1. Case Study on ENRON Corporation
History of ENRON Corporation:
Houston Natural Gas Corporation and Inter north Inc. merged in 1985 to form Enron
Corporation. Since its conception, Enron has distinguished itself as an innovative, prominent
leader in the natural gas market. Enron, headquartered in Houston, is the largest trader of natural
gas and electricity in North America today. Enron also markets and trades other commodities,
including water, paper, coal, chemicals, and fiber-optic bandwidth. Its telecommunications arm,
Enron Broadband Services, is building a national fiber-optic network and creating a market to
trade bandwidth capacity.
The success of Enron’s aggressive strategies is demonstrated by the rise in its stock price
from a split-adjusted $3.20 per share in 1985 to $80.63 per share on November 20, 2000. In this
same period, revenues increased from $10.3 billion to $40.1 billion and net income improved
from a loss of $54.7 million to $919.0 million. As a result of its ability to discover new business
opportunities, transform traditional industries, and enter new ones, Fortune magazine named
Enron “Most Innovative Company” for an unprecedented fifth consecutive year in 2000.
Enron’s focus on innovation has been demonstrated throughout its history. As a newly
formed company in the mid-1980, Enron pioneered the trading of natural gas when natural gas
markets were deregulated. When Enron entered the electricity market in 1993, it revolutionized
the industry by facilitating a market to trade electricity. Enron was also among the first energy
companies to expand beyond traditional energy markets by entering the telecommunications
industry. Enron has even entered the e-commerce sector by partnering with leading high-tech
companies to form Enron Online, a business-to-business website that facilitates the trading of
commodities.
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2. Factors of Success:
What is the story behind Enron’s success? Enron is not wedded to specific industry
strategies. Rather, it has an overall strategy that calls for creating an environment and culture of
creativity and idea generation. “Enron is a laboratory of innovation. Enron’s entrepreneurial
approach calls for new insights, new ways of looking at problems and opportunities try
something different change a goal, change a habit, change a mind. Enron has an exceptional
ability to leverage its intellectual capital. Individuals are empowered to do what they think is
best Enron’s philosophy is not to stand in the way of our employees.
This environment spurs the innovation that enables Enron to revolutionize traditional
energy markets and successfully enter new ones outside of the energy industry. “Enron’s
primary competitive advantage is to identify opportunities and gain a first-mover advantage that
we never surrender. Enron often introduces a product or concept before the competition even
senses that a market exists”.
Accounting practices:
Enron created offshore entities units which may be used for planning and avoidance of
taxes, increasing the profitability of a business. This provided ownership and management with full
freedom of currency transfer and the anonymity that allowed the company to hide losses. created a
dangerous spiral, in which each quarter, corporate officers would have to perform more and more
financial deception to create the illusion of billions of dollars in profit while the company was
actually losing money.
This practice increased their stock price to new levels, at which point the executives began
to work on insider information and trade millions of dollars’ worth of Enron stock. Chief Financial
Officer Andrew Fastow directed the team which created the off-books companies, and manipulated
the deals to provide himself, his family, and his friends with hundreds of millions of dollars in
guaranteed revenue, at the expense of the corporation for which he worked and its stockholders.
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3. Fraud Happened in ENRON:
The Enron fraud case is extremely complex. Some say Enron's demise is rooted in
the fact that in 1992, Jeff Skilling, then president of Enron's trading operations, convinced
federal regulators to permit Enron to use an accounting method known as "mark to market." This
was a technique that was previously only used by brokerage and trading companies. With mark
to market accounting, the price or value of a security is recorded on a daily basis to calculate
profits and losses. Using this method allowed Enron to count projected earnings from long-term
energy contracts as current income. This was money that might not be collected for many years.
The numbers were on the books so the stock prices remained high, but Enron wasn't
paying high taxes. Enron had been buying any new venture that looked promising as a new profit
center. Their acquisitions were growing exponentially. Enron had also been forming off balance
sheet entities to move debt off of the balance sheet and transfer risk for their other business
ventures. Because the executives believed Enron's long-term stock values would remain high,
they looked for ways to use the company's stock to hedge its investments in these other entities.
Business analysts began trying to unravel the source of Enron's money. The Raptors would
collapse if Enron stock fell below a certain point, because they were ultimately backed only by
Enron stock.
