Topics: Financial ratio, Enron scandal, Balance sheet Pages: 6 (1600 words) Published: January 9, 2011
Enron Case Study
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Enron Case Study

Enron was a corporation founded in 1985, when a merger combined Houston Natural Gas and InterNorth (Thomas, 2002). Throughout the first five years of Enron’s existence, they had many struggles. According to Salter (2005), the first years had many “near death” experiences. Eventually Enron was able to prevail over their many “near death” experiences. In 1989, “Enron locked in its first fixed price contract to supply natural gas, to a Louisiana aluminum producer” (Salter, 2005, p. 2). They continued to promote and gain success by recruiting employees from MBA schools. Only the brightest and best were hired to maximize the success of Enron. Enron expanded to trading electricity in 1994. Since the breakthrough of trading electricity, Enron continued to grow and continued to become an incredibly successful corporation. However, due to unfortunate decisions both within and outside of the company Enron declared bankruptcy on December 2, 2001 (Salter, 2005). Workforce

Enron was a company made up of the elite group of workers. Enron focused on hiring the “best and brightest traders” (Thomas, 2002, p.42) to maintain their status of being the top energy trading company. MBA schools were the sole focus of recruiting for Enron. However, there was a screening process that each recruit was required to go through. Enron screened for a sense of urgency, intelligence, a strong work ethic, and problem-solving ability (Salter, 2005). The company set the standards high to ensure they employed the best the corporation could have.

The employment of MBAs was not solely due to recruitment. MBAs also showed a great interest in the company of Enron. This was primarily because Enron offered great benefits and compensation to their employees. Examples of a couple perks for working at Enron included, a gym open to only the company and concierge services for the employees (Thomas, 2002, p. 42). Enron according to Salter (2005): Put recruits on a pedestal ‘so they would develop a sense of superiority.’ Not only were many new recruits lured with $20,000 signing bonuses and prospects of annual bonuses of up to 100% or salary, but the two-week orientation program also strove to impress Enron’s newest elite with images of Enron as ‘a cosmopolitan, global company with unlimited possibilities.’ The downside to the perks and signing bonuses was a vigorous working schedule (Salter, 2005, p. 17). Management Practices

Enron used a risk management system to run the company. This system consisted of a committee of lawyers, business managers, and financial and risk-assessment analysts (Salter, 2005, p. 21). The committee became known as the RAC or Risk Assessment and Control. The RAC were responsible for “analyzing the financial and nonfinancial risks,” (Slater, 2005, p. 22).

Enron used market-to-market procedures to run the company. This allowed the company to adjust assets and liabilities on their balance sheets at a fair market value (Thomas, 2002). According to Thomas (2002) not recording the proper value of both assets and liabilities will cause incorrect totals on the income statement. In turn the corporation was according to Thomas (2002), “booking unrealized gains or losses to the income statement of the period.” However, the market-to-market strategy is supposed to avoid the misuse of accounting documents. Bowen and Heath (2005) state, It is neither the "mark-to-market" procedure nor the fair value concept but rather the lack of both external and internal adequate controls, designed to avoid misuses and abuses of accounting standards, that must be condemned in this case. Even though Enron used this system, the accounting records and standards were being abused due to the fact of the size of the corporation. Management Worries for Enron

There were many reasons for Enron to be worried about their downfall. Enron was excused from many...

References: Bowen, S., & Heath, R. (2005). Issues management, systems, and rhetoric: exploring the distinction between ethical and legal guidelines at Enron. Journal of Public Affairs (14723891), 5(2), 84-98. doi:10.1002/pa.13.
Gordon, R. (2004). Corporate Aftershock: The Public Policy Lessons from the Collapse of Enron and Other Major Corporations (Book). Energy Journal, 25(4), 134-135. Retrieved December 7, 2009, from Academic Search Premier database.
Kobrak, C. (2009). Innovation Corrupted: The Origins and Legacy of Enron 's Collapse. Business History Review, 83(1), 173-177. Retrieved December 7, 2009, from Academic Search Premier database.
Salter, M. (2005). Innovation corrupted: the rise and fall of Enron. Harvard Business School
Schwartz, J
Thomas, C. (2002). The Rise and Fall of Enron. Journal of Accountancy, 193(4), 41-48. Retrieved December 7, 2009, from Business Source Elite database.
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