special Purpose Entities, and the entry of outright corruption in
the form of related party transactions. Then students will examine the plight of Enron’s resisters, such
as Sherron Watkins, Jordan Mintz and Vince Kaminski, who struggled to raise ethical issues within a
deeply compromised management structure.

The last third of the course will examine ethical issues surrounding financial transactions outside the
Enron context. Special attention here will be given to tax matters, leasing, and remittance strategies
from economically troubled emerging market countries.

Specific areas of instruction will include:

• How tactics for raising and working ethics issues vary with a firm’s “Stage of Ethical
Decomposition”
• How to develop a tactical game plan for working an ethics issue inside a corporation
• What constitutes the line between creativity and deception in such areas as:
o “Managing “ reported accounting results
o Announcing material disclosures and analyzing results for market analysts
o Leasing and other off-balance sheet financing
o Tax structures motivated by tax avoidance
o Developing financial transactions to work around foreign exchange controls in
developing countries
• Fundamentals of sound Financial Control and the economic rationale for investing in good
controls
• The conflict in-house legal counsels face between responsibility to the client and to the law,
.and the special capacities attorneys possess to resist unethical practices
• When it is both ethical and effective for resisters to take their concerns outside the company
management structure

Classes will generally consist of two case studies each week, supplemented by brief lectures. Guest
speakers will join specific classes to critique presentations of cases in which they were involved. It is
anticipated that Sherron Watkins and Jordan Mintz will be among the guest speakers.

Students should expect to participate in teams that organize and present at least two case studies during
the course of the semester. Grades will be apportioned 60% to the case study presentations, 30% to a
final exam and 10% for class participation. The final exam will likely be a take-home case study.

Reading assignments and case studies will primarily be found in Resisting Corporate Corruption,
Lessons in Practial Ethics from the Enron Wrckage (CCR), Stephen V. Arbogast, M & M Scrivener
Press. The Smartest Guys in the Room (SMGR), McClain and Elkind, will be used to provide
background material on Enron. CCR has been ordered and is available in the bookstore. SMGR can be
purchased in paperback from Amazon.com. These readings will be supplemented by case studies and
articles provided by the instructor.

All students should read the first case study, Enron Oil Trading I, prior to the first class. For
convenience sake, this case (and this case only) will be posted on WebCt at least a week in
advance of the first class.

The Professor’s office is 220-D in Melchor Hall and office hours are Monday and Wednesday from
4:30-6:00 PM. The Professor may also be contacted by e-mail at [email protected] or
[email protected].

At the conclusion of the course, students should have an enhanced awareness of the ethical issues that
arise in business, of the tactical options available to address such issues, and of the signal importance
of sound financial control in maintaining an ethical business culture.

Good Luck and Enjoy the Course

 Class Topics, Cases and Readings

Date Topic Assignments

Module 1: Causes & Nature of Corporate Corruption

January 16 Course Introduction, Why Enron? CCR: Preface

Why Finance?
The Complexity of Ethics Issues SMGR, pp. 10-19
How to do an Ethics Case Case Study: Enron Oil Trading (A)
CEO’s and Ethics: Ken Lay’s
Dilemmas w/ Enron Oil Trading

January 23 Fundamentals of Financial Control CCR: Essay 3

Economic Rationale for Financial SMGR, pp. 19-26
Control Cast Studies: Enron Oil Trading
Role of Internal Audit (B & C)
Pressures on Audit; The Politics
Of maintaining Audit’s Role

January 30 Enron’s “Gas Bank” CCR: Essay 2

Ethics and “Creative” Accounting
Enron’s version of ‘Mark-to-Market’ SMGR: 27-43
Neutering Corporate Gatekeepers
Ethics and the Aggressive Client
Creative accounting & Case Studies: Enter Mark-to-Market
Compensation systems (A & B)

February 6 Commodities Trading under MtM

Spread of questionable practices SMGR: 85-92, 114-118
when controls are impaired
Position and role of the resister Case Studies: Enter Mark-to-Market
Facing the boss/‘dominant function’ (C)
Role of CFO in protecting or Adjusting the Forward
impairing an ethical culture Curve in the Back Room (A)

