The case study discusses how Enron evolved as a company. It tackles the strategies and processes employed by Enron on its business innovations, personnel management, and risk management. This study also delves into the downfall of the company including the problems and breakdowns it encountered and had to deal with. Finally, this case study gives a view on the fall of Enron as a company and leads the students into understanding governance and management problems which affect the company as a whole.
Paul M. Healy; Krishna G. Palepu
Harvard Business Review (109039-PDF-ENG)
November 19, 2008
Case questions answered:
Case study questions answered in the first solution:
- Briefly, provide a history of the company.
- The Enron debacle created what one public official reported was a “crisis of confidence” on the part of the public in the accounting profession. List the parties who you believe are the most responsible for that crisis. Briefly justify each of your choices.
- Identify and list the governance principles and guidelines that were breached.
- Can Audit firms truly be independent consultants?
- Who was most affected by Enron’s Fall?
- Identify and list five recommendations that have been made recently to strengthen the audit function after Enron’s scandal.
Case study questions answered in the second solution:
- Enron’s stock price began in 2000 trading around $43. By late-August, it reached $90 – a 107% return in 8 months – and it closed 2000 at $83 – up 91% for the year. While Enron was up 91% for 2000, the S&P 500 Index declined by about 10% during the year. Knowing what you know from the case, would you have invested in Enron at the end of 2000? Why or why not?
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Case answers for The Fall of Enron
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Company Overview – Enron
This case analysis is focused on the fall of Enron, one of the largest natural gas and electricity companies in North America. Enron dealt with the development, production, transmission and supply and marketing of natural gas and electricity worldwide. It also served the emerging markets in futures and renewable energy. Enron in 2001 filed for bankruptcy and its stock price was greatly reduced.
i) Poor Management was greatly at fault.
Kenneth Lay, the CEO, and Jeffery Skilling, the President of Enron, promised investors ambitious profits, to say the least. The company’s super-normal growth was centered on the deregulation of the sector yet most states had not done so. Enron spent a lot of money lobbying for deregulation as it would greatly open their market.
Enron’s Executive Board quite craftily attracted investors to put their money on unstable business models. Most of these deals flopped and they concealed the true performance of the company. They hyped their stock price to very unsustainable levels with a large number of their shareholders suffering a great loss when their bubble burst.
Mr. Skilling resigned in 2001 and Mr. Lay resigned the following year while Enron was on a sharp decline.
ii) Accountants and Auditors were also at fault.
Investors were not made aware that Enron was failing. Losses were ‘creatively’ accounted for as new joint ventures and partnerships. This false accounting kept stock prices high and some of the executives even sold some of their shares in the company.
Suddenly the company announced losses and it came to light that it had been erroneously reporting its earnings for several years. Their accountants, the firm of Arthur Andersen, even went as far as destroying documents that showed damning irregularities in Enron’s bookkeeping and financial reporting.
They failed to fulfill their duty to the public and investors who expected them to objectively access the company’s stability in order to inform their investment in the business. They were in breach of the Ethical Laws and Professional Accounting Standards. They were sanctioned by Congress during their investigations into the case.
iii) The Government of the day
Several politicians were corrupt and on several occasions are believed to have received bribes from Enron in the advancement of their causes. No one was keeping the accountants/auditors accountable and their word was generally held to be true. The SEC authorization of Mark to Market Practices by Enron also enabled the company to defraud many of their investors ‘legally’.
The board, management, and other stakeholders all have defined roles, obligations, rights, and responsibilities outlined in corporate governance principles. Despite Enron being lauded as one of the top five companies with the best corporate governance set up, several governance principles were flagrantly breached. Some of these principles are:
- Independent auditors have authority over the audit of all the company affiliates and divisions
- The firm acts lawfully and ethically in dealing with shareholders
- Proper procedures and control over management day to day operation
- The external auditor is free from management influence
- The firm’s financial operating and governance activities are reported to shareholders in a fair accurate and timely manner
- Proper accounting and auditing procedure have been followed
- Detailed disclosure of the risks associated with the business
- The financial and operating results of the company
- Fees paid and the nature of new audit services performed by the auditors.
The principles were deliberately ignored for the growth prospect of Enron and making the business profit-oriented. Andrew Fastow & Jeffrey Skilling changed their business strategy and they appeared to make Enron very profitable and innovative.
The management of the company is to be blamed for the fall of Enron. Had it been they were…