enron case study answers

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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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.

Not the questions you were looking for? Submit your own questions & get answers .

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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Enron Case study

This Enron case study presents our own analysis of the spectacular rise and fall of Enron. It is the first in a new series assessing organisations against ACG’s Golden Rules of corporate governance and applying our proprietary rating tool.

As we say in our business ethics examples homepage introducing this series, the first and most critical rule is an ethical approach, and this should permeate an organisation from top to bottom. We shall therefore always start with an assessment of the ethical approach of the organisation. The way this creates the culture determines the performance in relation to the other four Rules.

The Enron case study: history, ethics and governance failures

Introduction: why enron.

Why pick Enron? The answer is that Enron is a well-documented story and we can apply our approach with the great benefit of hindsight to show how the end result could have been predicted. It is also a good example to illustrate how ethics drives culture which in turn pushes the ethical boundaries and is a key influence on all the four other key elements of good corporate governance.

Hence, in advance of using our own membership for the survey input we can apply the very detailed findings from the post crash dissection of Enron. Readers who are interested can go to  Wikipedia  and burrow into the history of Enron and its major players. They can also study the various accounts that have been written and which are referred to in Wikipedia. We particularly commend “ The Smartest Guys in the Room ”, the story of Enron’s rise and fall, by Bethany McLean and Peter Elkind, and we gratefully acknowledge the valuable insights we have drawn from this fascinating book in producing our Enron case study.

Below is a brief résumé of Enron’s spectacular rise in fifteen years to a market valuation of nearly $100bn and its precipitous collapse. We have prepared a detailed history (around 20,000 words) with our own annotations, which will soon be available as an ebook for those who would like to draw their own conclusions. We have also applied our proprietary survey tool to Enron and imagined how the various stakeholder groups might have responded to a business ethics survey at a critical time in Enron’s history, mid 2000, eighteen months before it suddenly collapsed. The results of this survey are summarised below.

History of Enron

Enron was created in 1986 by Ken Lay to capitalise on the opportunity he saw arising out of the deregulation of the natural gas industry in the USA. What started as a pipelines company was transformed by the vision of a McKinsey consultant, Jeff Skilling, who had the idea of applying models used in the financial services industry to the deregulated gas industry.

He persuaded Enron to set up a Gas Bank through which buyers and sellers of natural gas could transact with each other using an intermediary (Enron) whose contractual arrangements would provide both parties with reliability and predictability regarding pricing and delivery. Enron duly recruited him to run this business and he rapidly built up a major gas trading operation through the early nineties.

During this time Enron was extending its pipeline operations into a wider power supply business, initially in the USA and then on an international scale, completing a large plant at Teesside in the UK and contracting to build a huge plant near Mumbai in India. In due course it had deals all round the globe, from South America to China. The hard driving expansion of Enron’s power business worldwide created a global reputation for Enron.

San Francisco, California. The US West Coast was an early target for its aggressive and misguided expansion.

Skilling’s vision was to transform Enron into a giant, asset-light operation, trading power generally and his next target was trading electricity. Lay was lobbying Washington hard to deregulate electricity supply and in anticipation he and Skilling took Enron into California, buying a power plant on the west coast.

Enron’s national reputation rested on the rapid expansion of its domestic business and its steadily growing revenue and earnings from trading. So on the back of his track record, Skilling was appointed Chief Operating Officer by Ken Lay and he then embarked upon transforming the whole of Enron to reflect his vision.

Observing the dotcom boom, Skilling decided Enron could create a business based on a broadband network which could supply and trade bandwidth and he set out to build this at a great pace.

However, the experiment in deregulation in California didn’t work well and in due course was reversed with recriminations all round. Moreover, the international business expansion wasn’t underpinned by adequate administration and many of the contracts later turned bad.

So Enron then took the decision to build on its international presence by becoming a global leader in the water industry and bought a big water company in the UK, following it up with a big deal in Argentina.

At this point, around 2000, Enron’s reputation was still riding high and Lay and Skilling were looked up to as visionary thinkers and top business leaders.

However, as we see elsewhere in this case study, the rapid expansion had run well ahead of Enron’s ability to fund it, and to address the problem, it had secretly created a complex web of off-balance sheet financing vehicles. These, unwisely, were ultimately secured, and hence dependent, on Enron’s rapidly rising share price.

Also, its hard driving culture was underpinned by incentive schemes which promised, and delivered, huge rewards in compensation packages to outstanding performers. The result was that, to achieve results, aggressive accounting policies were introduced from an early stage. In particular, the use of mark to market valuation on contracts produced artificially large earnings, disguising for some years underlying poor profitability in major parts of the business.

This, of course, meant that Enron was not generating adequate cashflow, while spending extravagantly on expansion, and eventually it blew up suddenly and dramatically. Colleagues of this author who met Lay and had dealings with Enron confirm that there was scepticism in the market about Enron’s profitability and its cash position. Suspicions grew that Enron’s earnings had been manipulated and in late summer 2001 it emerged that its Chief Finance Officer had privately made himself rich at Enron’s expense through the off-balance sheet vehicles. About this time the dotcom boom ended suddenly and for Enron, this coincided with the international power business going radically wrong, the broadband business having to be shut down, the water business collapsing and the electricity services business getting into serious trouble in California. Enron’s share price started to slide and Skilling, appointed Chief Executive Officer in January 2001, resigned in August.

