Twenty Years Later: The Lasting Lessons of Enron
Michael Peregrine is partner at McDermott Will & Emery LLP, and Charles Elson is professor of corporate governance at the University of Delaware Alfred Lerner College of Business and Economics.
This spring marks the 20th anniversary of the beginning of the dramatic and cataclysmic demise of Enron Corp. A scandal of exceptional scope and impact, it was (at the time) the largest bankruptcy in American history. The alleged business practices of its executives led to numerous individual criminal convictions. It was also a principal impetus for the enactment of the Sarbanes-Oxley Act and the evolution of the concept of corporate responsibility. As such, it is one of the most consequential corporate governance developments in history.
Yet a new generation of corporate leaders has assumed their positions since then; for others, their recollection of the colossal scandal may have faded with the years. And a general awareness of corporate responsibility principles is no substitute for familiarity with the governance failings that reenergized, in a lasting manner, the focus on effective and responsible governance. A basic appreciation of the Enron debacle and its governance implications is essential to director engagement.
Enron was formed as a natural gas pipeline company and ultimately transformed itself, through diversification, into a trading enterprise engaged in various forms of highly complex transactions. Among these were a series of unconventional and complicated related-party transactions (remember the strangely named Raptor, Jedi and Chewco ventures) in which members of Enron’s financial leadership held lucrative financial interests. Notably, the management team was experienced, and both its board and its audit committee were composed of a diverse group of seasoned, skilled, and prominent individuals.
The company’s rapid financial growth crested in March 2001, with media reports questioning how it could maintain its high stock value (trading at 55 times its earnings). Famous among these was the Fortune article by Bethany McLean, and its identification of potential financial reporting problems at Enron.  In a dizzying series of events over the next few months, the company’s stock price collapsed, its CEO resigned, a bailout merger failed, its credit was downgraded, the SEC began an investigation of its dealings with related parties, and it ultimately declared bankruptcy. Multiple regulatory investigations followed, several criminal convictions were obtained and Sarbanes-Oxley was ultimately enacted to curb the perceived abuses arising from Enron and several similar accounting scandals. 
There remain multiple important, stand-alone governance lessons from Enron controversy of which all directors would benefit:
1. The Smartest Guys in the Room . The type of aggressive executive conduct that contributed heavily to the fall of Enron was not unique to the company, the industry or the times. In the absence of an embedded culture of corporate ethics and compliance, there is always the potential for some executives to pursue “edge of the envelope” business practices, especially when those practices produce meaningful near term financial or other operational results. That attitude, combined with weak board oversight practices, can be a disastrous combination for a company.
Even though commerce has made great progress since then on internal controls, corporate responsibility ultimately depends upon the integrity of management, and the skill and persistence of board oversight. 
2. The Critical Importance of Board Oversight . As the company began to implode, Enron’s board commissioned a special committee to investigate the implicated transactions, directed by William C. Powers Jr., then dean of the University of Texas School of Law. The Powers Report, as it came to be known, outlined in staggering detail a litany of board oversight failures that contributed to the company’s collapse. 
These included inadequate and poorly implemented internal controls; the failure to exercise sufficient vigilance; an additional failure to respond adequately when issues arose that required a prompt and serious response; cursory review of critical matters by the audit and compliance committee; the failure to insist on a proper information flow; and an inability to fully appreciate the significance of some of the information with which the board was provided. 
3. Spotting Red Flags . Amongst the most damaging of the governance breakdowns was the failure to question the legitimacy of the related-party transactions for which so many internal controls were required. These deficiencies served to bring a once significant company and its officers to their collective knees and offer many lasting governance lessons. As the Powers Report concluded with brutal clarity, a major portion of the company’s business plan—related-party transactions—was flawed. 
These transactions were replete with risky conflicts of interest involving management. There was a significant “forest for the trees” concern—an inability to recognize that conflicts of such magnitude that required so many board-approved internal controls and procedures should never have been authorized in the first place. All this, despite the fact that the individual Enron directors were people of accomplishment and capability who had been recognized by the media as a well-functioning board. 
Yet, they lacked the actual necessary independence to recognize the red flags waving before them. Their varied relationships with company leadership made them all-too-comfortable with what they were being told about the company.  This connection made it difficult for them to recognize the dangers associated with the warning signals that the conflicted transactions projected. Indeed it was the revelation of these conflicts that attracted media attention and ultimately “brought the house down”. 
