Enron Case Study
Part A: Problem Focused Analysis and Recommendations.
1. Brief Case Background. List key events, use timeline.
At one time Enron was one of the world’s largest producers of natural gas, oil, and electricity. It also appeared to be one of the most profitable companies, taking shareholders from $19.10 in 1999 to $90.80 by the end of 2000. Enron’s top management answered to a Board of Directors whose responsibility was to question and challenge new partnerships, ventures, and decisions within the company. On several occasions, Andrew Fastow, the company’s Chief Financial Officer approached the board of directors with new investment partnerships which the board approved with very little questioning. Some of these partnerships created a conflict of interest due to the fact that Fastow was not only managing the partnerships, but he was also an investor in an outside entity that took part in buying and selling assets with Enron. Fastow was able to create and manage several of these partnerships while still maintaining his role as CFO of Enron. This was due to the rule set in place by the Financial Accounting Standards Board (FASB) which states, “if an outside investor puts in 3 percent or more of the capital in a partnership, the corporation, even if it provides the other 97 percent, does not have to declare the partnership as a subsidiary. Therefore, assets and debt in the partnership can be withheld from the corporation’s balance sheet.” With this rule and the many partnerships Fastow created, Enron did not have to declare the assets and debts from these partnerships, therefore hiding hundreds of millions of dollars in losses and debt. The board of directors however did not consider Fastow’s interaction with the partnerships to be a serious problem due to the fact that the financial gain potential to Enron was great. In fact Enron had a 65 page code of ethics that was given to all employees. The code talked about obeying the law, treating customers fairly and honestly, and avoiding conflicts of interest. There was very little in the code about specific ethical principles. It became obvious toward the end of 2001 that the managers of Enron did not believe this code applied to them. By October of 2001 it became apparent that Enron was headed in the wrong direction. The company reported its first quarterly loss in over four years. The US Securities and Exchange Commission began looking into transactions between Enron and the Fastow partnerships. What they discovered would take Enron from being an American icon to Chapter 11 bankruptcy in a matter of a couple months. It was revealed that Enron had fraudulently stated its financial condition and in fact the company was hiding millions of dollars in debt and losses. Irregular accounting procedures were discovered which involved not only Enron but also their accounting firm Arthur Andersen. The scandal caused the dissolution of Arthur Andersen, which at the time was one of the world's top five accounting firms. When the scandal was revealed, Enron shared dropped from over $90 to just pennies. Major credit rating agencies downgraded Enron’s bonds to “junk” status. In addition thousands of employees were laid off by being sent home on the first day of bankruptcy and being informed that they would receive an email as to whether or not they still had a job. In addition to the layoffs, thousands of employees had their retirement plans invested in Enron stock. One Enron employee had over $700,000 in her retirement plan with Enron and now she has only about $4000. The top managers however had made out financially prior to the Chapter 11 filing. Only days before it filed Chapter 11, over $55 million was paid out in bonuses. In addition, shares were being sold off months prior to the Chapter 11 filing, leaving managers quite comfortable before the fall. The top managers were put on trial for their actions....
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