Enron’s share price then rapidly declined, triggering repayment clauses in the financing vehicles which Enron couldn’t handle. Its credit rating went to junk status, which caused the share price to collapse and triggered further crystallising of debt obligations. Banks refused further finance, suppliers refused to supply and customers stopped buying.

At the beginning of December 2001, Enron filed for the biggest bankruptcy the USA had yet seen.

This, in turn, took down one of the largest accounting firms in the world, Arthur Andersen, which was deemed to have so compromised its professional standards in its dealings with its client Enron that it was in many ways complicit in Enron’s criminal behaviour.

The second half of this Enron case study assesses business ethics and the impact on corporate governance, as measured against our Five Golden Rules.

Ethical assessment

Enron didn’t start out as an unethical business. As we have seen in this case study, what introduced the virus was the pursuit of personal wealth via very rapid growth. This led to the introduction of quite extreme incentive schemes to attract and motivate very bright and driven people, which, in turn, led to an unhealthy focus on short term earnings.

The next step was, naturally, to look at how earnings could be massaged to achieve the aggressive revenue and earnings targets. Since the massaged figures for growth in earnings still left a shortfall in cash, Enron quickly maxed out on its borrowing abilities.

But issuing more equity would have hurt the share price, on which most of the incentives were based. So schemes had to be created to produce funding secretly and this funding had to be hidden. In this way, an amoral and unethical culture developed in Enron in which customers, suppliers and even colleagues were misled and exploited to achieve targets. And the top management, who were rewarding themselves with these same incentive schemes, boasted that a pure, market-driven ethos was propelling Enron to greatness and deluded themselves that this equated to ethical behaviour. Lay even lectured the California authorities, whom Enron was cheating, that Enron was a model of business ethics.

Finally, the respected Arthur Andersen allowed greed for fees to over-rule the strong business ethics tradition of its founder and caused it to succumb to bending and suspending its professional standards, with fatal results.

Impact on Corporate Governance

Our five Rules of Good Corporate Governance start with the need for an ethical culture. Having established that Enron’s culture became progressively more deficient in this regard, let’s consider briefly the impact of this failure in business ethics on the other Rules.

Clear goal shared by all key stakeholders

Lay and, particularly Skilling, engendered in all the staff of Enron the goal of driving up the share price to the virtual exclusion of all else. The goal of achieving a long term satisfaction from a stable customer base took a distant second place to signing up deals. In California, the customers were deliberately exploited by the traders to the maximum extent their ingenuity could achieve. Even internally, the Chief Finance Officer’s funding scheme was designed to make him rich at his employer’s expense.

Strategic management

As a McKinsey consultant specialising in strategy, Skilling had a very clear vision, at least initially, of what he wanted Enron to achieve. However, he wasn’t interested in management per se and allowed operational management to wither. But his vision of a huge trading enterprise wasn’t carried down to the next level of developing and implementing practical business plans, as evidenced by his crazy launch into broadband, a field in which he had no personal knowledge or experience and in which Enron had almost no capability or likelihood of raising the funds required to implement the project

Organisation resourced to deliver

Skilling became COO on the departure of a very tough and experienced predecessor. Even at that point, Enron had been expanding at a rate which outran its ability to set up appropriate and adequate administrative systems and controls. Added to which it had always been short of funds. Skilling’s lack of interest in operational management meant that on his appointment at COO, he made a poor situation much worse by making bad managerial appointments. His focus on rapid growth incentivised by very generous compensation schemes, and with inadequate spending controls, created a totally dysfunctional organisation.

Transparency and accountability

From the early stages, Enron’s focus on earnings and share price growth and the related financial incentives led to a necessary lack of transparency as the figures were fiddled.. One could argue that Enron felt very much accountable to their shareholders for delivering consistent above average growth in Enron’s market capitalisation. However, this growth was achieved by subterfuge and deception. Certainly the dealings in California were as far from transparent as it was possible to be.

Finally, we bring a unique perspective to this Enron case study by using our proprietary survey tool, the ACGi, to rate the company, as at June 2000, and drawing conclusions from the results.

Conclusion and rating by our Survey tool

The flaws in Enron should have been spotted from early on, and indeed were periodically commented on by various observers from the early nineties onward. If independent ethical and corporate governance surveys had been conducted by independent parties they would have highlighted the growing problems. To illustrate, consider the hypothetical survey summarised in the following chart.

The scores out of ten (high is good) result from a set of questions which aim at deriving an independent, unbiased view from the interviewees, based on observations of corporate behaviour. What we have called the “sniff test” represents the personal view of the interviewee and would take into account their gut feel about the corporation and its management and owners. The highlighted scores would point the observer to clear problem areas.

Click image to enlarge

One would conclude from this survey in June 2000 that:

• neither customers, suppliers, financiers nor local communities rated Enron’s morality in terms of business ethics
• customers and local communities thought they were breaking regulations
• customers and suppliers thought they were probably bending their own rules
• customers, shareholders, suppliers, financiers and local communities thought they were not truly honest.

It is clear with the benefit of hindsight that what started out as an imaginative and ground-breaking idea, which transformed the natural gas supply industry, rapidly evolved into a megalomaniac vision of creating a world-leading company. Intellectual self confidence mutated into contempt for traditional business models and created an environment in which top management became divorced from reality. The obsessive focus on driving the share price obscured the lack of basic controls and benchmarks and the progressive dishonesty in generating revenue and earnings figures in order to deceive the stock market led to the management deceiving themselves about the true situation.

