enron harvard case study

• Contributors

Twenty Years Later: The Lasting Lessons of Enron

Michael Peregrine  is partner at McDermott Will & Emery LLP, and  Charles Elson  is professor of corporate governance at the University of Delaware Alfred Lerner College of Business and Economics.

This spring marks the 20th anniversary of the beginning of the dramatic and cataclysmic demise of Enron Corp. A scandal of exceptional scope and impact, it was (at the time) the largest bankruptcy in American history. The alleged business practices of its executives led to numerous individual criminal convictions. It was also a principal impetus for the enactment of the Sarbanes-Oxley Act and the evolution of the concept of corporate responsibility. As such, it is one of the most consequential corporate governance developments in history.

Yet a new generation of corporate leaders has assumed their positions since then; for others, their recollection of the colossal scandal may have faded with the years. And a general awareness of corporate responsibility principles is no substitute for familiarity with the governance failings that reenergized, in a lasting manner, the focus on effective and responsible governance. A basic appreciation of the Enron debacle and its governance implications is essential to director engagement.

Enron was formed as a natural gas pipeline company and ultimately transformed itself, through diversification, into a trading enterprise engaged in various forms of highly complex transactions. Among these were a series of unconventional and complicated related-party transactions (remember the strangely named Raptor, Jedi and Chewco ventures) in which members of Enron’s financial leadership held lucrative financial interests. Notably, the management team was experienced, and both its board and its audit committee were composed of a diverse group of seasoned, skilled, and prominent individuals.

The company’s rapid financial growth crested in March 2001, with media reports questioning how it could maintain its high stock value (trading at 55 times its earnings). Famous among these was the Fortune article by Bethany McLean, and its identification of potential financial reporting problems at Enron. [1] In a dizzying series of events over the next few months, the company’s stock price collapsed, its CEO resigned, a bailout merger failed, its credit was downgraded, the SEC began an investigation of its dealings with related parties, and it ultimately declared bankruptcy. Multiple regulatory investigations followed, several criminal convictions were obtained and Sarbanes-Oxley was ultimately enacted to curb the perceived abuses arising from Enron and several similar accounting scandals. [2]

There remain multiple important, stand-alone governance lessons from Enron controversy of which all directors would benefit:

1. The Smartest Guys in the Room . The type of aggressive executive conduct that contributed heavily to the fall of Enron was not unique to the company, the industry or the times. In the absence of an embedded culture of corporate ethics and compliance, there is always the potential for some executives to pursue “edge of the envelope” business practices, especially when those practices produce meaningful near term financial or other operational results. That attitude, combined with weak board oversight practices, can be a disastrous combination for a company.

Even though commerce has made great progress since then on internal controls, corporate responsibility ultimately depends upon the integrity of management, and the skill and persistence of board oversight. [3]

2. The Critical Importance of Board Oversight . As the company began to implode, Enron’s board commissioned a special committee to investigate the implicated transactions, directed by William C. Powers Jr., then dean of the University of Texas School of Law. The Powers Report, as it came to be known, outlined in staggering detail a litany of board oversight failures that contributed to the company’s collapse. [4]

These included inadequate and poorly implemented internal controls; the failure to exercise sufficient vigilance; an additional failure to respond adequately when issues arose that required a prompt and serious response; cursory review of critical matters by the audit and compliance committee; the failure to insist on a proper information flow; and an inability to fully appreciate the significance of some of the information with which the board was provided. [5]

3. Spotting Red Flags . Amongst the most damaging of the governance breakdowns was the failure to question the legitimacy of the related-party transactions for which so many internal controls were required. These deficiencies served to bring a once significant company and its officers to their collective knees and offer many lasting governance lessons. As the Powers Report concluded with brutal clarity, a major portion of the company’s business plan—related-party transactions—was flawed. [6]

These transactions were replete with risky conflicts of interest involving management. There was a significant “forest for the trees” concern—an inability to recognize that conflicts of such magnitude that required so many board-approved internal controls and procedures should never have been authorized in the first place. All this, despite the fact that the individual Enron directors were people of accomplishment and capability who had been recognized by the media as a well-functioning board. [7]

Yet, they lacked the actual necessary independence to recognize the red flags waving before them. Their varied relationships with company leadership made them all-too-comfortable with what they were being told about the company. [8] This connection made it difficult for them to recognize the dangers associated with the warning signals that the conflicted transactions projected. Indeed it was the revelation of these conflicts that attracted media attention and ultimately “brought the house down”. [9]

4. It Can Still Happen . The 2020 scandal encompassing the German financial services company Wirecard offers one of the latest high profile (international) examples of how alleged aggressive business practices, lax internal and auditor oversight, accounting irregularities and limited regulatory supervision can combine into a spectacular corporate collapse that prompted numerous government fraud investigations. It is for no small reason that the Wirecard scandal is referred to as the “German Enron”. [10]

