ACCOUNTING PROJECT

REPORT ON DYNEGY SCANDAL

BY
MOHAMMAD AWAIS RIAZ (033)
YUSRA HAMID (046)
GHAZAL ZAHID (006)

MHRM (REGULAR)

COURSE INSTRUCTOR
MR. WAQAR HASSAN RANDHAWA
 INTRODUCTION
The term project is based on the fall of Dynegy Inc. It was an electric company located in
Houston, Texas in the United States. It owned numerous power stations in the US. It was
founded in 1984 as Natural Gas clearing house. However they have changed their name to NGC
Corporation in 1995 after emerging into electrical power generation business. They have
adopted the name Dynegy in 1998 and have a contention with Enron to whom they agreed to
buy in 2001 but they withdrew this decision because of the wrongdoings of Enron. In 2002 they
nearly went bankrupt because several executives were involved in committing financial fraud
and due to some mismanagement. In 2002, they had left their energy trading business and in
2005 they left natural gas supply business and concentrated on electrical generation. They have
their major subsidiary named as Dynegy holdings and also operating three other subsidiaries
Coal Co, Gas Co and stub group. However its two subsidiaries went bankrupt which is one of
the major downfall of the Dynegy Inc. i.e. Dynegy holdings and Dynegy Inc.

THE ACCOUNTING SCANDAL OF DYNEGY

The incidence:

The Dynegy, scandal was revealed in 2002, eventually led to bankruptcy of Dynegy Inc.
Dynegy’s stock price fall 42 percent due to the investor pressure on energy stocks in the rouse
of Enron breakdown. However their stock price further affected by 22 percent due to their large
accounting error on a fuel contract. Moody’s investor service has announced to review their
US$4 billion. However in financial crisis they have applied for US credit of 900 million. The
formal investigation opened by US securities exchange and commission that how Dynegy’s
“project alpha” has allegedly overstated income from natural gas transactions and unlawfully
planned business partners to avoid income. Illinova one of its subsidiary was also part of the
investigation reported by New York Times two weeks later. They made a joint partnership
known as Catlin in January 2000 with a barely known investment company black thunder.
However, Dynegy failed to buy out black thunder’s investment and they did not sell the assets
as a result many of its officers has resigned. They were quickly approaching towards
bankruptcy by late June 2002. In order to raise company’s cash they were ready to sell off their
assets but unfortunately moody has downgraded its rating and as a result they announced to
form a financial partnership that can help them stabilize. On July 29 they have sold their
northern natural gas company to MidAmerican energy holdings for $928 million. It has saved
them somehow but company’s false accounting practices has continued to grow throughout
2002. The company has fired Dynegy controller and chief accounting officer for not
manipulating company’s financial statement, they further sued the company for this action. On
august 12 the company has suspended its dividend. However they have decided to pay fine to
Catlin Company and other business partnership of US$3 million for hiding loses and taxable
income. They also admitted that they were involved in round-trip trades, phony natural gas and
electricity trades designed to manipulate investors. It further mislead other companies as well.
Dynegy has fired five of its traders when commodity futures trading commission (CFTC) has
discovered that Dynegy traders has provided false prices to industry trade publication. However
they later paid (CFTC) US$5 million as a fine. They further sold out their horn sea natural gas
storage site in order to pay fine.

The reason:

As corporate acts originate in the choices and actions of human individual, these are those
individuals who must be seen as the primary bearers of moral duties and moral responsibilities.
It was discovered later that several executives were involved in the downfall of Dynegy. In june
2003 it was revealed that Jamie Olis (director of tax planning), gene foster (VC for taxation)
and Helen sharkey (a former employee) were found guilty on numerous frauds. They were
planning in early 2001 but to borrow money and make it look like an operational revenue. A
corporation was made named ABG Gas supply. The corporation worked to secure loans to buy
natural gas at market prices. They sold gas to Dynegy at discount which they resold to market
and earned a profit of US$ 300 million. ABG then bought this gas at market price and sold to
Dynegy at premium. The earned profit were then used to repay the loan. Olis, foster and
sharkey were accused of deceiving auditors, regulators and other company executives. Foster
and sharkey have admitted their mistake whereas Olis was found guilty in March 2004, he was
sentenced to prison for 24 years. In December 2003 three other employees at one of Dynegy’s
joint venture were found in manipulating firms income by US$ 11 million in 2001 to hide loses.
Shareholders too were unhappy about the financial crises of the company a lawsuit was filed
against the company. Therefore the whole corporation was not responsible for this scandal. It
was the misconducts of its employees and as a result Dynegy had faced financial crisis.