4. It Can Still Happen . The 2020 scandal encompassing the German financial services company Wirecard offers one of the latest high profile (international) examples of how alleged aggressive business practices, lax internal and auditor oversight, accounting irregularities and limited regulatory supervision can combine into a spectacular corporate collapse that prompted numerous government fraud investigations. It is for no small reason that the Wirecard scandal is referred to as the “German Enron”. 
5. A Significant Legacy . Yet the Enron controversy remains fundamentally relevant as the spark behind the corporate responsibility environment that has reshaped attitudes about corporate governance for the last 20 years. It’s where it all began—the seismic recalibration of corporate direction from the executive suite back to the boardroom, where it belongs. It birthed the fiduciary guidelines, principles, and “best practices” that serve as the corridors of modern corporate governance, developed in direct response to the types of conduct so criticized in the Powers Report. 
And that’s important for today’s board members to know.  Because over the years, the message may have lost its sizzle. The once-key oversight themes incorporated within “plain old” corporate responsibility seem to be yielding the boardroom field to the more politically popular themes of corporate social responsibility. And, while still important, corporate compliance seems to have had its “fifteen years of fame” in the minds of some executives; the organizational initiative has turned elsewhere.
But the pendulum may be swinging back. There is a renewed recognition that compliance programs can atrophy from lack of support. The new regulatory administration in Washington may return to an emphasis on organizational accountability. As Delaware decisions suggest, shareholders may be growing increasingly intolerant of costly corporate compliance and accounting lapses. And there’s a renewed emphasis on the role of the whistleblower, and the board’s role in assuring the support and protection of that role.
So it may be useful on this auspicious anniversary to engage the board on the Enron experience, in a couple of different ways. First, include an overview as part of formal director “onboarding” efforts. Second, have a board level conversation about expectations of oversight, and spotting operational and ethical warning signs. And third, reconsider the Enron board’s critical and self-admitted failures, in the context of today’s boardroom culture. 
Such a conversation would be a powerful demonstration of a board’s good-faith commitment to effective governance, corporate responsibility and leadership ethics.
1 Bethany McLean, “Is Enron Overpriced?” Fortune, March 5. 2001. https://archive.fortune.com/magazines/fortune/fortune_archive/2001/03/05/297833/index.htm. (go back)
2 See , Michael W. Peregrine, Corporate BoardMember , Second Quarter 2016 (henceforth “Corporate BoardMember”). (go back)
3 See , e.g., Elson and Gyves, In Re Caremark : Good Intentions, Unintended Consequences, 39 Wake Forest Law Review, 691 (2004). (go back)
4 Report of the Special Investigation Committee of the Board of Directors of Enron Corporation, February 1, 2002. http://i.cnn.net/cnn/2002/LAW/02/02/enron.report/powers.report.pdf. (go back)
5 See , Michael W. Peregrine, “The Corporate Governance Legacy of the Powers Report” Corporate Counsel , January 23, 2012 Monday. (go back)
6 See , Michael W. Peregrine, “Enron Still Matters, 15 Years After Its Collapse”, The New York Times , December 1, 2016. (go back)
7 F.N. 5, supra . (go back)
8 See , Elson and Gyves, “The Enron Failure and Corporate Governance Reform”, 38 Wake Forest Law Review 855 (2003) and Elson, “Enron and the Necessity of the Objective Proximate Monitor”, 89 Cornell Law Review 496 (2004). (go back)
9 John Emshwiller and Rebecca Smith, “Enron Posts Surprise 3rd-Quarter Loss After Investment, Asset Write-Downs”, The Wall Street Journal , October 17, 2001. https://www.wsj.com/articles/SB1003237924744857040. (go back)
10 Dylan Tokar and Paul J. Davies, “Wirecard Red Flags Should Have Prompted Earlier Response, Former Executive Says” The Wall Street Journal , February 8, 2021. https://www.wsj.com/articles/wirecard-red-flags-should-have-prompted-earlier-response-former-execu tive-says-11612780200. (go back)
11 Corporate BoardMember , supra . (go back)
12 See Peregrine, “Why Enron Remains Relevant”, Harvard Law School Forum on Corporate Governance, December 2, 2016. (go back)
13 Corporate BoardMember , supra. (go back)
Hello I am writing to request if we can use this article ‘without making change of any description’ for internal training. This will mean we will host the article on our internal CPD (Continuous professional development) platform called LITMOS. This article perfectly suits learnings from a corporate governance perspective and hence we request permission for its unaltered use. Thanks Nikhil Ghate
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The Fall of Enron
By: Paul M. Healy, Krishna G. Palepu
The case traces the rise of Enron, covering the company's business innovations, personnel management, and risk management processes. It then examines the company's dramatic fall including the…
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- Publication Date: Nov 19, 2008
- Discipline: Organizational Behavior
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The case traces the rise of Enron, covering the company's business innovations, personnel management, and risk management processes. It then examines the company's dramatic fall including the extension of its trading model into questionable new businesses, the financial reporting problems, and governance breakdowns inside and outside the firm. The case offers students an opportunity to explore why Enron failed and to understand the systemic problems in governance that affected its board of directors, the audit committee, the external auditors, and financial analysts.