5. A Significant Legacy . Yet the Enron controversy remains fundamentally relevant as the spark behind the corporate responsibility environment that has reshaped attitudes about corporate governance for the last 20 years. It’s where it all began—the seismic recalibration of corporate direction from the executive suite back to the boardroom, where it belongs. It birthed the fiduciary guidelines, principles, and “best practices” that serve as the corridors of modern corporate governance, developed in direct response to the types of conduct so criticized in the Powers Report. [11]

And that’s important for today’s board members to know. [12] Because over the years, the message may have lost its sizzle. The once-key oversight themes incorporated within “plain old” corporate responsibility seem to be yielding the boardroom field to the more politically popular themes of corporate social responsibility. And, while still important, corporate compliance seems to have had its “fifteen years of fame” in the minds of some executives; the organizational initiative has turned elsewhere.

But the pendulum may be swinging back. There is a renewed recognition that compliance programs can atrophy from lack of support. The new regulatory administration in Washington may return to an emphasis on organizational accountability. As Delaware decisions suggest, shareholders may be growing increasingly intolerant of costly corporate compliance and accounting lapses. And there’s a renewed emphasis on the role of the whistleblower, and the board’s role in assuring the support and protection of that role.

So it may be useful on this auspicious anniversary to engage the board on the Enron experience, in a couple of different ways. First, include an overview as part of formal director “onboarding” efforts. Second, have a board level conversation about expectations of oversight, and spotting operational and ethical warning signs. And third, reconsider the Enron board’s critical and self-admitted failures, in the context of today’s boardroom culture. [13]

Such a conversation would be a powerful demonstration of a board’s good-faith commitment to effective governance, corporate responsibility and leadership ethics.

1 Bethany McLean, “Is Enron Overpriced?” Fortune, March 5. 2001. https://archive.fortune.com/magazines/fortune/fortune_archive/2001/03/05/297833/index.htm. (go back)

2 See , Michael W. Peregrine, Corporate BoardMember , Second Quarter 2016 (henceforth “Corporate BoardMember”). (go back)

3 See , e.g., Elson and Gyves, In Re Caremark : Good Intentions, Unintended Consequences, 39 Wake Forest Law Review, 691 (2004). (go back)

4 Report of the Special Investigation Committee of the Board of Directors of Enron Corporation, February 1, 2002. http://i.cnn.net/cnn/2002/LAW/02/02/enron.report/powers.report.pdf. (go back)

5 See , Michael W. Peregrine, “The Corporate Governance Legacy of the Powers Report” Corporate Counsel , January 23, 2012 Monday. (go back)

6 See , Michael W. Peregrine, “Enron Still Matters, 15 Years After Its Collapse”, The New York Times , December 1, 2016. (go back)

7 F.N. 5, supra . (go back)

8 See , Elson and Gyves, “The Enron Failure and Corporate Governance Reform”, 38 Wake Forest Law Review 855 (2003) and Elson, “Enron and the Necessity of the Objective Proximate Monitor”, 89 Cornell Law Review 496 (2004). (go back)

9 John Emshwiller and Rebecca Smith, “Enron Posts Surprise 3rd-Quarter Loss After Investment, Asset Write-Downs”, The Wall Street Journal , October 17, 2001. https://www.wsj.com/articles/SB1003237924744857040. (go back)

10 Dylan Tokar and Paul J. Davies, “Wirecard Red Flags Should Have Prompted Earlier Response, Former Executive Says” The Wall Street Journal , February 8, 2021. https://www.wsj.com/articles/wirecard-red-flags-should-have-prompted-earlier-response-former-execu tive-says-11612780200. (go back)

11 Corporate BoardMember , supra . (go back)

12 See Peregrine, “Why Enron Remains Relevant”, Harvard Law School Forum on Corporate Governance, December 2, 2016. (go back)

13 Corporate BoardMember , supra. (go back)

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Leadership & Managing People

The Fall of Enron

The Fall of Enron ^ 109039

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Publication Date: November 19, 2008

Source: Harvard Business School

The case traces the rise of Enron, covering the company's business innovations, personnel management, and risk management processes. It then examines the company's dramatic fall including the extension of its trading model into questionable new businesses, the financial reporting problems, and governance breakdowns inside and outside the firm. The case offers students an opportunity to explore why Enron failed and to understand the systemic problems in governance that affected its board of directors, the audit committee, the external auditors, and financial analysts.

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The Enron collapse

This case charts the collapse of Enron, examines the role of various parties including senior management, the board and the auditors. It also looks at the complex structures and accounting policies used to artificially inflate both revenues and profits, and to conceal these from shareholders and others. It brings out key learning points on risk management, corporate governance, ethics and controls of a complex enterprise.

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Does the Enron Case Study Provide Valuable Lessons in the Early Detection of Corporate Fraud & Failure?

