Fall of Enron
Austin Winsett
Dr. Frances L. Ayers
Accounting 5252-920
27 March 2013
The Fall of Enron: Mini-Case Analysis
Summary:
Enron was founded in 1985 as a natural gas pipeline company. In the 1990s, Enron emerged as one of the leading pioneers in the energy market by building its business around energy trading and international energy-asset construction. Their emergence in the energy-trading sector all started when Enron recognized that they could take advantage their position as the largest interstate pipeline firm. They were able to manage volatility for buyers (utility companies) by entering long-term fixed-price contracts with these customers. At the same time, they were able to manage this risk by entering into long-term fixed-rate contracts (forward or future contracts) with the wellhead suppliers. Enron then implemented their complex trading business model into other markets across the world that were characterized by the following: undergoing significant deregulation, complex distribution channels, dedicated to a single commodity, opaque prices, and loose supply/service contract standards.
Enron continued to promote deregulation. They played an active role in the lobbying for deregulation. CEO, Ken Lay, was a strong advocate for deregulation of prices in energy markets. Early in his career he was a member of the FERC, and continued to create strong political connections. This eventually led to little government regulation and oversight of commercial transactions within the energy market. As a result, Enron was able to develop a trading operation that was virtually unregulated.
As Enron’s business model became more complex, it began to push the limits of accounting. The two main financial reporting issues that Enron faced consisted of mark-to-market accounting, and financial reporting for special-purpose entities (SPEs) that Enron used to implement its light asset strategy and to hedge investment gains. By 2000, Enron has hundreds of these
Dr. Frances L. Ayers
Accounting 5252-920
27 March 2013
The Fall of Enron: Mini-Case Analysis
Summary:
Enron was founded in 1985 as a natural gas pipeline company. In the 1990s, Enron emerged as one of the leading pioneers in the energy market by building its business around energy trading and international energy-asset construction. Their emergence in the energy-trading sector all started when Enron recognized that they could take advantage their position as the largest interstate pipeline firm. They were able to manage volatility for buyers (utility companies) by entering long-term fixed-price contracts with these customers. At the same time, they were able to manage this risk by entering into long-term fixed-rate contracts (forward or future contracts) with the wellhead suppliers. Enron then implemented their complex trading business model into other markets across the world that were characterized by the following: undergoing significant deregulation, complex distribution channels, dedicated to a single commodity, opaque prices, and loose supply/service contract standards.
Enron continued to promote deregulation. They played an active role in the lobbying for deregulation. CEO, Ken Lay, was a strong advocate for deregulation of prices in energy markets. Early in his career he was a member of the FERC, and continued to create strong political connections. This eventually led to little government regulation and oversight of commercial transactions within the energy market. As a result, Enron was able to develop a trading operation that was virtually unregulated.
As Enron’s business model became more complex, it began to push the limits of accounting. The two main financial reporting issues that Enron faced consisted of mark-to-market accounting, and financial reporting for special-purpose entities (SPEs) that Enron used to implement its light asset strategy and to hedge investment gains. By 2000, Enron has hundreds of these