Right up to nearly the end, Enron complied with all its regulatory requirements. The failings in these regulations led directly to Sarbanes-Oxley. But all the extra reporting in SarBox didn’t prevent the global financial meltdown in 2008 as the banks gamed the regulatory system. Now we have Dodd-Frank. What we actually need is independent Corporate Governance surveys.

If you found this summary useful, you may be interested in our full ebook :

• 52 pages of detailed analysis of the  Enron scandal
• An annotated walk-through of the history and ethics of the company
• Detailed explanations of the governance failures leading to the scandal
• Guidance for students of corporate governance
• Annexe with lessons for setting up stakeholder research 

You will also get a FREE version of our rating tool to adjust the scores according to your own assessment of the information presented in the full Enron Case Study.

If you have any comments or experience of Enron, please leave a contribution using the comments feature at the bottom of this page.

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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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Enron Case Study Answers: A Classic Corporate Governance Case

Looking for Enron Case Study Anslysis Report? Get Answers Enron Case Study Answers : A Classic Corporate Governance Case– 2000 Words – This Enron case study presents our own analysis of the spectacular rise and fall of Enron. The Case Analysis of the Scandal of Enron. Get accomplished critical Case Study Assignment Help with financial, Corporate Financial Report, Analysis, Report, checklist within significant Enron Case Study Report writing .

The merger of Houston Natural Gas and InterNorth in 1985 created a new Texas energy company called Enron. In 1989, Enron began trading in commodities—buying and selling wholesale contracts in energy. By 2000, turnover was growing at a fantastic rate, from US$40 billion in 1999 to US$101 billion in 2000, with the increased revenues coming from the broking of energy commodities. The rapid rate of growth suggested a dynamic company and Enron’s share price rocketed. Top executives reaped large rewards from their share options. The company’s bankers, who received substantial fees from the company, also employed analysts who encouraged others to invest in Enron. But the cash flow statement included an unusual item: ‘other operating activities $1.1 billion’. The accounts for 2000 were the last Enron was to publish.

  Case Study Answers on Enron: A Classic Corporate Governance Case

The chief executive of Enron, Jeffrey Skilling, believed that old asset-based businesses would be dominated by trading enterprises such as Enron  making markets for their output. Enron was credited with ‘aggressive earnings management’. To support its growth, hundreds of special purpose entities (SPEs) were created. These were separate partnerships that traded with Enron, with names such as Cayman, Condor and Raptor, Jedi and Chewco, often based in tax havens. Enron marked long-term energy supply contracts with these SPEs at market prices, taking the profit in its own accounts immediately. The SPEs also provided lucrative fees for Enron top executives. Further, they gave the appearance that Enron had hedged its financial exposures with third parties, whereas the third parties were, in fact, contingent liabilities on Enron. The contemporary American GAAP did not require such SPEs to be consolidated with partners’ group accounts, so billions of dollars were kept off Enron’s balance sheet.

In 2000, Enron had US$100 billion in annual revenues and was valued by the stock market at nearly US$80 billion. It was ranked seventh in Fortune’s list  of the largest US firms. Enron then had three principal divisions, with over 3,500 subsidiaries: Enron Global Services, owning physical assets such as power stations and pipelines; Enron Energy Services, providing management and outsourcing services; and Enron Wholesale Services, the commodities and trading business. Enron was the largest trader in the energy market created by the deregulation of energy in the USA.

Case Study Analysis Answers on Enron: A Classic Corporate Governance Case

The company had many admirers. As the authors of the book The War for Talent (Harvard Business School Press, 2001) wrote, ‘few companies will be able to achieve the excitement extravaganza that Enron has in its remarkable business transformation, but many could apply some of the principles’.

Enron’s auditor was Arthur Andersen, whose audit and  consultancy  fees from Enron were running around US$52 million a year. Enron also employed several former Andersen partners as senior financial executives. In February 2001, partners of Andersen discussed dropping their client because of Enron’s accounting policies, including accounting for the SPEs and the apparent conflicts of interest of Enron’s chief financial officer, Andrew  Fastow, who had set up and was benefiting from the SPEs.

In August 2001, Skilling resigned ‘for personal reasons’. Kenneth Lay, the chairman, took over executive control. Lay was a close friend of US  President George W. Bush and was his adviser on energy matters. His name had been mentioned as a future US Energy Secretary. In 2000, Lay made £123 million from the exercise of share options in Enron.

A week after Skilling resigned, Chung Wu, a broker with UBS Paine Webber US (a subsidiary of Swiss bank UBS), emailed his clients advising them to sell Enron. He was sacked and escorted out of his office. The same day Lay sold US$4 million worth of his own Enron shares, while telling employees of the high priority he placed on restoring investor confidence, which ‘should result in a higher share price’. Other UBS analysts were still recommending a ‘strong buy’ on Enron. UBS Paine Webber received substantial brokerage fees from administering the Enron employee stock option programme. Lord Wakeham, a former UK cabinet minister, was a director of Enron and chair of its nominating committee. Wakeham, who was also a chartered accountant and chair of the British Press Complaints Council, was paid an annual consultancy fee of US$50,000 by Enron, plus a US$4,600 monthly retainer and US$1,250 attendance fee for each meeting.