16 Pages Posted: 7 Aug 2011

Baitshepi Tebogo

The Learning Village(Pty)Ltd

Date Written: August 6, 2011

The company that came to be known as Enron underwent an extensive transformation in terms of name, and scope of activities. By the time of its collapse, it had a massive number of subsidiaries and was considered one of the most successful companies in the world partly because financial analysts were not paying attention to the very basic financial metrics. The large size and, until 2001, exquisite reputation of Enron appeared to have made financial analysts and other investigators lax and devoid of vigilance when it came to scrutinising its financial performance. However, several financial analysis done after the demise of Enron showed that its collapse could have been predicted much earlier. In this paper, the Beneish ratios, the Modified Altman Z-Score, Chanos Algorithm and the Grove and Cook ratios have all shown that the Enron collapse was predictable, had analysts done what they were supposed to do and not considered the company to be too big to fail. The Enron case study also highlights the importance of qualitative analysis in reviewing corporate performance, which as things turned out was instrumental in drawing the public’s attention to the company’s dubious accounting practices.

Keywords: Enron, Beneish, Chanos Algorithm, Modified Altman, Z-Score, Grove and Cook, Corporate Fraud

Suggested Citation: Suggested Citation

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The Fall of Enron – Case Solution

The case study discusses how Enron evolved as a company. It tackles the strategies and processes employed by Enron in its business innovations, personnel management, and risk management. This study also delves into the downfall of the company including the problems and breakdowns it encountered and had to deal with. Finally, this case study gives a view of the fall of Enron as a company and leads the students into understanding governance and management problems that affect the company as a whole.

​Paul M. Healy; Krishna G. Palepu Harvard Business Review ( 109039-PDF-ENG ) November 19, 2008

Case questions answered:

Case study questions answered in the first solution:

• Enron’s stock price began in 2000, trading at around $43. By late August, it reached $90 – a 107% return in 8 months – and it closed 2000 at $83 – up 91% for the year. While Enron was up 91% for 2000, the S&P 500 Index declined by about 10% during the year. Knowing what you know from the case, would you have invested in Enron at the end of 2000? Why or why not?

Case study questions answered in the second solution:

• Briefly provide a history of the company.
• The Enron debacle created what one public official reported was a “crisis of confidence” on the part of the public in the accounting profession. List the parties who you believe are the most responsible for that crisis. Briefly justify each of your choices.
• Identify and list the governance principles and guidelines that were breached.
• Can Audit firms truly be independent consultants?
• Who was most affected by Enron’s Fall?
• Identify and list five recommendations that have been made recently to strengthen the audit function after Enron’s scandal.

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The Fall of Enron Case Answers

Executive summary – the fall of enron.

As an individual investor, I would have invested in Enron at the end of 2000. Of all the six reasons that will be discussed later in the analysis section, I believe the first two, (1) The high profile of Enron and (2) The assurance of an external auditor, have the most influence on my decision to invest in Enron, and the last one, (6) The blurry big picture, prevents me from seeing the real problems of Enron.

Had I known more about Enron’s corporate governance weaknesses and linked them with the conflicts of interest of other external parties, my answer would have been different.

1. The high profile of Enron

Enron was one of the biggest companies, and its expansion into energy trading to take the opportunities of deregulation was a smart strategic move. As one of the first movers, Enron had a huge potential to prospect in the new markets. Evidently, Enron’s revenue in 2000 was booming compared to its revenue in 1999 (increased by 151%). 1

Also, Enron’s recruitment policy, which attracted many sophisticated and highly skilled employees, made me even more confident to invest in Enron. It stated in the case study that Enron’s risk management team worked efficiently, and Enron’s business expansion was also based partly on this.

Enron’s Board of Directors, especially the Audit Committee, consisted of many high-profile members and had more expertise in accounting and finance. The company also established the Code of Ethics, which was supposed to prevent potential conflicts of interest. This, of course, would strengthen investors’ investment decisions.

Finally, Enron compensated its managers with heavy stock options, which might help to minimize conflict of interest because the managers now owned part of the company.

With such a promising company like Enron and its attempt to mitigate the risk of conflict of interest through corporate governance, I think it’s reasonable to invest in this company. The next reasons will strengthen this investment decision.

2. The assurance of a highly reputable external auditor

Enron’s auditor is Arthur Andersen, one of the most trustworthy accounting firms at that time (among the “Big Five”). As an outsider, I would heavily…

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The Enron Litigation Case Study: Lessons from a Corporate Catastrophe

The Enron scandal stands as one of the most infamous examples of corporate fraud in American history. The collapse of Enron Corporation not only led to significant financial losses for investors but also brought about widespread legal ramifications, regulatory reforms, and a rethinking of corporate governance practices. This case study delves into the intricacies of the Enron litigation, highlighting the key events, legal proceedings, and lasting impacts of the scandal.

