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Enron Case Study Solution & Analysis

The Enron Scandal depicts how such a big business giant that reached dramatic heights faced sever downfall and disintegrated almost overnight. This actually brings into notice how often businesses not just require appropriate strategy to operate but significant leadership to successfully guide the business through the most critical challenges.

About the Company:

The company was formed in 1985 which was followed by a merger between Houston Natural Gas Company and Omaha-based InterNorth Incorporated. Following the merger, Kenneth Lay, who had been the chief executive officer (CEO) of Houston Natural Gas, became Enron's CEO and chair. Soon after this Lay started to rebrand Enron into an energy trader and supplier. Deregulation of the energy markets allowed companies to place bets on future prices, and Enron was poised to take advantage. It was during 1990 that Lay had created the Enron Finance Corporation and there he appointed Jeffrey Skilling who was previously associated with McKinsey & Company as a consultant. As Skilling joined Enron the business seemed to flourish quite heavily. At the end of the 1990s, the dot-com bubble was in full swing, and the Nasdaq hit 5,000.

As he entered the organization one of the changes which were observed as in Enron’s accounting practices as he changed the traditional historical cost accounting methods to mark-to-market (MTM) accounting method for which the company gained the necessary approval from the officials of SEC in 1992. This approach was chosen to provide a more realistic appraisal of an institution’s or company’s current financial situation and became a very widely used and accepted practice of accounting. However according to some market researchers it was this MTM system which actually marked the beginning of the end of Enron as it actually permitted the organization to log estimated profit as their actually profits

Hence Enron’s business reached great heights with its innovation like building on electronic trading websites to providing credit and expertise in the energy sector which made the organization "America's Most Innovative Company" by Fortune for six consecutive years between 1996 and 2001.

The scandal and Enron’s Downfall:

Analysing the fall of this business giant actually started when Enron entered into a partnership with Blockbuster  in July 2000 in the burgeoning VOD market. The VOD market was a sensible pick, but Enron started logging expected earnings based on the expected growth of the VOD market, which vastly inflated the numbers. It was observed that by the mid of 2000 Enron understand that already it had spent hundreds of millions of dollar in this project with almost no return. Finally when recession hit in 2000 Enron’s financial positioned weakened and many of its trusted creditors and investors understood how the company was losing its feet. By the fall of 2000, Enron was starting to crumble under its own weight.

CEO Jeffrey Skilling hid the financial losses of the trading business and other operations of the company using mark-to-market accounting. Along with this financially crumbing situation it was seen that Fastow and the management at Enron had orchestrated a scheme to use off-balance-sheet special purpose vehicles (SPVs) to actually hide its mountains of debts and toxic assets from the investors and creditors. The main aim of this was to hide the accounting realities rather than operating results. This was another major grave that the company officials had dig for themselves. The standard Enron-to-SPV transaction would be the following: Enron would transfer some of its rapidly rising stock to the SPV in exchange for cash or a note. This was an illegal practice that was been observed where along with Andrew Fastow another major player in this scandal was David B.

Duncan who looked after Enron’s accounts. These suspicious practices raised a wave of questions by 2001 regarding the transparency of the business operation of Enron. By 2001 Enron saw its freefall, CEO Kenneth Lay returned and Skilling resigned as CEO , Enron’s stock descended and the first quarterly loss was reported which actually caught the attention of the SEC.  Investigations began and Fastow was fired. Enron had losses of $591 million and had $690 million in debt by the end of 2000.  Arthur Andersen was charged with criminal offenses for these accounting malpractices while several of Enron's executives were charged with conspiracy, insider trading, and securities fraud. Through out the analysis of the scandal and downfall of the business of Enron it is highly evident how the lack of strategic leadership and a sound organizational culture impacted on the overall performance of the business which was globally spread. Lack of these actually resulted in one after the other unethical activities which the management continued to conduct with the organization.

SWOT Analysis:

Strengths:

  • Enron when it initiated its business was one of the biggest natural gas pipeline system companies which operated in U.S of America. The company ranked seven among the top 500 companies
  • Enjoyed a strong competitive position amongst the existing market competition
  • Initially had a strong brand value for the customers
  • Along with energy level supply the company also took the advantage by keeping the price reasonable

Weakness:

  • The company lacked transparency in its business operation
  • The leadership was not strong and authentic
  • There existed several conflict among the management and the employees that affected the work culture
  • Greater focus on financial gains that degraded the moral values

Opportunities:

  • Enron’s main opportunity has always been its brand name
  • Enron could take the opportunity of expanding its products as they were the supplier of gas pipelines and various other material goods related to it
  • In 1970 the deregulation of energy market actually provided better opportunity for Enron to expand its business

Threats:

  • Its internal work culture has been its greatest threat
  • The lack of trust and clarity within the employees and the management threatened the work culture
  • Increasing market competition
  • Lack of moral values amongst the leaders.

PESTEL Analysis:

 Political Factors:

Government Stability actually was one of the primary reasons behind the growth and expansion of Enron’s business. Political stability actually helped Enron to attract more investors for its business and also supported the growth and development of its infrastructure.  Favourable and desirable tax policies also worked in favour for the growth and development of the business. Government regulations also helped Enron to sustain better in the market competitiveness while international trade relations flourished with the constant support of the government

Economic Factors:

Moderate inflation rates in the economy actually helped Enron to better establish its business. It was observed that these economic factors actually helped Enron to gain more investors, bring changes in its economic and accounting practices. However with the gradual decrease of transparency in its economic the company suffered from various doubts and speculations. Finally the recession of 2000 had hit the market and the organization quite strong which actually brought its major downfall. This actually led to decreasing credibility of the investors and creditors regarding the financial activity of Enron and negatively affected its economic condition in the global market

Social Factors:

 Social factors actually relate to how the management and the employees interacted with each other in the social setting that is within the organization that actually determined the level of existing organizational ethics and sound leadership. It was definitely the lack of both which actually led Enron to its path of destruction and downfall. The organization and its management were so deeply engrossed in the financial gains that it completely overlooked the aspect of ethical and righteous functioning. This negatively impacted on the overall work climate.

Technological Factors:

Global business entities have to focus on their technological advancements for expanding its business operations. Technological expansion and innovation is extremely necessary for expanding market presence which is exactly the reason that Enron also played greater emphasis on its R&D and building its technology for increasing its supply base of oil and gas and emerge as a strong energy supply in the global market

Environmental Factors:

Functioning in the energy supply industry on a global platform it is extremely important to focus on the aspect of sustainability. However Enron did not focus on its ethical standards of business operation this is exactly the reason which brought its overall downfall. Sustainable business practices was not been encouraged by the management of Enron which ultimately led to its overall downfall.

Legal Factors:

For global businesses to sustain in the market it is extremely important to follow certain laws and legislation. This is exactly the reason why Enron with its suspicious activities of misrepresenting its accounts or hiding facts from the investors finally led to its downfall and got the management arrested of criminal charges. These legal hassles can be avoided if the business organizations abide by the legal regulations of doing the business in a fair manner.

The overall impact of Enron’s scandal can be identified with individual and institutional investors loosing million of dollars. Enron's collapse and the financial havoc it wreaked on its shareholders and employees led to new regulations and legislation to promote the accuracy of financial reporting for publicly held companies. In July 2002, President George W. Bush signed into law the Sarbanes-Oxley Act. The Act heightened the consequences for destroying, altering, or fabricating financial statements and for trying to defraud shareholders.

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