Enron Case Study
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
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
Cited: Ackman Dan, Enron: Now the Recriminations, FORBES, Nov. 30, 2001, available at. http://www.forbes .com/2001/11/30/1130topnews_print.html Ackman Dan, Enron the Incredible, FORBES, Jan. 15, 2002, available at http://www.forbes.com/ 2002/01/15/0115enron_print.html. BAUMAN D. JEFFREY, ELLIOT J. WEISS, ALAN R. & PALMITER, CORPORATIONS LAW AND POLICY at 972-3 (5th ed. 2003). Farrell, Greg. “Enron’s Fastow ‘juiced’ books” USA Today. 7 Mar. 2006. 29 July 2006 <http://www.usatoday.com/money/industries.energy/2006-06-07-fastow-usat_x.htm> Ferrell, O.C, John Fraedrich, Linda Ferrell Business Ethics: Ethical Decision Making and Cases. Boston: Houghton Mifflin Company, 2005 PG(248 – 256) Smith, James L., James R. Paine “The Enron Aftermath: Proposed New Rules for Directors and Officers” Cybersecuritieslaw. April 2002. 29 July 2006 <http://www.cybersecuritieslaw.com/wslawyer/smith.htm>