Table of Contents

The Rise and Fall of Enron

Enron Corporation, once a titan in the energy sector, was founded in 1985 through the merger of Houston Natural Gas and InterNorth. Under the leadership of CEO Kenneth Lay, Enron rapidly expanded its operations, diversifying into various energy-related ventures and pioneering new trading strategies. By the late 1990s, Enron was hailed as one of the most innovative companies in America, boasting a market capitalization of over $60 billion.

However, behind the facade of success, Enron was engaged in a series of complex and fraudulent accounting practices designed to inflate its profits and hide its mounting debts. The use of special purpose entities (SPEs) and mark-to-market accounting allowed Enron to manipulate its financial statements, deceiving investors, analysts, and regulators.

The Unraveling of the Scandal

The downfall of Enron began in earnest in late 2001, when a series of investigative reports by financial analysts and journalists started to reveal discrepancies in the company’s financial statements. On October 16, 2001, Enron announced a massive third-quarter loss and disclosed the existence of over $1 billion in previously unreported debt. This announcement triggered a rapid decline in investor confidence and a precipitous drop in Enron’s stock price.

On December 2, 2001, Enron filed for bankruptcy, marking the largest corporate bankruptcy in U.S. history at the time. The fallout from Enron’s collapse was extensive, leading to significant financial losses for employees, investors, and pensioners, as well as the dissolution of Arthur Andersen, one of the world’s largest accounting firms, which was implicated in the scandal for its role as Enron’s auditor.

Legal Proceedings and Litigation

The Enron scandal led to a cascade of legal actions, targeting both the company and its executives. Key figures, including Kenneth Lay, Jeffrey Skilling (Enron’s COO and later CEO), and Andrew Fastow (CFO), faced criminal charges for their roles in the fraud.

Kenneth Lay : Charged with conspiracy, securities fraud, and making false statements, Lay was convicted on multiple counts in 2006. However, he died of a heart attack before sentencing, leading to the vacation of his conviction.

Jeffrey Skilling : Skilling was found guilty of conspiracy, securities fraud, and insider trading in 2006 and was sentenced to 24 years in prison. His sentence was later reduced to 14 years, and he was released in 2019.

Andrew Fastow : Fastow, the architect of many of Enron’s fraudulent schemes, pled guilty to conspiracy and was sentenced to six years in prison in 2006. He cooperated with prosecutors, providing valuable testimony against his former colleagues.

In addition to criminal prosecutions, numerous civil lawsuits were filed by investors, employees, and other stakeholders who suffered financial losses due to Enron’s collapse. These lawsuits resulted in significant settlements, including a $7.2 billion settlement in a class-action lawsuit against Enron’s banks, auditors, and law firms.

Regulatory Reforms

The Enron scandal underscored the need for stricter regulatory oversight and reforms in corporate governance. In response, the U.S. Congress enacted the Sarbanes-Oxley Act (SOX) in 2002, which introduced comprehensive changes to improve financial transparency, accountability, and the integrity of corporate disclosures.

Key provisions of SOX include:

• Enhanced financial disclosures and accuracy requirements.
• Increased penalties for corporate fraud.
• Protections for whistleblowers.
• The establishment of the Public Company Accounting Oversight Board (PCAOB) to oversee the auditing profession.

Lessons Learned

The Enron scandal serves as a stark reminder of the potential for corporate malfeasance and the devastating impact it can have on stakeholders. Key lessons from the Enron litigation case study include the importance of:

• Robust internal controls : Effective internal controls and compliance programs are essential to prevent and detect fraudulent activities.
• Transparency and accountability : Transparent financial reporting and accountability are critical to maintaining investor confidence and market integrity.
• Regulatory oversight : Strong regulatory frameworks and oversight mechanisms are necessary to safeguard against corporate misconduct.
• Ethical leadership : Corporate leaders must prioritize ethical behavior and decision-making to foster a culture of integrity and responsibility.

The Enron litigation case study remains a pivotal example of the consequences of corporate fraud and the necessity for rigorous oversight and ethical leadership in the corporate world. While the collapse of Enron was a monumental tragedy for many, the lessons learned from this scandal continue to shape the landscape of corporate governance and financial regulation, aiming to prevent similar occurrences in the future.

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Enron and World Finance

A Case Study in Ethics

• © 2006
• Paul H. Dembinski (Professor) 0 ,
• Carole Lager (PhD in Political Science) 1 ,
• Andrew Cornford (Research Fellow) 2 ,
• Jean-Michel Bonvin (PhD in Sociology, Professor) 3

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University of Geneva, Switzerland

Financial markets center, switzerland.

University Paris IV-Sorbonne, Switzerland Department of Sociology, University of Geneva, Switzerland

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A Virtue Ethics Approach in Finance

Table of contents (16 chapters)

Front matter, overview of the book.