The deals were so complex that no one could really determine what was legal and what
wasn't. Eventually, the house of cards began falling. When Enron's stock began to decline, the
Raptors began to decline as well. On August 14, 2001, Enron's CEO, Jeff Skilling, resigned due
to "family issues." This shocked both the industry and Enron employees. The Enron scandal,
revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, the
dissolution of Arthur Andersen, which was one of the five largest audit and accountancy
partnerships in the world. Enron undoubtedly is the biggest audit failure. It is ever the most
famous company in the world, but it also is one of companies which fell down too fast.
Meanwhile, it makes analysis the moral responsibility From Individuals’ Angle and
Corporation’s Angle.
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4. ENRON: Discovering Fraud
On August 15, Sherron Watkins, an Enron VP, wrote an anonymous letter to Ken Lay
that suggested Skilling had left because of accounting improprieties and other illegal actions. She
questioned Enron's accounting methods and specifically cited the Raptor transactions. Later that
same month, Chung Wu, a UBS PaineWebber broker in Houston, sent an e-mail to 73
investment clients saying Enron was in trouble and advising them to consider selling their shares.
Sherron Watkins then met with Ken Lay in person, adding more details to her charges.
She noted that the SPEs had been controlled by Enron's CFO, Fastow, and that he and other
Enron employees had made their money and left only Enron at risk for the support of the
Raptors. The Raptor deals were written such that Enron was required to support them with its
own stock.
When Enron's stock fell below a certain point, the Raptors' losses would begin to
appear on Enron's financial statements. On October 16, Enron announced a third quarter loss of
$618 million. During 2001, Enron's stock fell from $86 to 30 cents. On October 22, the SEC
began an investigation into Enron's accounting procedures and partnerships. In November, Enron
officials admitted to overstating company earnings by $57 million since 1997. Enron, or "the
crooked E," filed for bankruptcy in December of 2001.
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5. Share Prices before and after Fraud happens:
Final Destination of Frauds:
Enron's CFO, Andrew Fastow, was behind the complex network of partnerships and
many other questionable practices. He was charged with 78 counts of fraud, conspiracy,
and money laundering. Fastow accepted a plea agreement in January 2004. After pleading guilty
to two counts of conspiracy, he was given a 10-year prison sentence and ordered to pay $23.8
million in exchange for testifying against other Enron executives. Jeff Skilling and Ken Lay were
both indicted in 2004 for their roles in the fraud.
On May 25, 2006, a jury in a Houston, Texas federal court found both Skilling and
Lay guilty. Jeff Skilling was convicted of 19 counts of conspiracy, fraud, and insider trading and
making false statements. Ken Lay was convicted of six counts of conspiracy and fraud. In a
separate trial, Lay was also found guilty on four counts of bank fraud. Kenneth Lay died of
a heart attack on July 5, 2006, and a federal judge ruled that his conviction was void because he
died before he had a chance to appeal. On October 23, 2006, Skilling was sentenced to 24 years
in prison.
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6. Conclusion:
(1) There should be a healthy corporate culture in a company. In Enron’s case, its corporate
culture played an important role of its collapse. The senior executives believed Enron had
to be the best at everything it did and the shareholders of the board, who were not
involved in this scandal, were over optimistic about Enron’s operating conditions. When
there existed failures and losses in their company performance, what they did was
covering up their losses in order to protect their reputations instead of trying to do
something to make it correct.
(2) A more complete system is needed for owners of a company to supervise the executives
and operators and then get the idea of the company’s operating situation. There is no
doubt that more governance from the board may keep Enron from falling to bankruptcy.
The boards of directors should pay closer attention on the behavior of management and
the way of making money. In addition, Enron’s fall also had strikingly bad influence on
the whole U.S. economy. Maybe the government also should make better regulations or
rules in the economy.
(3) “Mark to market” is a plan that Jeffrey Skilling and Andrew Fastow proposed to pump
the stock price, cover the loss and attract more investment. But it is impossible to gain in
a long-term operation in this way, and so it is clearly immoral and illegal. However, it
was reported that the then US Security and Exchange Commission allowed them to use
“mark to market” accounting method. Thus, an accounting system which can disclose
more financial information should be created as soon as possible.
(4) Maybe business ethics is the most thesis point people doing business should focus on. As
a loyal agent of the employer, the manager has a duty to serve the employer in whatever
ways will advance the employer's self-interest. In this case, they violated the principle to
be loyal to the agency of their ENRON. Especially for accountants, keeping a financial
statement disclosed with true profits and losses information is the basic responsibility that
they should follow.
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