February 13 Cactus, JEDI, Whitewing & Chewco

Use of Special Purpose Entities
And “Off-Balance Sheet” Financing SMGR: 66-68, 132-140, 143-149,
Tactics of a corruption agent 155-161, 165-170
Stopping a flawed transaction at Case Studies: Adjusting the Forward
the last minute Curve in the Back Room (B)
Ethics and transaction details An SPE Too Far?
Module 2: Resisting Corporate Corruption

February 20 LJM & Related-Party Transactions

Conflict of Interest Policy
Standard Related-Party Controls SMGR: 208-211
“Going to the Top” with an
Ethics Issue Case Studies: Jeff Skilling and LJM
Managing a Follow-up Investigation (A) & (B)

February 27 LJM Hedging MtM gains Guest: Jordan Mintz

Resisting as an In-house attorney
Choosing the issue for resistance SMGR: 189-193, 327-330
Positioning the issue for
Management Case Studies: New Counsel for Andy
Managing career risks Fastow (A) & (B)

March 5 Company-wide Risk Study Guest: Vince Kaminski

Total Return Swaps SMGR: 304-312
Bring forward a ‘Disaster Scenario’
Working inside/outside the firm (1) Case Study: No Where to Go with the
The ethics of Anonymous outside Probability of Ruin
Disclosure

March 12 No Class Homework Assignment

(due March 26)

March 26 LJM Raptor Transactions Guest: Sherron Watkins

Whistleblowers, Risks & Legal
Status SMGR: 342-343, 354-357, 358-359
Managing Earnings vs. Accounting
Fraud Case Study: “Whistleblowing” before
Tactics for Whistleblowers Imploding in Accounting
Scandals

April 2 CEOs and Public Company CCR: Ethical Lessons from the Enron File
Disclosure Laws
Saving Enron after Skilling SMGR: SMGR: 330-335, 342-351
Business fundamentals and 357-358
damaging disclosures Case Studies: Lay Back, and Say What?
Law Firm conflict of interest Investigating Accounting
Improprieties at Jayen
Corporation
Module 3: Distinguishing Financial Creativity from Ethics Issues

April 9 Tax Avoidance & Ethics Guest: Eric Herpin, Chief Tax Counsel
The M&A “Mixing Bowl” ExxonMobil Chemical
Examples of ‘Over the Line’
Tax Avoidance Structures Case Study: Newco
Ethical gray zones & boundaries

April 16 Financial Leasing Case Studies: The Railcar Leases

Financial motives & effects
Accounting motives & effects
Ethical gray zones & boundaries

April 23 Blocked Funds Remittance Strategies

Blocked Funds Exposure to Loss and
Conventional Hedging Case Studies: Trapped by the San Jose
Full Disclosure to Host Governments Convenio
Ethical gray zones & boundaries
Opening Access to Resource Plays Case Study: Winning the Bid in Equatorial
Value Propositions, Local Corruption Nigola
And Reason to Suspect
The Foreign Corrupt Practices Act

April 30 Business Ethics Environment Today Guest: Loren Steffy, Business Columnist
Backlash against Enron, SOX Houston Chronicle
Course Summary and Review for
Take-Home Final Case Study

Final Words:

Academic Honesty:
The University of Houston Academic Honesty Policy is strictly enforced by the C. T. Bauer College of Business. No violations
of this policy will be tolerated in this course. A discussion of the policy is included in the University of Houston Student
Handbook, http://www.uh.edu/dos/hdbk/acad/achonpol.html. Students are expected to be familiar with this policy.

Accommodations for Students with Disabilities:

The C. T. Bauer College of Business would like to help students who have disabilities achieve their highest potential. To
this end, in order to receive academic accommodations, students must register with the Center for Students with Disabilities
(CSD) (telephone 713-743-5400), and present approved accommodation documentation to their instructors in a timely
manner.