A warning about the company’s accounting techniques was given to Lay in mid-2001 by Sherron Watkins, an Enron executive, who wrote: ‘I am nervous that we will implode in a wave of accounting scandals.’17 She also advised Andersen of potential problems. In October 2001, a crisis developed, when the company revised its earlier financial statements revealing massive losses attributable to hedging risks taken as energy prices fell, which had wiped out US$600 million of profits. A SEC investigation into this restatement of profits for the past five years revealed massive, complex derivative positions and the transactions between Enron and the SPEs. Debts were understated by US$2.6 billion. Fastow was alleged to have received more than US$30  million for his management of the partnerships. Eventually, he was indicted on 78 counts involving the complex financial schemes that produced  phantom profits, enriched him, and doomed the company.  He claimed that  he did not believe he had committed any crimes.

The FBI began an investigation into possible fraud at Enron three months later, by which time files had been shredded. In a subsequent criminal trial, Andersen was found guilty of destroying key documents, as part of an effort to impede an official inquiry into the energy company’s collapse. Lawsuits against Andersen followed. The Enron employees’ pension fund sued for US$1 billion, plus the return of US$1 million per week fees, seeing the firm  as its best chance of recovering some of the US$80 billion lost in the Enron debacle. Many Enron employees held their retirement plans in Enron stock: some had lost their entire retirement savings. The US Labor Department alleged that Enron had illegally prohibited employees from selling company stock in their ‘401k’ retirement plans as the share price fell. The Andersen firm subsequently collapsed, with partners around the  world  joining other ‘Big Four’ firms.

In November 2001, Fastow was fired. Standard and Poor’s, the credit-rating agency, downgraded Enron stock to junk bond status, triggering interest rate penalties and other clauses. Merger negotiations with Dynergy, which might have saved Enron, failed.

Enron filed for Chapter 11 bankruptcy in December 2001. This was the largest corporate collapse in US history up until then: Worldcom was to exceed it. The NYSE suspended Enron shares. John Clifford Baxter, a vice- chair of Enron until his resignation in May 2001, was found shot dead. He  had been one of the first to see the problems at Enron and had heated arguments about the accounting for off-balance-sheet financing, which he found unacceptable. Two outside directors, Herbert Weinokur and Robert Jaedicke, members of the Enron audit committee, claimed that the board either was not informed or was deceived about deals involving the SPEs.

Early in 2002, Duncan, the former lead partner on Enron’s audit, who had allegedly shredded Enron files and been fired by Andersen, cooperated with the Justice Department’s criminal indictment, becoming a whistle blower and pleading guilty to charges that he had ‘knowingly, intentionally and corruptly persuade[d] and attempt[ed] to persuade Andersen partners and employees to shred documents’.

Why did it happen? Three fundamental reasons can be suggested: Enron switched strategy from energy supplier to energy trader, effectively becoming a financial institution with an increased risk profile; Enron’s financial strategy hid corporate debt and exaggerated performance; US accounting standards permitted the off-balance-sheet treatment of the SPEs.

Enron Case study

What are the implications of the Enron case? First, important questions are raised about corporate governance in the United States, including the roles

of the CEO and board of directors, and the issue of duality;  the independence of outside, non-executive directors; the functions and membership of the audit committee; and the oversight role of institutional shareholders. Second, issues of regulation in American financial markets arise, including the regulation of industrial companies with financial trading arms like Enron, the responsibilities of the independent  credit-rating agencies, the regulation of US pension funds, and the effect on capital markets worldwide. Third, there are implications for accounting standards, particularly the accounting for off-balance-sheet SPEs, the regulation of the US accounting profession, and the convergence of US GAAP with international accounting standards. Last, auditing issues include auditor independence, auditors’ right to undertake non-audit work for audit clients, the rotation of audit partners, audit firms or government involvement in audit, and the need for a cooling-off period before an auditor joins the staff of a client company.

Some British banks were caught in the Enron net. Andrew Fastow, the former CFO, produced an insider account of how the banks had helped to prop up the house of cards. Three British bankers were extradited to the  United States to stand trial, under legislation designed to repatriate terrorists.

Jeffrey Skilling, the former CEO, was sentenced to 24 years’ prison and to pay US$45 million restitution in October 2006. Claiming innocence, he appealed. Kenneth Lay (aged 64) was also found guilty, but died of a heart attack in July 2006, protesting his innocence and believing he would be exonerated.

Although Enron collapsed with such dramatic results, international corporate governance guidelines had in fact been followed, with a separate chair and CEO, an audit committee chaired by a leading independent accounting academic, and a raft of eminent independent non-executive directors. However, the subsequent collapse owes more to abuse of their power by top managers and their ambivalent attitudes towards honest and balanced corporate governance.

• Should a company’s bankers, who receive substantial fees from that company, also employ analysts who encourage investment in that company?
• Enron’s external auditor, Arthur Andersen, earned substantial consultancy fees from the company as well as the audit fee. Enron also employed several former Andersen partners as senior financial executives. Could the external auditors really be considered independent?

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Founding of Enron and its rise

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• Harvard Law School Forum on Corporate Governance - Twenty Years Later: The Lasting Lessons of Enron
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The Enron scandal was a series of events involving dubious accounting practices that resulted in the 2001 bankruptcy of the energy, commodities, and services company Enron Corporation and the subsequent dissolution of the accounting firm Arthur Andersen . The collapse of Enron, which held more than $60 billion in assets, involved one of the biggest bankruptcy filings in the history of the United States.

The Enron scandal resulted in a wave of new regulations and legislation designed to increase the accuracy of financial reporting for publicly traded companies. The Sarbanes-Oxley Act (2002) imposed harsh penalties for destroying, altering, or fabricating financial records. The act also prohibited auditing firms from doing any concurrent consulting business for the same clients.