Andrew Cornford

Enron: Origins, Character and Failure

Enron and internationally agreed principles for corporate governance and the financial sector, a revisionist view of enron and the sudden death of ‘may’.

• Frank Partnoy

Who Is Who in the World of Financial ‘Swaps’ and Special Purpose Entities

• François-Marie Monnet

Ethics in Thought and Action

An ethical diagnosis of the enron affair.

• Etienne Perrot

Anonymity: Is a Norm as Good as a Name?

• Edward Dommen

Spaces for Business Ethics

• Domingo Sugranyes Bickel

Corporate Governance and Auditing

The demise of andersen: a consequence of corporate governance failure in the context of major changes in the accounting profession and the audit market.

• Catherine Sauviat

Enron et al. and Implications for the Auditing Profession

• Anthony Travis

Enron Revisited: What Is a Board Member to Do?

• Beth Krasna

How to Restore Trust in Financial Markets?

• Hans J. Blommestein

Corporate Culture and Ethics

Enron: the collapse of corporate culture.

• John Dobson

Ethics, Courage and Discipline: The Lessons of Enron

• Robert C. Kennedy

Developing Leadership and Responsibility: No Alternative for Business Schools

• Henri-Claude de Bettignies

Ethics for a Post-Enron America

• John R. Boatright

'The essays in this book greatly enhance our understanding of the causes of one of the most important events in financial history. The authors examine in notable depth the ethical and governance dimensions of the Enron saga, while providing a fascinating commentary on the nature of modern finance capitalism.' - John Plender, Financial Times and author of Going off the Rail - Global Capital and the Crisis of Legitimacy

'Enron and World Finance addresses the most important issue of our time...This brilliant collection of essays with its remarkably insightful introduction and conclusion require us to consider what might be called the tyranny of economics...Enron is important not only in itself but also as a warning signal of the predictable destructive consequences of the failure of language.' - Robert A. G. Monks, Lens Governance Advisors, USA

'Enron offers an 'ideal' example of using or perhaps misusing financial innovations within modern corporations. The book Enron and World Finance provides a very insightful overview of this memorable case where the ethical dimension of an organization is nonexistent. As professors of Finance, we welcome such a book that illustrates the pitfalls of financial creativity when it ignores or abuses the boundaries of an honest corporate culture and of its management.' - Marc Chesney and Rajna Gibson, Professors of Finance, Swiss Banking Institute, University of Zürich, Switzerland

'The book provides, at once, afresh understanding of the place of ethical thought in financial markets, and a focus on leadership and responsibility for the implementation of ethical duties. I commend this fascinating book to a wide readership in financial and academic institutions.' - Professor Dr. Hans Tietmeyer, Bundesbankprasident i.R., Germany

Editors and Affiliations

Paul H. Dembinski

Carole Lager

University Paris IV-Sorbonne, Switzerland

Jean-Michel Bonvin

Department of Sociology, University of Geneva, Switzerland

About the editors, bibliographic information.

Book Title : Enron and World Finance

Book Subtitle : A Case Study in Ethics

Editors : Paul H. Dembinski, Carole Lager, Andrew Cornford, Jean-Michel Bonvin

DOI : https://doi.org/10.1057/9780230518865

Publisher : Palgrave Macmillan London

eBook Packages : Palgrave Economics & Finance Collection , Economics and Finance (R0)

Copyright Information : Palgrave Macmillan, a division of Macmillan Publishers Limited 2006

Hardcover ISBN : 978-1-4039-4763-5 Published: 16 December 2005

eBook ISBN : 978-0-230-51886-5 Published: 16 December 2005

Edition Number : 1

Number of Pages : XVI, 257

Topics : Accounting/Auditing , Business Strategy/Leadership , Business Ethics , Finance, general

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Solutions, Causes, & Conclusion: Enron Case Study

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Enron Case Study Introduction

Enron case study background, company attributes, business strategy, industry analysis using porter’s five forces, the fall of enron case study: swot analysis, organizational culture, enron case study problems and key issues, enron scandal conclusion and recommendations.

Welcome to our The Fall of Enron case study! Here, you will find the scandal timeline, company background, and a comprehensive conclusion. Enron case study will also reveal who was involved in the company’s downfall and how it could’ve been avoided.

Agency problem is one of the major challenges that shareholders face in their effort to maximize wealth through investment. One source of agency problems is associated with the existence of conflicts of interest. In an effort to increase their earnings, firms’ management teams engage in unethical practices such as financial irregularities. Additionally, they also implement operational strategies that aim at maximizing their firms’ profitability rather than the shareholders’ wealth.

Therefore, to better illustrate how the operational strategies implemented by firms’ management teams can cause a firm to collapse, this paper will evaluate causes, solutions, and conclusion of Enron scandal. More focus goes to the company background, cultural environment and the implemented management control. The paper also conducts an analysis of Enron’s ineffectiveness in implementing a strong organizational culture and its inefficient management control system. In conclusion, Enron case study will provide recommendations for Enron scandal.