Nov 19, 2008 (Revised: Jul 26, 2019)
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What Happened at Enron?
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Publication Date: July 26, 2004
On December 2, 2001, Enron Corporation filed for bankruptcy protection under Chapter 11. One of the most highly publicized business debacles in history-its settlements, criminal charges, civil charges, and workouts will continue for years. But outside of the courts and sensational press, what really happened? What caused the collapse of what at one time was the sixth largest company in the United States? The case explores the Enron story-in an attempt to not only answer the question of what happened, but what may be learned from this failure.
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- Harvard Case Studies
Harvard Business Case Studies Solutions – Assignment Help
In most courses studied at Harvard Business schools, students are provided with a case study. Major HBR cases concerns on a whole industry, a whole organization or some part of organization; profitable or non-profitable organizations. Student’s role is to analyze the case and diagnose the situation, identify the problem and then give appropriate recommendations and steps to be taken.
To make a detailed case analysis, student should follow these steps:
STEP 1: Reading Up Harvard Case Study Method Guide:
Case study method guide is provided to students which determine the aspects of problem needed to be considered while analyzing a case study. It is very important to have a thorough reading and understanding of guidelines provided. However, poor guide reading will lead to misunderstanding of case and failure of analyses. It is recommended to read guidelines before and after reading the case to understand what is asked and how the questions are to be answered. Therefore, in-depth understanding f case guidelines is very important.
Harvard Case Study Solutions
STEP 2: Reading The Enron Case Harvard Case Study:
To have a complete understanding of the case, one should focus on case reading. It is said that case should be read two times. Initially, fast reading without taking notes and underlines should be done. Initial reading is to get a rough idea of what information is provided for the analyses. Then, a very careful reading should be done at second time reading of the case. This time, highlighting the important point and mark the necessary information provided in the case. In addition, the quantitative data in case, and its relations with other quantitative or qualitative variables should be given more importance. Also, manipulating different data and combining with other information available will give a new insight. However, all of the information provided is not reliable and relevant.
When having a fast reading, following points should be noted:
- Nature of organization
- Nature if industry in which organization operates.
- External environment that is effecting organization
- Problems being faced by management
- Identification of communication strategies.
- Any relevant strategy that can be added.
- Control and out-of-control situations.
When reading the case for second time, following points should be considered:
- Decisions needed to be made and the responsible Person to make decision.
- Objectives of the organization and key players in this case.
- The compatibility of objectives. if not, their reconciliations and necessary redefinition.
- Sources and constraints of organization from meeting its objectives.
After reading the case and guidelines thoroughly, reader should go forward and start the analyses of the case.
STEP 3: Doing The Case Analysis Of Enron Case:
To make an appropriate case analyses, firstly, reader should mark the important problems that are happening in the organization. There may be multiple problems that can be faced by any organization. Secondly, after identifying problems in the company, identify the most concerned and important problem that needed to be focused.
Firstly, the introduction is written. After having a clear idea of what is defined in the case, we deliver it to the reader. It is better to start the introduction from any historical or social context. The challenging diagnosis for Enron Case and the management of information is needed to be provided. However, introduction should not be longer than 6-7 lines in a paragraph. As the most important objective is to convey the most important message for to the reader.
After introduction, problem statement is defined. In the problem statement, the company’s most important problem and constraints to solve these problems should be define clearly. However, the problem should be concisely define in no more than a paragraph. After defining the problems and constraints, analysis of the case study is begin.