Enron scandal , series of events that resulted in the bankruptcy of the U.S. energy , commodities , and services company Enron Corporation in 2001 and the dissolution of Arthur Andersen LLP , which had been one of the largest auditing and accounting companies in the world. The collapse of Enron, which held more than $60 billion in assets, involved one of the biggest bankruptcy filings in the history of the United States , and it generated much debate as well as legislation designed to improve accounting standards and practices, with long-lasting repercussions in the financial world.

Enron was founded in 1985 by Kenneth Lay in the merger of two natural-gas -transmission companies, Houston Natural Gas Corporation and InterNorth, Inc.; the merged company, HNG InterNorth, was renamed Enron in 1986. After the U.S. Congress adopted a series of laws to deregulate the sale of natural gas in the early 1990s, the company lost its exclusive right to operate its pipelines. With the help of Jeffrey Skilling, who was initially a consultant and later became the company’s chief operating officer, Enron transformed itself into a trader of energy derivative contracts, acting as an intermediary between natural-gas producers and their customers. The trades allowed the producers to mitigate the risk of energy-price fluctuations by fixing the selling price of their products through a contract negotiated by Enron for a fee. Under Skilling’s leadership, Enron soon dominated the market for natural-gas contracts, and the company started to generate huge profits on its trades.

Skilling also gradually changed the culture of the company to emphasize aggressive trading. He hired top candidates from MBA programs around the country and created an intensely competitive environment within the company, in which the focus was increasingly on closing as many cash-generating trades as possible in the shortest amount of time. One of his brightest recruits was Andrew Fastow , who quickly rose through the ranks to become Enron’s chief financial officer. Fastow oversaw the financing of the company through investments in increasingly complex instruments, while Skilling oversaw the building of its vast trading operation.

The bull market of the 1990s helped to fuel Enron’s ambitions and contributed to its rapid growth. There were deals to be made everywhere, and the company was ready to create a market for anything that anyone was willing to trade. It thus traded derivative contracts for a wide variety of commodities—including electricity, coal, paper, and steel—and even for the weather. An online trading division, Enron Online, was launched during the dot-com boom , and by 2001 it was executing online trades worth about $2.5 billion a day. Enron also invested in building a broadband telecommunications network to facilitate high-speed trading.

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The Fall of Enron

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Paul M. Healy

Krishna G. Palepu

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Enron Case Study

            Seven years after the fact, the story of the meteoric rise and subsequent fall of the Enron Corporation continues to capture the imagination of the general public. What really happened with Enron?  Outside of those associated with the corporate world, either through business or education, relatively few people seem to have a complete sense of the myriad people, places, and events making up the sixteen years of Enron’s existence as an American energy company. 

Some argue Enron’s record-breaking bankruptcy and eventual demise was the result of a lack of ethical corporate behavior attributed, more generally, to capitalism’s inability to check the unmitigated growth of corporate greed.  Others believe Enron’s collapse can be traced back to questionable accounting practices such as mark-to-market accounting and the utilization of Special Purpose Entities (SPE’s) to hide financial debt.  In other instances, people point toward Enron’s mismanagement of risk and overextension of capital resources, coupled with the stark philosophical differences in management that existed between company leaders, as the primary reasons why the company went bankrupt.  Yet, despite these various analyses of why things went wrong, the story of Enron’s rise and fall continues to mystify the general public as well as generate continued interest in what actually happened.

            The broad purpose of this paper is to investigate the Enron scandal from a variety perspectives.  The paper begins with a narrative of the rise and fall of Enron as the seventh largest company in the United States and the sixth largest energy company in the world.  The narrative examines the historical, economic, and political conditions that helped Enron to grow into one of the world’s dominant corporation’s in the natural gas, electricity, paper and pulp, and communications markets.  Upon providing the substantive narrative of Enron’s rise and fall, the paper continues with an explanation of what went wrong based on two frameworks provided by leadership and ethical theory.  From the leadership framework, both trait and transformational leadership theories have been identified as the appropriate analytical tools for examining Enron’s culture whereas the two ethical systems of egoism and mixed deontology provide the philosophical foundations for analyzing the Enron matter from an ethical perspective. 

            The third and final part of the paper examines the policy responses to the Enron scandal.  After providing an overview of the Sarbanes-Oxley (SOX) legislation, the policy theories associated with the work of Frank Baumgartner and Bryan Jones (punctuated equilibrium) and Murray Edelman (symbolic politics) will be applied in order to gain a better understanding of Congress’ policy response to the Enron matter.  It is hoped that via the application of these two policy theories, future policy makers will gain a better appreciation for how and why policy is created as well as the overall effect policy has on governance issues within the private and public sectors. 

Background Narrative

The Rise of Enron

Enron Corporation was born in the middle of a recession in 1985, when Kenneth Lay, then-CEO of Houston Natural Gas Company (HNG), engineered a merger with Internorth Incorporated (Free, Macintosh, Stein, 2007, p. 2).  Within six months of the merger, the CEO of Internorth Inc., Samuel Segner, resigned leaving Lay as the CEO of the newly formed company.  Shortly thereafter, HNG/Internorth was renamed Enteron, a name which was later shortened to Enron in 1986.  The new company, which reported a first year loss of over $14 million, was made up of $12.1 billion in assets, 15,000 employees, the country’s second-largest gas pipeline network, and an enormous amount of debt (p. 2). 

