The Enron Scandal Case Study

FACTS OF THE CASE
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Enron's predecessor was the Northern Natural Gas Company, which was formed during 1932, in Omaha, Nebraska. It was reorganized during 1979 as the main subsidiary of a holding company, Inter-North which was a diversified energy and energy related products company. During 1985, it bought the smaller and less diversified Houston Natural Gas company
> Employed approximately 20,000 staff
> One of the world's major electricity, natural gas, communications, and pulp and paper companies.
> Revenues of nearly $40.1 billion.
Enron was almost universally considered one of the country's most innovative companies. The company continued to build power plants and operate gas lines, but it became better known for its unique trading businesses.
Enron’s Line of Business Enron was originally involved in transmitting and distributing electricity and natural gas throughout the United States. The company developed, built, and operated power plants and pipelines while dealing with rules of law and other infrastructures worldwide. Enron owned a large network of natural gas pipelines, which stretched ocean to ocean and border to border.
Enron Corporation represented one of the largest fraud scandals in history. As a result of the fraud investigations, the company was forced to file for bankruptcy in December 2001. Enron was “a provider of products and services related to natural gas, electricity and communications to wholesale and retail costumers”
The sudden and unexpected collapse of Enron Corp. was the first in a series of major corporate accounting scandals that has shaken confidence in corporate governance and the stock market. Only months before Enron’s bankruptcy filing in December 2001, the firm was widely regarded as one of the most innovative, fastest growing, and best managed businesses in the United States. With the swift collapse, shareholders, including thousands of Enron workers who held company stock in their 401(k) retirement accounts, lost tens of billions of dollars. It now appears that Enron was in terrible financial shape as early as 2000, burdened with debt and money-losing businesses, but manipulated its accounting statements to hide these problems. Why didn’t the watchdogs bark? This report briefly examines the accounting system that failed to provide a clear picture of the firm’s true condition, the independent auditors and board members who were unwilling to challenge Enron’s management, the Wall Street stock analysts and bond raters who failed to warn investors of the trouble ahead, the rules governing employer stock in company pension plans, and the unregulated energy derivatives trading that was the core of Enron’s business.
The Enron Scandal was characterized by greed and arrogance. Senior Executives were involved in breaking the law through a series complicated financial deceptions. The company’s accounts were manufactured to conceal substantial financial losses. The Chief Executive took the decision that expense claims would be processed without checking in order to save time and focus on performance. The erosion of ethics took place gradually over time, and it became easy for staff to turn a blind eye to poor practices. Some managers lied and altered the records of colleagues; other used the whistle blowing system to submit negative views about people they wanted to remove and to save themselves.
As Enron Collapsed, so did its pension scheme, taking with it the pension of thousands of employees whose whole pension fund was in the company scheme. It emerged that the fund’s trustees acted more in the interests of the company than in those of its pension holders, for example, when employees were banned from selling their stock in the weeks before bankruptcy.
Although Enron was able to fool a wide range of stakeholders it was unable to continue fooling the market. The company runs out of cash to keep unprofitable subsidiaries afloat and files for bankruptcy protection in December 2001.
PROBLEMS OF THE CASE
The need for significant reforms in accounting and corporate governance in the United States, as well as for a close look at the ethical quality of the culture of business generally and of business corporations in the United States.
A private company like Enron currently hires and pays its own auditors. This again is a conflict of interest built into our legal system because the auditor has an incentive not to issue an unfavorable report on the company that is paying him or her.

ALTERNATIVE COURSES OF ACTIONS