STEP 4: SWOT Analysis of the Enron Case HBR Case Solution:
SWOT analysis helps the business to identify its strengths and weaknesses, as well as understanding of opportunity that can be availed and the threat that the company is facing. SWOT for Enron Case is a powerful tool of analysis as it provide a thought to uncover and exploit the opportunities that can be used to increase and enhance company’s operations. In addition, it also identifies the weaknesses of the organization that will help to be eliminated and manage the threats that would catch the attention of the management.
This strategy helps the company to make any strategy that would differentiate the company from competitors, so that the organization can compete successfully in the industry. The strengths and weaknesses are obtained from internal organization. Whereas, the opportunities and threats are generally related from external environment of organization. Moreover, it is also called Internal-External Analysis.
In the strengths, management should identify the following points exists in the organization:
- Advantages of the organization
- Activities of the company better than competitors.
- Unique resources and low cost resources company have.
- Activities and resources market sees as the company’s strength.
- Unique selling proposition of the company.
- Improvement that could be done.
- Activities that can be avoided for Enron Case.
- Activities that can be determined as your weakness in the market.
- Factors that can reduce the sales.
- Competitor’s activities that can be seen as your weakness.
- Good opportunities that can be spotted.
- Interesting trends of industry.
- Change in technology and market strategies
- Government policy changes that is related to the company’s field
- Changes in social patterns and lifestyles.
- Local events.
Following points can be identified as a threat to company:
- Company’s facing obstacles.
- Activities of competitors.
- Product and services quality standards
- Threat from changing technologies
- Financial/cash flow problems
- Weakness that threaten the business.
Following points should be considered when applying SWOT to the analysis:
- Precise and verifiable phrases should be sued.
- Prioritize the points under each head, so that management can identify which step has to be taken first.
- Apply the analyses at proposed level. Clear yourself first that on what basis you have to apply SWOT matrix.
- Make sure that points identified should carry itself with strategy formulation process.
- Use particular terms (like USP, Core Competencies Analyses etc.) to get a comprehensive picture of analyses.
STEP 5: PESTEL/ PEST Analysis of Enron Case Case Solution:
Pest analyses is a widely used tool to analyze the Political, Economic, Socio-cultural, Technological, Environmental and legal situations which can provide great and new opportunities to the company as well as these factors can also threat the company, to be dangerous in future.
Pest analysis is very important and informative. It is used for the purpose of identifying business opportunities and advance threat warning. Moreover, it also helps to the extent to which change is useful for the company and also guide the direction for the change. In addition, it also helps to avoid activities and actions that will be harmful for the company in future, including projects and strategies.
To analyze the business objective and its opportunities and threats, following steps should be followed:
- Brainstorm and assumption the changes that should be made to organization. Answer the necessary questions that are related to specific needs of organization
- Analyze the opportunities that would be happen due to the change.
- Analyze the threats and issues that would be caused due to change.
- Perform cost benefit analyses and take the appropriate action.
- Next political elections and changes that will happen in the country due to these elections
- Strong and powerful political person, his point of view on business policies and their effect on the organization.
- Strength of property rights and law rules. And its ratio with corruption and organized crimes. Changes in these situation and its effects.
- Change in Legislation and taxation effects on the company
- Trend of regulations and deregulations. Effects of change in business regulations
- Timescale of legislative change.
- Other political factors likely to change for Enron Case.
- Position and current economy trend i.e. growing, stagnant or declining.
- Exchange rates fluctuations and its relation with company.
- Change in Level of customer’s disposable income and its effect.
- Fluctuation in unemployment rate and its effect on hiring of skilled employees
- Access to credit and loans. And its effects on company
- Effect of globalization on economic environment
- Considerations on other economic factors
- Change in population growth rate and age factors, and its impacts on organization.
- Effect on organization due to Change in attitudes and generational shifts.
- Standards of health, education and social mobility levels. Its changes and effects on company.
- Employment patterns, job market trend and attitude towards work according to different age groups.
case study solutions
- Social attitudes and social trends, change in socio culture an dits effects.
- Religious believers and life styles and its effects on organization
- Other socio culture factors and its impacts.
- Any new technology that company is using
- Any new technology in market that could affect the work, organization or industry
- Access of competitors to the new technologies and its impact on their product development/better services.