In the initial years, Enron attempted to function as a traditional natural gas firm situated in a competitive, yet regulated energy economy (Free, Macintosh, Stein, 2007, p. 2).  Due to its tremendous debt and early losses on oil futures, however, the company had to fight off a hostile takeover and its stock did little to impress to the traders on Wall Street (p. 2).  Fortunately for Enron, things began to change in American governmental policy with respect to the way the natural gas industry operated.  At the core of Enron’s historical rise to power, lies the concept of policy-driven, market deregulation.  

In the mid-to-late 1980’s, the natural gas market was deregulated through a series of federal policies, most notably Federal Energy Regulatory Commission (FERC) Order No. 436, the Natural Gas Wellhead Decontrol Act of 1989 (NBGWDA), and FERC Order No. 636 of 1992.  Each of these policies was designed to eliminate the regulatory constraints by the federal government on the natural gas market, largely, to help avoid a repeat of the tough economic issues resulting from the 1970’s energy crisis (“The History of Regulation,” 2004).  Enron capitalized on the governmental deregulation of the natural gas market by providing consumers with greater access to natural gas via their nationwide pipeline system.  Due to deregulation, as supplies increased and the price for natural gas fell by over 50 percent from 1985 to 1991, Enron was able to charge other firms for using their pipelines to transport gas.  Likewise, Enron was also able to transport gas through other companies’ pipelines (Culp and Hanke, 2003, p. 8).

Around this time, Jeffrey Skilling, an up and comer working for the consulting firm McKinsey and Company, began working with Enron.  Beginning in 1987, Skilling started his work in creating a forward market for Enron in the deregulated natural gas sector.  To help create this market, Skilling argued that Enron needed to set up a “gasbank” to help intermediate gas purchases, sales, and deliveries (Culp and Hanke, p. 8).  Skilling’s major selling point to Enron CEO Kenneth Lay was that in an era of post deregulation, customers needed risk management solutions in the form of a natural gas derivatives market or, a place where consumers could purchase forward contracts to help alleviate price volatility commonly found in the natural gas industry. 

In this regard, Skilling was, according to Culp and Hanke (2003), “…functioning as a classic entrepreneur.  Skilling spotted an opportunity to develop new markets.  By introducing forward markets, individuals could acquire information and knowledge about the future and express their own expectations by either buying or selling forward (p. 8).”  Lay eventually went for Skilling’s concept of the gasbank and the Enron GasBank was established (McLean and Elkind, 2003, pp. 35-37).

From an economic perspective, Enron was the market maker for natural gas derivatives in the political era of deregulation of the late 1980’s and early 1990’s.  Through their GasBank, Enron was able to both buy and sell natural gas derivatives and effectively became, “the primary supplier of liquidity to the market, earning the spread between bid and offer prices as a fee for providing the market with liquidity” (Culp and Hanke, p. 9).  The fact that Enron also had physical assets in the form of natural gas pipelines further leveraged their position in this new market and helped to control some of the residual price risks arising from its market making operations, otherwise known as Enron Gas Services (EGS) and later Enron Capital and Trade Resources (EC&TR).  Risk management solutions were provided to customers, in part, via Enron’s knowledge of congestion points that were likely to impact supply and demand within the physical system of gas pipelines.  This allowed Enron to trade around congestion points and helped them to exploit their knowledge of the surplus or deficit in pipeline capacity.  All of this was accomplished within a financial market based on futures trading that Skilling had helped to create through his application of the gasbank concept as Enron’s market wholesaler (Culp and Hanke, p. 10). 

During the 1990’s, Enron began to delve into other aspects of the energy market such as electricity, coal, and fossil fuels in addition to pulp and paper production.  They did so by utilizing what Skilling described as an “asset light” philosophy (Culp and Hanke, 2003, p. 10-11).  According to the asset light strategy, Enron would,

Begin with a relatively small capital expenditure that was used to acquire portions of assets and establish a presence in the physical market.  This allowed Enron to learn the operational features of the market and to collect information about factors that might affect market price dynamics.  Then, Enron would create a new financial market overlaid on that underlying physical market presence-a market in which Enron would act as market maker and liquidity supplier to meet other firm’s risk management needs” (p. 11).

Based on this strategy of financial trading activity overlay, as well as the measured, disciplined leadership provided by Enron’s then-President and Chief Operating Officer (COO) Richard Kinder, Enron Corporation was able to position itself as a dominant energy company in the United States and one of major energy players in the world by the mid-1990’s.  An example of Enron’s innovative approach to the energy business was their development of the hugely successful Teesside power plant in England, pushed through by former Enron employee John Wing in 1992-93.  Throughout its history, however, Enron’s consistent financial and market successes, like Teesside, took place only in the energy sector or, a sector in which they held considerable physical assets.  Although Enron attempted on numerous occasions to repeat their financial successes in other markets such as water and broadband, they were never able establish the comparative advantage they initially held in the deregulated, natural gas sector (Culp and Hanke, p. 12).

Political Connections

Once established as a major player in the natural gas market, Enron began utilizing its resources to exert its influence on U.S. political processes.  For example, Kenneth Lay was one of George W. Bush’s key backers during Bush’s early political career as the Governor of Texas and this connection continued up through, and beyond, the younger Bush’s run for the presidency in 2000.  (Hunnicutt, 2007, p. 5).  Lay’s connection to Bush’s presidential campaign came in the form of significant campaign donations both to Bush, $113,800, and the Republican Party, $1.2 million in 2000 (Gutman, 2002, pp.1-2).  According to Hunnicutt, “Lay, after all, was for a long time one of Bush’s most important political supporters” (p. 2). 

