Enron a Case Study
Enron, once known as the worldwide leader in energy trading, began as a natural gas pipeline company. “At its peak, Enron brokered up to 20 percent of America’s energy transactions. These included basic contracts to deliver natural gas from wells to pipelines for distribution to homes, contracts for the purchase of electrical power facility out port, and more complex financial contracts, which allowed power companies to manage price and market risk” (Ackman).
Along with selling oil and gas, Enron was an inventive market maker for the sale of gas related products. With market making activities and trading, Enron’s growth went from a simple regional supplier of energy to a global financial power. “In some ways, Enron functioned like a stock specialist on the floor of the New York Stock Exchange (NYSE). It acted as both a dealer, trading for Enron’s accounts, and a broker, trading for others who made orders to buy or sell” (Bauman). Enron created markets for dealers to buy and sell energy, by continuously being willing and able to buy and sell products that made the market liquefiable.
Enron had an information advantage over their competitors and allowed it to extend the spread between bid and asking prices because of their physical presence in the products transport and production markets. Enron’s management was not content with the advantage they had. Management aggressively reported each derivative contract transaction on its entirety as revenue, rather than only the spread gained as with other securities transactions. “Enron exploited an accounting loophole allowing it to book entire transactions as “sales” and Wall Street analysis, whole own firms could never engage in such creative accounting, never caught on. Enron used its dealer market to match a buyer with a seller, but Enron considered itself to take “delivery” of the entire contract for a moment in time-thus allowing Enron to book the entire transaction as a “sale” even though Enron really was only the middleman. Enron reported an increase in “sales” from $13.3 billion in 1996 to $100.8 billion in 2000, inflating its market capitalization until it became America’s seventh-largest company – at least on paper Bauman). Arrogant often described Enron’s corporate culture. Enron executives believed that they were “the world leading company” and that no other competitor could touch them. Another standard within the culture was how much money could be made for the executives. Floating or even breaking the rules were encouraged by Enron’s culture, to provide its executives with as much profits as possible, instead of the wealth of its shareholders.
The system created by Jeffery Skilling, known as the rank and yank, forced out the employees that were rated in the bottom 20 percent. This system created a hostile environment, which employees competed with rivals inside and outside of the company. Problems were often covered up rather than being communicated to management because of this system.
Enron’s bankruptcy in 2001 was caused by fraud, theft, and insider trading. Enron used partnerships called special-purpose entities (SPEs) to conceal its losses. “In a meeting with Enron’s lawyers in August 2001, the company’s chief financial officer, Andrew Fastow, stated that Enron had established the SPEs to move assets and debits off its balance sheet and to increase cash flow by showing that funds were flowing through its books when it sold assets” (Ferrell, Fraedrich, and Ferrell 248-256). This practice of accounting concerned people because it might cause fraudulent financial reporting due to the fact that it did not represent the company’s actual financial condition. Enron funded the SPEs with its own stock and maintained control over them. When these partners were unable to meet the obligations, Enron covered the debt with its own stock, which was fine if the stock price was high, if not cash was needed to...
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