- Research areas of government and education institutes in which the company can make any efforts
- Changes in infra-structure and its effects on work flow
- Existing technology that can facilitate the company
- Other technological factors and their impacts on company and industry
These headings and analyses would help the company to consider these factors and make a “big picture” of company’s characteristics. This will help the manager to take the decision and drawing conclusion about the forces that would create a big impact on company and its resources.
STEP 6: Porter’s Five Forces/ Strategic Analysis Of The Enron Case Case Study:
To analyze the structure of a company and its corporate strategy, Porter’s five forces model is used. In this model, five forces have been identified which play an important part in shaping the market and industry. These forces are used to measure competition intensity and profitability of an industry and market.
porter’s five forces model
These forces refers to micro environment and the company ability to serve its customers and make a profit. These five forces includes three forces from horizontal competition and two forces from vertical competition. The five forces are discussed below:
- THREAT OF NEW ENTRANTS:
- as the industry have high profits, many new entrants will try to enter into the market. However, the new entrants will eventually cause decrease in overall industry profits. Therefore, it is necessary to block the new entrants in the industry. following factors is describing the level of threat to new entrants:
- Barriers to entry that includes copy rights and patents.
- High capital requirement
- Government restricted policies
- Switching cost
- Access to suppliers and distributions
- Customer loyalty to established brands.
- THREAT OF SUBSTITUTES:
- this describes the threat to company. If the goods and services are not up to the standard, consumers can use substitutes and alternatives that do not need any extra effort and do not make a major difference. For example, using Aquafina in substitution of tap water, Pepsi in alternative of Coca Cola. The potential factors that made customer shift to substitutes are as follows:
- Price performance of substitute
- Switching costs of buyer
- Products substitute available in the market
- Reduction of quality
- Close substitution are available
- DEGREE OF INDUSTRY RIVALRY:
- the lesser money and resources are required to enter into any industry, the higher there will be new competitors and be an effective competitor. It will also weaken the company’s position. Following are the potential factors that will influence the company’s competition:
- Competitive advantage
- Continuous innovation
- Sustainable position in competitive advantage
- Level of advertising
- Competitive strategy
- BARGAINING POWER OF BUYERS:
- it deals with the ability of customers to take down the prices. It mainly consists the importance of a customer and the level of cost if a customer will switch from one product to another. The buyer power is high if there are too many alternatives available. And the buyer power is low if there are lesser options of alternatives and switching. Following factors will influence the buying power of customers:
- Bargaining leverage
- Switching cost of a buyer
- Buyer price sensitivity
- Competitive advantage of company’s product
- BARGAINING POWER OF SUPPLIERS:
- this refers to the supplier’s ability of increasing and decreasing prices. If there are few alternatives o supplier available, this will threat the company and it would have to purchase its raw material in supplier’s terms. However, if there are many suppliers alternative, suppliers have low bargaining power and company do not have to face high switching cost. The potential factors that effects bargaining power of suppliers are the following:
- Input differentiation
- Impact of cost on differentiation
- Strength of distribution centers
- Input substitute’s availability.
STEP 7: VRIO Analysis of Enron Case:
Vrio analysis for Enron Case case study identified the four main attributes which helps the organization to gain a competitive advantages. The author of this theory suggests that firm must be valuable, rare, imperfectly imitable and perfectly non sustainable. Therefore there must be some resources and capabilities in an organization that can facilitate the competitive advantage to company. The four components of VRIO analysis are described below: VALUABLE: the company must have some resources or strategies that can exploit opportunities and defend the company from major threats. If the company holds some value then answer is yes. Resources are also valuable if they provide customer satisfaction and increase customer value. This value may create by increasing differentiation in existing product or decrease its price. Is these conditions are not met, company may lead to competitive disadvantage. Therefore, it is necessary to continually review the Enron Case company’s activities and resources values. RARE: the resources of the Enron Case company that are not used by any other company are known as rare. Rare and valuable resources grant much competitive advantages to the firm. However, when more than one few companies uses the same resources and provide competitive parity are also known as rare resources. Even, the competitive parity is not desired position, but the company should not lose its valuable resources, even they are common. COSTLY TO IMITATE: the resources are costly to imitate, if other organizations cannot imitate it. However, imitation is done in two ways. One is duplicating that is direct imitation and the other one is substituting that is indirect imitation. Any firm who has valuable and rare resources, and these resources are costly to imitate, have achieved their competitive advantage. However, resources should also be perfectly non sustainable. The reasons that resource imitation is costly are historical conditions, casual ambiguity and social complexity. ORGANIZED TO CAPTURE VALUE: resources, itself, cannot provide advantages to organization until it is organized and exploit to do so. A firm (like Enron Case) must organize its management systems, processes, policies and strategies to fully utilize the resource’s potential to be valuable, rare and costly to imitate.