The case illustrates the rise and collapse of Enron Corporation. Some of the salient features evident in the case include:

• Factors that contributed to the rise of the company – These factors are clearly illustrated and explained. The case makes it evident that Enron’s collapse was due to inefficient control by the company’s Chief Executive Officer, Jeff Skilling.
• The leadership style adopted by Jeff Skilling – Leadership style stands out as the major factor that contributed towards the emergence of an inefficient organizational culture.
• Establishment of a “new economy”- Skilling laid more emphasis on transforming the firm from being an “old economy” to being a “new economy”. However, the leadership style he adopted had a negative impact on the firm’s effort to achieve its goal.
• Management control system – The case cites inefficiency in controlling the activities of the employees, which comes out as a major cause that significantly contributed towards the firm’s failure.

Enron Corporation was energy and commodities trading company, which was formed in 1985 by Kenneth Lay. Its headquarters were located in Houston, in the US. The firm owned the most extensive natural gas pipeline in the US. In a quest to maximize its profitability, the firm ventured into the international market. In addition to its energy business, Enron also positioned itself as a giant with regard to water and wastewater management having ventured into the industry in 1998.

Upon its market entry, the firm gained global recognition courtesy of its strategic move with regard to its adoption of the “new economy” strategy. Enron’s management team appreciated the importance of diversification in an effort to maximize profitability. Consequently, the firm established numerous divisions.

Some of these divisions included online marketplace, transportation, wholesale, and broadband services. The firm’s decision to incorporate the concept of product and service diversification emanated from its founders’ focus on steering it towards maximizing the shareholders’ value.

The success of a firm depends on the effectiveness with which it formulates and implements business strategies. In the course of its operation, Enron adopted a business strategy that focused on attaining a high rate of expansion. Consequently, Enron incorporated a number of business strategies, which included internationalization and formation of mergers and acquisitions.

The firm’s success in the international market emanated from its ability to implement strategic practices such as acquisitions. For example, in 1987, Enron acquired Zond Corporation, a leader in wind-power, which provided an opportunity to venture into the renewable energy sector. The firm was very effective in venturing into the international market. In its internationalization strategy, one source of the firm’s success was its ability to formulate and implement effective international marketing campaigns.

Understanding industry characteristic is paramount in a firm’s efforts to formulate and implement competitive strategies. The porter’s model is one of the frameworks that are suitable in analyzing the intensity of competition, buyer and supplier bargaining power, degree of rivalry, and threat of entry of a particular industry.

The industry was experiencing an increment in threat of entry due to its profitability potential. New firms especially firms dealing in production of renewable energy were considering the possibility of venturing into the industry to exploit the presented profitability. The threat of entry was minimal given that there were minimal legal barriers. The emergence of renewable forms of energy significantly increased the threat of substitute.

Consumers were switching to renewable forms of energy. The intensity of competition led to an increment in the degree of industry rivalry. The various alternatives with regard to forms of energy significantly increased the buyers’ power. This aspect emanated from the fact that they could switch at a minimal cost. On the other hand, the suppliers’ bargaining power was low due to the large number of suppliers.

Pipeline infrastructure -The firm established an elaborate natural gas pipeline network in the United States. The firm’s name attained a relatively high credibility given that it ranked 7 th on the Fortune 500.

Positive reputation -In the course of its operation, Enron managed to attain and sustain positive reputation. Its strength also emanated from the fact that it had attained a monopolistic advantage over its competitors emanating from its large size. The firm achieved this goal by positioning itself as the largest energy provider in the US.

Human capital pool- A f irm’s ability to attain high competitive advantage relative to its competitors is directly impacted by the quality of its human capital. In its operation, Enron had been very effective in enhancing its employees’ skills, abilities, knowledge, and capabilities by undertaking comprehensive training and development.

Innovation- Enron’s management team appreciated the fact that it operated in a very dynamic industry. Consequently, it laid great emphasis on innovation in an effort to thrive. Its innovation ability enabled Enron to shift from natural gas and energy transportation to being a trading company. The firm specifically focused on other areas such as pulp and paper production, coal, steel, and communication business lines.

Marketing and value delivery- Since its establishment, Enron had been committed towards meeting the customers’ needs. Its ability to identify and deliver customer values played a significant role in enabling Enron to attain an optimal market position.

Failed board of directors- The firm’s board of directors did not execute its oversight role effectively, which stands out clearly in the face of its inability to monitor the firm’s operations through its committees. Additionally, the firm’s board of directors failed in enhancing moral and ethical practices within the firm. As a result, its auditors and employees engaged in unethical practices such as deceit.