THE EFFECT:

Dynegy Inc., considered to be a remarkable firm based in Houston Texas before its downfall. Its
downfall not only affected the company but affected the industry as a whole. This downfall had
an impact on employees. This collapse stimulated them to shutter their online energy trading
business and this closure laid off 14 percent of its employees. Shareholders were also unhappy
because of company’s financial crisis and the lawsuit was filed against them which they had
settled. US$468 million would be paid to shareholders as a fine. It has its effects on the whole
economy as company’s executives were involved in fraud. Stock price of the company has
fallen to the extent of 64 percent. Apart from the financial loses many people lost their stable
jobs and security to earn their living.

The conclusion: (Awais 033)

Dynegy Inc. based in Houston Texas has many of its subsidiaries as well. Due to its vast
expansion it was unable to communicate with others. Due to this inconvenience, they were
unable to operate their business appropriately and as a result laws were broken and officers
were involved in fraudulent activities. Its main subsidiary declared bankrupt in 2011 which
means management team of the company is unable to hold the performance of the company.
This bankruptcy has led negative impact on shareholders. It is necessary for an organization to
set organizational goals before merging their business because ethical code of conduct plays a
very important role in company’s success and in the building block of the company. Its
management team failed to conduct ethics that has further decline its stock prices in the market.

In order to survive in this competitive world, it is necessary for Dynegy to conduct ethical
behavior in the organization. However to learn from wrongdoings could help to improve the
firm personally as well as professionally. It is necessary for Dynegy to cut down their operating
cost so that they can have more profit. They need to shut down their unprofitable subsidiaries. It
is necessary to protect the rights of stakeholders so that it could increase life span of the
business.
They need to establish proper ethical standards and must be implemented strictly to meet
organizational goals. They need to encounter a system that could find new solutions for the new
problems.

In Pakistan context, we can expect this to happen as it has many loopholes in the corporate law.
These type of scandals usually occurred due to the misconduct of the employees and due to
some unethical practices of internal employees. This mismanagement can severely effect
business practices.

The conclusion (yusra 046)

It is noted that numerous firms collapsed when the companies faces financial crises but some of
them survived and they only survived because their ethical standards are maintained properly.
As many of Dynegy’s officers, executives and directors were involved in manipulating
accounting statements and they hide loses and taxable income. These frauds and
mismanagement were discovered later when the company had severely affected. They also
exited some of its subsidiaries in order to raise cash and to pay fine. They were involved in
round trip trades which was an illegal way to raise company’s profit. It happened because of
some unethical activities of its employees. This case highlighted the importance of training,
inducting and developing board members.

They must have eliminated its unprofitable businesses and initiate a way to reduce cost. In order
to increase revenue they must concentrate on their profitable businesses. They should enable
safeguards to protect their ethical climate. They must focus on core values that guide most
useful principles. They must implement a system that would measure effectiveness of ethics
initiatives. They need to enhance their information system, lack of communication has led to
several frauds.

Yes it is possible to have these types of scandals in Pakistan. Pakistan is a developing country
and many of its politicians are involved in corruption and its corporate law has so many flaws,
so these type of scandals could expect to happen. Along with that management of the
company’s plays an important role in the progress of the company. Mismanagement can cause
great loses.

The Conclusion: (Ghazal 006)

It was a huge company with a lot of side businesses. It became hard for them to
control or to cater all of the affairs. Due to mismanagement and the misleading by the
executives of the company it is impossible for the company to function properly. They misguide
the accounts of the company to hide the loss and taxable income of the company. Which badly
affected the company financially. They dissolute some of their business to help them financially
and to pay some of their obligations. They want to increase the income so they had also some
illegal activities. The company’s top management failed to serve the company honestly and also
to fail to perform their jobs efficiently. This case enables us to realize the importance of training
of the employees on the work place and developing the board members.

They should have reduce their cost instead of wrong doings in the company they should have
focused on their profitable business to increase income. If they had eliminated their unprofitable
subsidiaries it might possible that company could have survived. They need to establish their
organizational hierarchy in that way in which they protect the rights of their stakeholders which
lead to increase the stability of the company. As modern problems require modern solutions the
company needs to set their standards accordingly.

Yes this can also happen in Pakistan. We had listened about too many scandals happened in the
past, which clearly suspect the mismanagement and unethical behavior of the employees and
the top management. As we all know corruption is very common in Pakistan in all the sectors
from lower to upper level. People wants to earn overnight so they take short cuts. Pakistan is
also struggling to compete with developing countries in terms of all kind of businesses.