STEP 8: Generating Alternatives For Enron Case Case Solution:
After completing the analyses of the company, its opportunities and threats, it is important to generate a solution of the problem and the alternatives a company can apply in order to solve its problems. To generate the alternative of problem, following things must to be kept in mind:
- Realistic solution should be identified that can be operated in the company, with all its constraints and opportunities.
- as the problem and its solution cannot occur at the same time, it should be described as mutually exclusive
- it is not possible for a company to not to take any action, therefore, the alternative of doing nothing is not viable.
- Student should provide more than one decent solution. Providing two undesirable alternatives to make the other one attractive is not acceptable.
Once the alternatives have been generated, student should evaluate the options and select the appropriate and viable solution for the company.
STEP 9: Selection Of Alternatives For Enron Case Case Solution:
It is very important to select the alternatives and then evaluate the best one as the company have limited choices and constraints. Therefore to select the best alternative, there are many factors that is needed to be kept in mind. The criteria’s on which business decisions are to be selected areas under:
- Improve profitability
- Increase sales, market shares, return on investments
- Customer satisfaction
- Brand image
- Corporate mission, vision and strategy
- Resources and capabilities
Alternatives should be measures that which alternative will perform better than other one and the valid reasons. In addition, alternatives should be related to the problem statements and issues described in the case study.
STEP 10: Evaluation Of Alternatives For Enron Case Case Solution:
If the selected alternative is fulfilling the above criteria, the decision should be taken straightforwardly. Best alternative should be selected must be the best when evaluating it on the decision criteria. Another method used to evaluate the alternatives are the list of pros and cons of each alternative and one who has more pros than cons and can be workable under organizational constraints.
STEP 11: Recommendations For Enron Case Case Study (Solution):
There should be only one recommendation to enhance the company’s operations and its growth or solving its problems. The decision that is being taken should be justified and viable for solving the problems.
The Enron Scandal
Rachel smith december 10, 2018, submitted as coursework for ph240 , stanford university, fall 2018, introduction.
Enron Corporation (see Fig. 1) was an American energy company based in Houston, Texas. It was founded in 1985 following the merger of two small regional energy companies, Houston Natural Gas and InterNorth. Over the years, Enron expanded its business plan to increase profitability. Now acting more like a hedge fund, Enron dealt in commodities and services including natural gas, electricity, paper, freight, water, and communication technology. Enron was praised for its innovative business model; the company was named "America's Most Innovative Company" by Fortune magazine every year between 1996 and 2001. Enron's stock price reached a high of US$90.75 per share in mid-2000. After it was revealed that the company had been engaging in accounting fraud - had, in fact, been hiding billions of dollars in debt via various accounting loopholes - the company's shareholders filed a $40 billion lawsuit. Enron's stock price plunged to less than $1 per share by the end of November 2001. On December 2, 2001, Enron filed for bankruptcy. At the time, Enron's meteoric fall marked the largest corporate bankruptcy in US history. 
The Fall of Enron
Enron engaged in mark to market (MTM) accounting, for which the company received official US Securities and Exchange Commission (SEC) approval in 1992. This accounting method allows companies to value their financial situation based on the "fair value" of the company's assets, which may change as market conditions change. Enron used this accounting method to overinflate the company's estimated profits and mislead investors.  To hide its mounting debt, Enron used special purpose vehicles (SPVs: shell companies capitalized entirely by Enron stock) to borrow money on Enron's behalf. By 2001, Enron had used hundreds of SPVs to hide its debt. 
By the end of 2001, investor confidence in Enron had started to decline. Jeffrey Skilling took over the role of CEO after Kenneth Lay retired in February. Skilling resigned for "personal reasons" in August. Analysts began to downgrade Enron's stock rating. On October 16, Enron reported the company's first quarterly loss. Shortly thereafter, the SEC announced it was opening an investigation into Enron and its SPVs. Enron restated the company's earnings (or lack thereof) and revealed that the company had $628 million in debt and $591 million in losses.  After Dynegy, a company that had previously stated plans to merge with Enron, backed out of the deal, Enron filed for bankruptcy. 