Conflict of interest- The firm’s weakness also stands out given the inability of the management team to control conflicts of interest that occurred in various transactions that the firm engaged in during its existence. This aspect pushed the firm into great losses due to the persistent fraud, which further necessitated the firm’s collapse.

Opportunities

Public reputation -In the course of its operation, Enron developed a strong public reputation, which presents an opportunity that the firm could have exploited in the course of its operation. Consumers associated Enron with its ability to provide quality energy. Consequently, Enron could have exploited such public perception to expand its pipeline and other businesses. Additionally, Enron could have exploited the move by the government to deregulate the energy industry by venturing in other energy sectors. For example, the firm should have considered the possibility of venturing into production of clean energy. This move would have played a significant role in dealing with climate change challenges of the 21 st century and thus the firm’s reputation would have improved significantly.

Formation of mergers and acquisitions – Considering the prevailing economic environment, Enron should have improved its competitive advantage by seeking reputable firms in the industry to form mergers and acquisitions. Some of the potential partners that the firm should have focused on included firms dealing in production of clean energy. In the course of its operation, Enron gained sufficient experience informing mergers and acquisitions.

Terrorist threat – The threat of terrorism had become real to firms in different economic sectors. Terrorists were increasingly targeting major infrastructure in the US such as energy plants in an effort to sabotage the country’s economy. Therefore, the extensive natural gas pipeline that Enron had developed in the US could have attracted terrorists, and such an occurrence could have a significant impact on Enron’s operation.

Economic crisis- Due to the high rate of globalization, the US could not shield itself from the occurrence of another economic recession. The occurrence of a recession could have directly affected Enron because it derived a significant proportion of its revenue from household consumption.

Competition – In the course of its operation, Enron faced competition challenges emanating from the numerous firms in the US energy industry. The intense competition significantly increased the degree of rivalry within the industry. Consequently, most firms in the industry focused at formulating and implementing strategies that enhanced their ability to increase their market share. One of the strategies that the industry players were focusing on entails research and development.

An organization’s culture has a significant impact on how its employees act. This aspect arises from the fact that the culture nurtured by a particular organization affects its traditions and customers coupled with how employees execute their duties and responsibilities. Firms develop their culture over time. Upon his entry into the company, Jeff Skilling intended to transform the company’s culture into a “New Economy”, and to achieve this goal, he focused on transforming the company into becoming an exemplary intellectual capital firm that would greatly delight the shareholders and stakeholders.

Consequently, Enron developed a culture that was characterized by intense regulation. This move significantly contributed towards the firm’s collapse. The firm’s management team believed that the culture it developed would foster its innovativeness and capacity to adapt.

Consequently, the firm recruited the most talented employees mostly composed of new university graduates such as MBA holders. The decision to recruit employees of such caliber hinged on the management teams’ emphasis on entrepreneurial thinking and risk taking, which made the firm’s managers to become overconfident.

Enron nurtured an aggressive culture that led to a high rate of employee turnover. This scenario arose from the fact that the firm laid more emphasis on attaining short-term results. The firm’s management team formulated an employee evaluation program that was conducted after every six months. The objective of the evaluation was to enhance the integrity and creativity amongst the employees.

However, this move stressed most of the employees thus reducing their operational efficiency. Employees who succeeded in attaining the set targets received extensive monetary rewards such as salary increments, stock options, and bonuses. Skilling’s focus on development of such culture did not succeed. Instead, a culture of arrogance, fierce internal competition, and extreme decentralization became the norm.

The firm’s manager was mainly concerned with transforming the institution into a postmodern, hyper-flexible, and a firm that continuously re-invents in order to align with changes in the external business environment. According to Skilling’s opinion, this would enable the firm to increase its profitability. Conversely, the ever-changing characteristic of the firm made employees to perceive a significant decline in their job security.

Due to its extensive expansion, Enron ventured into unfamiliar territories. The inexperience of the firm’s executives significantly contributed towards the occurrence of mistakes.

Additionally, the management team’s emphasis on generation of ideas from the employees led to accumulation of information, which the firm could not process adequately. Its over-emphasis on risk taking made the firm to ignore the costs associated with such risks. Additionally, putting pressure on the employees to be creative stimulated most employees to take shortcuts, which were in most cases unethical.

The firm’s employees laid more emphasis on creativity because it attracted great rewards compared to integrity. This aspect led to the occurrence of agency problem between shareholders and managers. Employees were mainly concerned with their personal welfare rather than attaining the shareholders’ wealth maximization goal.

The case illustrates a number of problems and key issues that Enron experienced in the course of its operation. One of the major problems evidenced in the case touches on the accounting system used by the firm.

Enron adopted an aggressive accounting style whereby the accounting officers inflated figures in the firm’s financial statements. Additionally, special partnerships were formed with the objective of defrauding the firm. The partnerships rendered the process of accounting very complicated. The accounting officer did not record the actual values in the firm’s accounting books.