The Bush administration responded to Lay’s financial support by placing former Enron executives in posts within the federal government (Gutman, p. 5).  Lay, himself, was given veto power over the important position of chairman of the FERC as well as a prominent position within the highly secretive, Cheney-led Energy Task Force early on in the Bush presidency (p. 5).  When, for example, it became apparent that Lay did not agree with the chairman of the FERC on key energy issues directly impacting Enron, Lay asked that the chairman change his views or run the risk of being replaced.  Needless to say, when the chairman’s term expired, he was not reappointed.  Lay then provided a short list of new appointees for the FERC to President Bush.  Two of Lay’s choices were appointed after Mr. Lay recommended them to Vice-President Cheney.  One of them, Pat Wood, was appointed to the post of chairman of the FERC on September 1, 2001, a position he held until his resignation in 2005 (Gutman, 2002, p. 2). 

Enron’s political machinations were not, however, limited to President Bush and the Republican Party.  Apparently, during the Clinton administration of 1992-2000, under which Enron flourished considerably, Enron contributed funds to the Democratic Party in excess of $500,000 in addition to one time contributions of $100,000 and $25,000, respectively, to the 1993 Clinton inauguration and celebration (Smith, 2002).  The Clinton administration responded to Enron’s lobbying presence by supporting the deregulation of electricity at the federal level as evidenced by the U.S. Department of Energy’s failed deregulation bill of the mid-1990’s.  Some states, like California, bowed to the political pressure created via Enron’s lobbying presence in their state legislature and eventually chose to deregulate, at least partially, their publicly held electric utilities (Hauter and Slocum, 2001).  The disastrous consequences of this action, including Enron’s involvement in the, “gaming of the California system,” which led to the Western Energy Crisis of 2000 and 2001, have been well documented (McLean and Elkind, 2003, pp.271-83).

A second response to Enron’s support of the Clinton administration can be found in a trip made to India in 1995 by then-U.S. Secretary of Commerce Ron Brown and Ken Lay.  The two men traveled to India to oversee the signing of the loan agreement by the Dabhol Power Company with the U.S. Export-Import Bank and the “independent” U.S. government agency, Overseas Private Investment Corporation (OPIC).  Later in 1995, when the $3 billion Dabhol project was in jeopardy due to local political opposition, then-U.S. Energy Secretary, Hazel O’Leary issued a warning to India that any actions in opposition to the Enron backed project would discourage future foreign investment.  According to Emad Mekay of the India Resource Center (2003), Enron, “…regularly and aggressively called on staff from the Treasury, the State Department, the Office of the U.S. Trade Representative, and the World Bank to meet with foreign officials to favorably resolve its problems and disputes with their governments” (p. 1).  In the end, the Dabhol Project turned out to be a financial disaster, both for Enron and the Indian Maharashtra state in which it was located (McLean and Elkind, 2003, pp. 79-83). 

This, however, did little to deter Enron and its political game playing as evidenced by the continual lobbying pressure they placed on U.S. government officials to arrange deals and help settle international disputes between Enron and nations like Turkey, Argentina, and Brazil (Mekay, pp. 1-2).  Regarding Enron’s connection to the federal government, Tyson Slocum, a research director with Public Citizen, a U.S.-based consumer group, stated (2003), “Enron, for its size, flexed an enormous amount of political muscle…Enron used its money and connections to distort government policies in a way that gave it free rein to cheat consumers (pp. 1-2).  

The Fall of Enron

            In a way, Enron went bankrupt for the same general reason that all companies go bankrupt: they invested in projects that proved too risky and, in turn, they were unable to keep up with the debt obligations of the firm (Niskanen, 2005, p. 2).  This does little, however, to explain the specific reasons why Enron became the largest company to file for bankruptcy in U.S. history.  Although many will point to Enron’s abuse of accounting and disclosure policies such as mark-to-market accounting, utilization of SPE’s to hide debt, and using inadequately capitalized subsidiaries and SPE’s for “hedges” to reduce earnings volatility as the primary causes for bankruptcy, these abuses were merely symptomatic of a larger problem at Enron: identity crisis.  What eventually brought Enron to its knees was the incompatibility of two competing ideological systems relating to how Enron was to operate as a company and make its money. 

            Prior to the resignation of Richard Kinder in 1996, Enron’s President and COO, a contentious struggle for control was taking place within the upper tier of management at Enron.  Two individuals with vastly different leadership styles and management strategies were competing for Ken Lay’s favor as his number two person in the company.  These two charismatic leaders at Enron were Jeffrey Skilling and Rebecca Mark.  Each employed a different strategy for doing business.  Skilling was a proponent of the asset light strategy discussed earlier.  Mark, on the other hand, was a firm believer in the philosophy of asset rich, or heavy, infrastructure development in areas such as energy, water, and telecommunications. 

As President of Enron International (EI), Mark pursued a business strategy that involved the acquisition or development of capital-intensive and high-debt projects such as the Dabhol Power Plant (Niskanen, 2005, p. 3).  As Enron’s primary deal-maker for major power plants and water companies, she believed that projects could be developed on the basis of their own merit and that the return on an investment was a long-term process that needed to be cultivated and realized over time.  In effect, Mark’s philosophy was the antithesis of Skilling’s asset light “make money now” strategy which involved financial trading activity overlaying a minimal physical asset base in a deregulated market.  

