Enron Case Study

Introduction

There are a lot of things that people should know and needs to investigate to make better decisions. Enron’s case is one of those. Through this work and through the investigation we discovered how a company with great projection and performance was being manipulated from their financial statements to create a false representation of the reality. There it is involved financial people as politicians that work in favor of Enron. I do invite you to read carefully and to understand that not always you need to be confident on anything other said.

As we go further, we are going to understand that Enron’s case goes beyond corporate history. It will remain as one or the most important fraud case in the recent years.

The history, development, and growth of ENRON over time

Enron Corporation was one of the largest global energy, services and commodities company. Before it was filed bankruptcy under chapter 11, it sold natural gas and electricity, delivered energy and other commodities such as bandwidth internet connection, and provided risk management and financial services to the clients around the world.

Enron was based in Houston, Texas, and was founded in July 1985 (though company with Enron name emerged still in 1930 (Swatz, Watkins, 2003)) by the merger of Inter North of Omaha in Nebraska, and Houston Natural Gas. Enron Company quickly developed from merely delivering energy to brokering energy futures contracts on deregulated energy markets. In 1994, the company started to sell electricity, and in 1995, it entered European energy market. By the middle 2001, Enron employed about 30,000 people globally.

Questionable accounting methods and techniques provided Enron with possibility to be listed as seventh largest United States Company and were expected to dominate the market which the company virtually invented in the communications, weather and power securities. But instead the corporation became the largest corporate failure in the global history and an example of well-planned and institutionalized corporate fraud. Enron became wealthy due to its pioneering marketing and promotion of power and communications bandwidth services and risk management derivatives, including such innovative and exotic items as weather derivatives.

In 1999, Enron launched an initiative of buying and selling access to high-speed Internet bandwidth, and also Enron Online was launched as a Web-based trading site, making Enron e-commerce Company. In 2000, the reported revenues of the company made $101 billion. It had stakes in almost 30,000 miles of gas pipelines; either owned or accessed 15,000 miles of fiber-optic network and had stakes in global operations on generating electricity.

In the result, for five years in a row, from 1996 to 2000, Enron was named "America's most innovative Company" by Fortune magazine, and headed the list of Fortune's "100 best companies to Work for in America" in 2000. Enron reputation was undermined by rumors on bribery and political pressure with the objective of securing contacts in South and Central America, Philippines and Africa. The Enron was blamed to use its connections with Clinton and Bush administrations to express pressure in their contracts. The events were followed by a series of scandals involving irregular accounting methods bordering on fraud which involved Enron and Arthur Andersen accounting firm and led Enron on the verge of undergoing the largest bankruptcy in economic history in November 2001.

Since Enron was always considered a blue chip stock, the bankruptcy was a disastrous and unprecedented event in the global financial world. Enron's downfall was definite when it was found out that a considerable share of its profits resulted from deals with so-called special-purpose entities, limited partnership under control of Enron. It resulted in the possibility of not reporting many of the company's losses in its financial statements. The final plan of Enron's bankruptcy included creation of three new businesses which would be spun off the company.

The reorganization process started in 2003 with the creation of three companies вЂ" Cross Country Energy, Prisma Energy International, and Portland General Electric. Cross Country Energy was sold to CCE Holdings L.L.C., with the money to be used for the repayment of the debts, while Prisma Energy International and Portland General Electric should emerge as independent companies descendant of Enron (Swatz, 2003).

• 1985- Enron is formed by merger of Houston Natural Gas and Inter North creating the largest company owned natural gas pipeline.

• 1989- Enron opens its Gas Bank, where consumers can buy long-term supplies of natural gas at a fixed price, setting the stage to become a commodity trading company.

• 1990-1998- Enron expands its holdings in the U.K., Europe, South America, and India. Enron in this time moved away from natural gas and pipeline operations instead focusing more on marketing other energy related commodities.

• 1999- Enron launches its broadband services and Enron Online.

• August 2000- Enron’s share price reaches an all time high of $90, ranking it the seventh largest energy company in the world.

• October 2001- Enron post its first quarterly loss in four years, $618 million and a reduction in shareholder equity by over $1 billion dollars.

• December 2, 2001- Enron files for bankruptcy protection.

The identification of the company’s internal strengths and weaknesses

Strengths

An important strength that we should remark us the fact that Enron is the largest company-owned natural gas pipeline system in the United States and is ranked seventh by the Fortune 500 creating the sensation of good name and confident. Also would be its reputation and public perception. Enron has a competitive and almost monopolistic advantage over its competitors because they are the largest energy provider. They also have market-making abilities that result in price and service advantages.

Weaknesses

They have a lack of ethical and moral behavior among employees and auditors by engaging in deceitful and wrongful acts. Management has a lack of control and conflicts of interest occur in numerous transactions. The culture of Enron was all about results therefore, expectations