Enron Analisis

Case Study: The Fall of Enron

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TABLE OF CONTENTS

1. ABSTRACT
2. INTRODUCTION
3. MAIN QUESTIONS
4. ETHICS DISCUSSION
5. CONCLUSIONS

ABSTRACT

In recent years, since the most important deregulation in our economy during the 1990s, we have seen many important corporations filing for bankruptcy. The deregulation brought freedom to act in markets but also the possibility of taking higher risks in relation to accounting practices.

Enron, one of the most admired companies in the 1990s, named by Fortune Magazine “America's Most Innovative Company” for six years in a row, filed for bankruptcy in 2001 after one of the most relevant accounting scandals. The big American energy, commodities and services company was unable to survive its continuate unethical and dubiously illegal accounting practices.

In this paper, we are going to critically analyze the case of the Enron scandal to develop ethical conclusions about their behaviour in the market.

INTRODUCTION

MAIN QUESTIONS

1.         Why was Enron such an admired company prior to 2000?

In 1985, Enron was founded as a result of the acquisition of Houston Natural Gas by InterNorth. Kenneth Lay, named CEO of the company, managed to properly unite both organizational cultures, what leaded to a more richness company in terms of culture. This is the story of a company which saw an opportunity in the market and got all the profit from it.

Due to the deregulation in the US gas market, companies in the sector had to change it business model and adapt to the new necessities of the consumers. Even the deregulation gave more freedom to the gas users, it became more difficult for them to manage their expenses. In this scenario, Enron saw an opportunity in the market and started offering an innovative product to the customers which, apart from helping them, attached consumers in the long term; they managed to increase their customer retention rate, something which seemed difficult considering the new regulations.

With the entrance of Jeffrey Skilling, the firm started to use financial methods to create profit. Not only was its core business profitable but also their accounting and financial practices. However, the most important development of Enron was the creation of EnronOnline (EOL). The website allowed users to buy, sell and trade commodity products with Enron, and enabled the firm to highly grow its trading business and provided a huge amount of valuable information.

Do to the success of their business model, in 1997 Enron started to diversify and expanded to other industries such as electricity, water or coal. Their revenues and earnings were growing by rates of 168 and 240 percent respectively, similarly was increasing the admiration of the investors and economic leaders towards the company.

The growing process of the company did not stop. The success in the home market lead the company to expand to other countries, internationalize and export the model. They first expanded to Europe, a market with a similar culture and ways of working, and after it, to more challenging markets such as India, the Middle East or South America. Their foreign investment was another success.

In addition, the company was investing in the recruitment and retention of talent. It recruited scientists, engineers and economists and retained them by offering high bonuses tied to their performance, giving freedom to move inside different positions of the company and encouraging to try new things and bringing new ideas. Not only had Enron a good reputation outwards but also inside the company.

Nevertheless, not all their methods to acquire such a relevance and reputation were strictly ethical. Due to the influence of Lay, the company managed to lobby governments and institutions to get favourable conditions for their business model, that is to say, deregulation of markets. They also used unethical practices, abuse of power, to convince external organizations such as the SEC or the Commodity Futures Trading Commission to oversee their business practices. Overall of them, they created third parties companies to hide losses and generate profits, SPEs, special-purpose entities. Though, all this actions and business practices, let the company to increase their value in the market, giving Enron a high valuation and admiration all over the United States of America.

2.         Why did the company fail?

La causa inmediata de la bancarrota es la falta de capacidad de Enron para afrontar el pago de las deudas que había contraído. Estas deudas habían sido ocultadas utilizando distintos artificios durante, al menos, cinco años hasta que la ocultación no pudo continuar a la vista de la magnitud de las deudas; no es lo mismo ocultar un raton que un elefante, aún más cuando éste se pretende que quepa en un armario diminuto. La pregunta pasa a ser ¿cómo el ratón de la deuda pudo engordar tanto y nadie se dio cuenta hasta que convertido en elefante que no cupo en el armario? La primera respuesta es la ceguera colectiva de los mercados; y no sólo de los mercados. Muy pocos tuvieron capacidad para ver lo que de verdad estaba ocurriendo.

La habilidad de los directivos de Enron fue contrastada; transformaron una empresa de la economía tradicional, en una de la nueva economía. Sin embargo, su gran creación fue crear una empresa virtual con beneficios virtuales; tener la habilidad de crear tan poco pero aparentar que es muchísimo y engañar a tantos, salvándose los directivos, quienes mucho han ganado haciendo uso de la información sobre la situación real de la empresa y sobre la inminencia del colapso.

Los directivos utilizaron lo que se ha dado en llamar una “contabilidad agresiva” para multiplicar los beneficios y reducir las deudas. Los procedimientos fueron variados y complejos. Uno de los más utilizados se basaba en la constitución de Special Purpose Entities, SPEs, con las que Enron hacía negocios y atraían inversiones de bancos y fondos; estos negocios permitían a Enron multiplicar los beneficios (por ejemplo, contabilizando los ingresos de una de sus empresas como beneficios) o localizar las deudas en estas empresas. La dinámica fue imparable. El globo fue creciendo: alimentado por la exigencia de presentar más y mayores beneficios cada año, los partneships de la compañía asumían más y mayores deudas, al tiempo que sus negocios iban de fracaso en fracaso; un fracaso se pretendía cubrir con el siguiente éxito; se repitió la espiral catastrófica típica de los adictos al juego.

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