The records were made to look attractive, which was not the case. The management team engaged in fraudulent reporting by manipulating the firm’s revenue and earnings in order to sustain the firm’s credit rating. Consequently, most investors perceived the firm as a solid and reliable investment partner. The auditors colluded with the management team in return of huge financial gains.

Approximately, the auditors and consultants earned between $25 million and $27 million in audit and consulting fees. In the course of executing its oversight duties, Enron ignored the firm’s financial capacity, which made its shares to rise significantly during the 1990s.

Enron relied on the “mark to Market” accounting system, which enabled it to succeed in adjusting the value of its stocks and shares by reflecting the prevailing market value. By using this method, Enron comfortably reported its expected future earnings as current earnings.

Therefore, Enron disregarded its codes of ethics, which is based on integrity, respect, excellence, and communication. The existence of conflict of interest between managers and shareholders comes out clearly given the fact that the executive mainly focused on maximizing their earnings. In August 2001, the company Chief Executive Officer Jeff Skilling resigned from the company and immediately disposed off his stocks, which were valued at more than $33 million.

In addition to the accounting fraud, another key issue that is evident in the case study relates to the firm’s overdependence on making deals. Despite the fact that Enron had developed a professional risk assessment and control committee, the committee did not execute its duties effectively.

For example, the committee was reluctant to reject projects that were evidently risky. Its inability to execute this role was necessitated by the fact that the management team mainly focused on making deals that would contribute to increment in the firm’s cash flows, hence necessitating the firm’s ability to attain high growth.

Additionally, the committee was reluctant to express its opinion regarding illegal businesses and practices that the firm was undertaking. This scenario arose from the fact that making such opinions would herald their career’s death. The firm’s management team rewarded blind loyalty to employees and quashed those who portrayed dissent.

Enron situation fits perfectly in the theory of planned behavior. The theory explains that there exist reasons behind the occurrence of a particular situation.

It asserts that unethical practices such as corruption mainly hinge on specific values and intent. Enron’s employees mainly focused on engaging themselves in extreme competitive actions and favored unethical practices in order to achieve their desired operational efficiency. The behavior thrived because the employees observed the optimal treatment to individuals who engaged in shortcuts to attain the desired level of creativity.

In summary, the fraud in Enron Corporation was a result of failure in the firm’s leadership system, management control, and ineffective organizational culture. Its focus on positioning itself as a “new economy” stimulated employees to engage in unfair activities in order to achieve the desired objective.

Additionally, the management team developed a culture that focused on attainment of results rather than nurturing integrity. Consequently, employees engaged in unethical practices and disregarded the codes of ethics implemented by the firm. Therefore, to deal with these challenges, we suggest the following recommendations for Enron scandal.

• Enron should have adopted a progressive-adoptive culture. This culture focuses on generation of new ideas and openness to new ideas. However, it does not force employees to implement the ideas hence it does not enhance unhealthy competition. It would also have been important for the firm to consider nurturing a community-oriented culture, which mainly seeks to ensure a high level of collaboration and cooperation amongst employees. Adoption of such cultures would have played an important role in providing employees with direction.
• To ensure effective reporting, Enron should have incorporated accrual method of reporting to ensure accurate description of the company’s value.
• With regard to control issues, the firm should have adopted a more current control system by reviewing its policies, procedures, and rules. The policies and procedures should have focused on nurturing integrity and ethics. The firm should have remained strict in implementing ethical policies and procedures to refrain employees from unethical behavior.

Action plan on how to implement the recommendations and the expected time duration

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IvyPanda. (2018, November 30). Solutions, Causes, & Conclusion: Enron Case Study. https://ivypanda.com/essays/enron-case-study/

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IvyPanda . (2018) 'Solutions, Causes, & Conclusion: Enron Case Study'. 30 November.

IvyPanda . 2018. "Solutions, Causes, & Conclusion: Enron Case Study." November 30, 2018. https://ivypanda.com/essays/enron-case-study/.

1. IvyPanda . "Solutions, Causes, & Conclusion: Enron Case Study." November 30, 2018. https://ivypanda.com/essays/enron-case-study/.

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IvyPanda . "Solutions, Causes, & Conclusion: Enron Case Study." November 30, 2018. https://ivypanda.com/essays/enron-case-study/.

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The Fall of Enron Case Solution & Answer

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The case describes the rise of Enron, covering innovations in risk management processes of corporate business, personnel management, and. It then examines the dramatic fall of the company, including the expansion of its business model in new suspicious activities, financial reporting issues, and government failures inside and outside the company. The case offers students the opportunity to explore why Enron failed and understand systemic governance problems that have affected its Board of Directors, the Audit Committee, the external auditors and financial analysts. by Paul M. Healy, Krishna G. Palepu Source: Harvard Business School 22 pages. Date Posted: November 19, 2008. Prod #: 109039-PDF-ENG The fall of Enron solution

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