Enron Case Study

The Enron Collapse

By: Jeff Porter

Kevin Clark

Jared Sabelhaus

February 18, 2005

Introduction

Companies have mission statements that often read like inspirational leaflets.

Enron's mission was at first to be the world's greatest energy company then later revised

in early 2001 to be the "world's greatest company". In the late 1990's, Enron seemed to

have accomplished their mission accumulating vast amounts of assets, had the

intellectually elite at the helm, a political climate in their favor and numerous

opportunities to expand. Enron gave all appearances of a vastly superior company that

could do no wrong. The thing about king of the mountain is that the ones on top never

seem to stay there for very long and in Enron's case the fall from corporate mountain was

spectacular and felt all over the world. Over the course of three short years Enron went

from the seventh largest company in the U.S. to financial ruin. However deep and

impressive their intelligent managerial pool was; internal flaws led to a slide of epic

standards. In our report, we will analyze these internal flaws that include inadequate

control measures, a hostile environment and flawed accounting and financing methods.

Because of the financial severity which the company was in we concluded that Filing

Chapter 11 bankruptcy was the only option for Enron and therefore will be assumed in

our report. When we asked Rich Kidwell if there was anything Enron could have done to

keep from filing Chapter 11 he said "I don't know if there was anything that they could

do. Enron was like a house of cards and it was only a matter of time before they were

blown down." We examined different ideas on how to transform these flaws and then

suggest which idea we feel is best suited to the needs of this company.

Assumptions

While writing this paper we assumed the following points:

* Enron has already filed for Chapter 11 bankruptcy.

* Enron is unique in regards to size and operations (accounting methods and

actions) compared to other regulated commodity companies.

* Due to Enron's aggressive accounting we understand the financial ratios that are

computed using Enron's financial statements are more than likely not going to

give an accurate or clear picture of the company's current status.

Brief History

* 1985- Enron is formed by merger of Houston Natural Gas and InterNorth

creating the largest company owned natural gas pipeline.

* 1989- Enron opens its Gas Bank, where consumers can buy long-term

supplies of natural gas at a fixed price, setting the stage to become a

commodity trading company.

* 1990-1998- Enron expands its holdings in the U.K., Europe, South

America, and India. Enron in this time moved away from natural gas and

pipeline operations instead focusing more on marketing other energyrelated

commodities.

* 1999- Enron launches its broadband services and Enron Online.

* August 2000- Enron's share price reaches an all time high of $90, ranking

it the seventh largest energy company in the world.

* October 2001- Enron post its first quarterly loss in four years, $618

million and a reduction in shareholder equity by over $1 billion dollars.

* December 2, 2001- Enron files for bankruptcy protection.

S.W.O.T. Analysis

Strengths

Enron is the largest company-owned natural gas pipeline system in the United

States and is ranked seventh on the Fortune 500 giving it an established name with

credibility. Another strength of the company would be its reputation and public

perception. Enron has a competitive and almost monopolistic advantage over its

competitors because they are the largest energy provider. They also have market-making

abilities that result in price and service advantages (26).

Weaknesses

It is easy to target Enron's weaknesses in the company. They have a lack of

ethical and moral behavior among employees and auditors by engaging in deceitful and

wrongful acts. Management has a lack of control and conflicts of interest occur in

numerous transactions. The culture of Enron was all about results therefore, expectations

of financial statements were high and employees were told to make up for losses.

Opportunities

Name recognition is an opportunity for Enron. Society recognizes Enron as a high

quality energy provider. There are many opportunities for Enron to expand or use to their

advantage the many assets they have such as pipeline. Deregulation of the energy

industry in the 1970s allowed Enron the opportunity to grow