In the end, many of Enron's executives were charged for insider trading, securities fraud, and conspiracy. Former CEO Kenneth Lay was convicted of six counts of fraud and conspiracy and four counts of bank fraud, but he died of a heart attack before he could be sentenced.  Jeffrey Skilling was convicted of insider trading, fraud, and conspiracy. Skilling was finally released from prison in 2018. 
Enron's collapse prompted President George W. Bush to sign into law the Sarbanes-Oxley Act, a law designed to protect investors from corporations' fraudulent accounting activities.  At the time, Enron's collapse was the biggest to ever hit the US financial world. It was soon surpassed, however, by WorldCom, in 2002. 
© Rachel Smith. The author warrants that the work is the author's own and that Stanford University provided no input other than typesetting and referencing guidelines. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.
 W. W. Bratton, "Enron and the Dark Side of Shareholder Value," Tul. L. Rev. 76 , 1275 (2002).
 P. M. Healy and K. G. Palepu, "The Fall of Enron," J. Econ. Perspect. 17 , 3 (2003).
 " An Implosion on Wall Street ," New York Times, 29 Nov 01.
 A. Clark, " Disgraced Boss Ken Lay Dies at Luxury Ski Chalet ," The Guardian, 6 Jul 06.
 C. Morris, " Former Enron CEO Jeff Skilling Released From Prison ," Fortune, 31 Aug 18.
 E. Bumiller, " Corporate Conduct: The President; Bush Signs Bill Aimed at Fraud In Corporations ," New York Times, 31 Jul 02.
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Case Study: Enron
Once the seventh largest company in America, Enron was formed in 1985 when InterNorth acquired Houston Natural Gas. The company branched into many non-energy-related fields over the next several years, including such areas as Internet bandwidth, risk management, and weather derivatives (a type of weather insurance for seasonal businesses). Although their core business remained in the transmission and distribution of power , their phenomenal growth was occurring through their other interests. Fortune Magazine selected Enron as "America's most innovative company" for six straight years from 1996 to 2001. Then came the investigations into their complex network of off-shore partnerships and accounting practices.
How the Fraud Happened
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. It is thought that this technique was used to inflate revenue numbers by manipulating projections for future revenue.
Use of this technique (as well as some of Enron's other questionable practices) made it difficult to see how Enron was really making money. The numbers were on the books so the stock prices remained high, but Enron wasn't paying high taxes. Robert Hermann, the company's general tax counsel at the time, was told by Skilling that their accounting method allowed Enron to make money and grow without bringing in a lot of taxable cash.
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 (LJM, LJM2, and others) to move debt off of the balance sheet and transfer risk for their other business ventures. These SPEs were also established to keep Enron's credit rating high, which was very important in their fields of business. 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. They did this through a complex arrangement of special purpose entities they called the Raptors. The Raptors were established to cover their losses if the stocks in their start-up businesses fell.
When the telecom industry suffered its first downturn, Enron suffered as well. 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. Accounting rules required an independent investor in order for a hedge to work, but Enron used one of their SPEs.
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. Enron chairman Ken Lay stepped in as CEO.
In the next section we'll look at how the fraud was discovered.
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The Fall of Enron Harvard Case Solution & Analysis
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The case traces the growth of Enron, covering the business of innovation, human resources and risk management. Then he sees a sharp drop in the company, including the expansion of its business model in questionable new businesses, the financial problems of accountability and governance failures within and outside the firm. The case offers students the opportunity to learn why Enron failed and understand the systemic problems in the administration, which has affected its board of directors, audit committee, external auditors, and financial analysts. "Hide by Paul M. Healy, Krishna G. Palepu Source: Harvard Business School 21 pages. Publication Date: 19 November 2008. Prod. #: 109039-PDF-ENG
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As the company began to implode, Enron's board commissioned a special committee to investigate the implicated transactions, directed by William C. Powers Jr., then dean of the University of Texas School of Law.
Case HBS Case Collection The Fall of Enron By: Paul Healy and Krishna Palepu Format: Print | Language: English | Pages: 21 Email Print Share Abstract The case traces the rise of Enron, covering the company's business innovations, personnel management, and risk management processes.
