Enron Case Study

1. Brief Background and Context

Enron is one of the most famous bankruptcy cases in US corporate history on how it can go all so wrong. The Enron case is one of the most often taught and discussed cases when deliberating about ethics in business.

Enron came from relatively humble origins. Houston Natural Gas, under the leadership of Ken Lay, merged with InterNorth, a gas line pipeline company, to form Enron. The combined company grew to become the largest natural gas pipeline system in the US.

Ken Lay, Chairman and CEO, was a huge proponent of energy deregulation. He hired Jay Skilling, Partner in charge of Energy practice at McKinsey to head up Enron Finance and form a "gas bank" that enabled funding for small gas producers in exchange for selling their natural gas to Enron and route through their pipeline network.

Enron began to expand overseas it its drive to become a true global player. Significant investments were made in Latin America, India (Dabhol) and the UK (water utility).

Enron also ramped up its trading activities. Andy Fastow was hired to develop Enron's funding business and to manage capital and debt. Enron was quite highly leveraged and needed to be proactive about its financial profile.

Skilling got promoted to President and COO (and later to CEO) and he appointed Fastow to become CFO. Enron continued to simultaneously pursue to competing strategies: physical assets and trading assets, both of which required a lot of capital. Real pressure was on trying to preserve investment grade ratings while not diluting the shareholders. Enron turned to off balance-sheet structured finance techniques and "mark-to-market" accounting to handle this financial tension.

Enron continued to expand quickly and broaden its trading strategies. The lack of management integrity and the resulting impact on corporate culture was ultimately the downfall of Enron.

2. Who are the key players involved in the case?

Ken Lay - Chairman

Jay Skilling - CEO

Andy Fastow- CFO and GP of LBJ

Richard Kinder - COO

Rebecca Mark - Head of International Power & Pipeline Development

Sherron Watkins- Key Informant; worked for Andy Fastow

Accountants: Arthur Anderson

Lawyers: Vinson & Elkins

Bankers: Barclays, Chase, Citi, Deutsche, GE Capital, JPMorgan, Merrill Lynch, RBS, and UBS

3. What are the main issues/allegations?

The key issues that contributed to Enron's spectacular downfall include:

i. Regulation and Regulators

a. Decision by US Commodities and Futures Trading Commission to exempt traders from regulatory oversight

b. SEC's decision to grant Enron temporary permission to use mark-to-market accounting was never revisited

c. Lack if SEC scrutiny on regulatory filings

d. FERC declining to get involved in California

ii. Political Connections

a. Unprecedented relationship between Enron and two President Bush's

i. Enron largest financial contributor to campaigns

b. Expectation of Ken Lay becoming Secretary of Energy

c. Wendy Graham appointed to Enron board

d. FERC chairman one of Ken Lay's guys

iii. Remuneration Systems and Job Security

a. "Booked" profits on deals drove bonus systems

b. Remuneration far above industry norms

c. "Rank or Yank" staff retention/exit policy

d. Created large incentive to break rules or remain silent in order to remain employed

iv. Overseas Infrastructure deals

a. Large overseas infrastructure project were a significant cash drain and were losing money

b. Ultimately led to asset impairment issues and investment write-downs.

c. Dabhol project in India particularly