Enron Case Study

Enron case study

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Enron Case

OVERVIEW OF WHAT HAPPENED

Enron was born in 1985 as a result of fusion between Houston Natural Gas and InterNorth, and it was a energy and services company. The first CEO had been Kenneth Lay. Since his born the Enron’s company culture was always based on fraud and corruption. Moreover its financial condition was sustained by institutionalized, systematic, and creatively planned accounting fraud. Infact the company was involved in a lot of scandals like:

* Vahalla scandal : deregulation of the energy markets allowed companies to place bets on future petroleum’s prices, and Enron was poised to take advantage.

* Offshore accounts scandal : many important managers, like Louis Borget, hide the company’s money in a personal founds. To do this they created fake bank documents, manipulating balances and destroying dayling contractual documents.

* Liberalization of the energy market price in California : the managers consciously manipulated California’s energy markets during the winter of 2000 and reaped large profits in the process ( with the banks’s support because they had 50% of the shares). In operation Ricochet, Enron bought energy in California with the expressed purpose of sending it to another state where the energy was sold for a small profit. Then Enron bought the same power back and sold it in California at a still higher profit. The Enron company made bets on rising energy prices.

The Enron’s decline started when Skilling become the new CEO in 1992 with his new manager’s idea : mark to market. The mark-to-market practice led to schemes that were designed to hide the losses and make the company appear to be more profitable than it really was.

The bad investments in the “new economy” like broadband connection put the Enron’s financial situation in worse conditions but they recordered in the balance a profit of 53 millions of dollars and their shares’ value increased of 34%. The Enron’s campany invested in many different markets like weather or internet.

Enron built a natural gas power plant in India where other investors wouldn’t. The company lost over 1 Billion on the project when the local population could not afford the power the plant supplied.

In 2000 the shares of internet decreased of 31% but the Enron’s shares increased of 90% and it was named America’s most innovative company

The new strategy: to hide the bad financial situation, Andy Fastow was named financial chefs. His task was to hide the critical situation and maintain high the shares’ price though the Enron had 30 billions of debts. He created thounsands societies to increase the shares’ price hiding the Enron’s debt in these last.

One of this was LJM that was created to buy Enron’s assets to very high price.

Lay's company, Enron, went bankrupt in 2001. It was the biggest bankruptcy in U.S. history. In total 20,000 employees lost their jobs and in many cases their life savings. Investors also lost billions of dollars.

One of the greatest frauds was that Enron convinced all America about its very good results and profits, its employees were proud to work in the best company of the country and they were convinced to invest all their savings in the Enron’s shares. Enron made a very important advertising campaign thanks to which all people believed in their power.

ANALYSIS OF CORPORATE CULTURE AND ENVIRONMENT

Analysis SWOT

Strenghts

* Is the one of the biggest natural gas pipeline system company

* Competitors advantages

* Strong imagine

Weaknesses

* Operator dishonest and unehtical

* Few control by the managers on their employees

* Fake balance and profit

* Scandals

* Manager support the illegal affairs

Opportunities

* Strong brand known all around the world

* Deregulation of the energy’s price

Threats

* Internal environment not so good

* Competitors

MAJOR PLAYERS AND THEIR ROLES

Kenneth Lay

Former chairman and CEO. Founded Enron in 1985 when Houston Natural Gas merged with InterNorth and became chairman and CEO the next year.

Stepped down as CEO in February 2001 when Jeffrey Skilling took over.

Jeffrey K. Skilling

Former CEO and director. Became president and chief operating officer in 1996, then succeeded Lay as CEO in February 2001.

Claimed no knowledge of intimate details of Enron's financial dealings. Sold 1.3 million shares of stock for $70.6 million and transferred 2 million shares back to Enron from June 1996 to November 2001. Received $13.2 million in bonuses 1997-2000.

His most important idea is to consider the energy like a financial instrument that permitted to sell energy like shares or bonds