Bestseller What Happened at Enron? By: Michael Moffett On December 2, 2001, Enron Corporation filed for bankruptcy protection under Chapter 11. One of the most highly publicized business debacles in history-its settlements, criminal charges, civil… Length: 22 page (s) Publication Date: Jul 26, 2004 Discipline: Organizational Behavior
The Fall of Enron | Harvard Business Publishing Education The case traces the rise of Enron, covering the company's business innovations, personnel management, and risk management processes. It then examines The case traces the rise of Enron, covering the company's business innovations, personnel management, and risk management processes.
This case highlights the history of Arthur Andersen and the collapse of the firm following the Enron Corp. audit and the Department of Justice obstruction of justice conviction. Keywords Accounting Audits; Financial Statements; Business Exit or Shutdown; Lawfulness; United States Citation Hawkins, David F., and Jacob Cohen. "Arthur Andersen LLP."
Product Description. The case traces the rise of Enron, covering the company's business innovations, personnel management, and risk management processes. It then examines the company's dramatic fall including the extension of its trading model into questionable new businesses, the financial reporting problems, and governance breakdowns inside ...
In Enron's case, that was the firm of Arthur Andersen. ... one study shows fraudsters are likely to be extroverts with an ability to lie, able to "rationalise fraud as a normal sort of task, just ...
Product Description. On December 2, 2001, Enron Corporation filed for bankruptcy protection under Chapter 11. One of the most highly publicized business debacles in history-its settlements, criminal charges, civil charges, and workouts will continue for years. But outside of the courts and sensational press, what really happened?
Enron scandal, series of events that resulted in the bankruptcy of the U.S. energy, commodities, and services company Enron Corporation and the dissolution of Arthur Andersen LLP, which had been one of the largest auditing and accounting companies in the world.
Enron Case Study - Economics bibliographies - in Harvard style . Change style powered by CSL. Popular AMA APA ... These are the sources and citations used to research Enron Case Study. This bibliography was generated on Cite This For Me on Wednesday, January 3, 2018. Journal.
The What Happened at Enron case study is a Harvard Business Review case study, which presents a simulated practical experience to the reader allowing them to learn about real life problems in the business world.
STEP 1: Reading Up Harvard Case Study Method Guide: Case study method guide is provided to students which determine the aspects of problem needed to be considered while analyzing a case study. It is very important to have a thorough reading and understanding of guidelines provided.
This Enron case study presents our own analysis of the spectacular rise and fall of Enron. A summary was first published on our website in 2015, opening a series of case studies assessing organisations against ACG's Golden Rules of corporate governance and applying our proprietary rating tool.
November 17, 2020. Oliver Furrer/Getty Images. Summary. Recent research shows that overconfidence within an organization can be contagious. That social contagion can shed new light on relatively ...
On December 2, 2001, Enron filed for bankruptcy. At the time, Enron's meteoric fall marked the largest corporate bankruptcy in US history.  The Fall of Enron. Enron engaged in mark to market (MTM) accounting, for which the company received official US Securities and Exchange Commission (SEC) approval in 1992.
The case explores the history of Enron in an attempt to not only answer the question of what happened, but what can be learned from this failure. This study Thunderbird Case. "Hide by Michael Moffett Source: Thunderbird School of Global Management 22 pages. Publication Date: July 26, 2004. Prod. #: TB0123-PDF-ENG Related Case Solutions & Analyses:
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.
It is also a good example to illustrate how ethics drives culture which in turn pushes the ethical boundaries and is a key influence on all the four other key elements of good corporate governance ...
The case offers students the opportunity to learn why Enron failed and understand the systemic problems in the administration, which has affected its board of directors, audit committee, external auditors, and financial analysts. "Hide by Paul M. Healy, Krishna G. Palepu Source: Harvard Business School 21 pages. Publication Date: 19 November ...
What Happened at Enron case study solution, What Happened at Enron case study analysis, Subjects Covered Energy by Michael Moffett Source: Thunderbird School of Global Management 22 pages. Publication Date: Jul 26, 2004. Prod. ... Harvard Case Study Analysis Solutions ...
Subjects Covered Annual reports Business history Business models Corporate governance Corruption Innovation Leadership Risk. by Paul M. Healy, Krishna G. Palepu. Source: Harvard Business School. 21 pages. Publication Date: Nov 19, 2008. Prod. #: 109039-PDF-ENG. The Fall of Enron Harvard Case Study Solution and HBR and HBS Case Analysis
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