            The conflict between Mark and Skilling became more apparent after Kinder’s resignation in 1996.  In 1997, Lay announced that Skilling was replacing Kinder as the President and COO at Enron.  This did little to quell the competitive atmosphere that had developed at Enron between Mark’s EI and Skilling’s EGS and EC&TR.  Mark continued to advance her position and asset rich strategy within the company, investing heavily in overseas projects like the Dabhol Plant in India and the Azurix operations in Argentina, Canada, and Britain.  Unfortunately for Mark, however, many of these projects never resulted in the accrual of long-term profits for Enron.  While Mark and her employees at EI were reaping millions of dollars worth of compensatory benefits from developing these deals, seemingly one after the other, few were aware of how heavily these failed overseas projects were indebting the company.  According to the former CEO of a major oil company, “The failure of Enron before all the accounting scandals can be seen in the results overseas” (McLean and Elkind, p. 71). 

            In the final analysis of the fall of Enron, one may pinpoint the ideological friction between Skilling and Mark and the identity crisis that ensued, in addition to the resignation of Rich Kinder whose obsession with the levels of cash flow at Enron had helped to keep the company in the black during the early-to-mid 1990’s, as central reasons why Enron went bankrupt (Niskanen, p. 3).  Skilling’s asset light model required that Enron maintain sufficient equity capital and borrowing capacity to cushion the intermittent loss of cash flow from its trading activities (p. 3).  Initially, Skilling’s market maker, the GasBank, did quite well.  Over time, however, the wholesale markets for natural gas and electricity became more competitive making it increasingly difficult for Enron Financial to post additional quarterly earnings and continue gaining Wall Street’s favor as a blue-chip stock (p. 3).  As the margin for error decreased within Skilling’s asset light model, due in large part to increased market competition, the asset rich model employed by Mark, as has been demonstrated, was taking on heavy losses at the international level with failed investments in water, power plants, and broadband. 

As if an identity crisis at Enron weren’t already enough, high level managers in both Mark’s and Skilling’s camps were taking advantage of huge compensation packages for having completed deals and demonstrated quarterly earnings through, in many instances, questionable trading and accounting measures such as mark-to-market accounting and the use of SPE’s.  The compensation structure at Enron fostered a culture of narcissism that rewarded individuals such as Chief Financial Officer (CFO) Andrew Fastow for creating illegal schemes like Chewco to hide Enron’s mounting debt and, ironically, provided generous kickbacks for doing so.  Coupled with the problems arising from Mark’s and Skilling’s infighting over which business/economic model to follow, the accounting scandals that publicly emerged in 2001 were enough to finally bring Enron to its knees.  In the following paragraphs, the paper will take a look at how and why Enron’s organizational culture developed and what went wrong from variety of leadership and ethical perspectives.  In total, four theories will be explained and applied as the lenses in which to more completely examine the leadership that fostered the culture at Enron.

Leadership and Ethical Theories

Trait and Transformational Theories of Leadership

            This portion of the paper focuses on two specific leadership theories that help to explain how and why the Enron culture developed.  Those two theories are trait theory and transformational theory.  To begin, the trait theory approach to leadership was one of the first attempts by 20 th century scholars to identify the qualities that made up leadership.  It was initially known as the “great man theory” due to the fact that many studies focused on the universal qualities or characteristics that made leaders great in social, political, and military arenas (Northhouse, 2004, p. 15). 

            By the mid-20 th century, however, researcher and scholar, R.M. Stogdill, began questioning the universality of leadership traits.  What Stogdill found was that leadership changed depending on the situations encountered by leaders and followers.  In Stogdill’s model of leadership, personal factors or leadership traits enmeshed with social situations and group member behaviors to create an emergent sort of leadership that took on socially constructed meaning.  The core idea within this model was that leadership was not a passive process but an active one involving leaders and group members working together in a variety of co-determinous situations. 

What Stogdill and other researchers later discovered was that there were five major leadership traits that emerged from socially constructed situations encountered by leaders and group members.  The five traits identified were: intelligence, self-confidence, determination, integrity, and sociability (Northouse, p. 19).  In this model, each of the five traits worked together to help provide effective leadership.  When all five traits were present and effectively functioning there was a balance between the individual leader and the situational factors needed to both influence group member behavior and develop a healthy organizational culture.  If, however, one or more of the traits was significantly lacking in the leader, problems could then arise in the construction of the situationally based social exchanges between the leader and the group members impacting, in a negative manner, the development of organizational culture.

In looking at the leadership that developed at Enron, one can see how the absence of a key trait like integrity negatively impacted the development of the organization’s culture.  According to Northouse (2004), integrity is an important leadership trait for it involves, 

…the quality of honesty and trustworthiness.  Individuals who adhere to a strong set of principles and take responsibility for their actions are exhibiting integrity.  Leaders with integrity inspire confidence in others because they can be trusted to do what they say they are going to do.  They are loyal, dependable, and not deceptive.  Basically, integrity makes a leader believable and worthy of our trust (p. 20). 

Integrity was not a trait frequently exhibited by many of the executive leaders within the culture at Enron.  Jeffrey Skilling, for example, was a supremely confident, intelligent, and determined leader.  His ability to provide a vision for the company was, by many accounts, amazing and inspiring.  Skilling’s leadership style was one that exemplified and encouraged creativity and risk-taking, especially as it related to the maximization of profit and Enron’s share value (Free, Macintosh, and Stein, 2007, p 5). 

In the case of Skilling’s leadership style, however, the maximization of profit was aggressively taken to such an extreme that the leadership trait of integrity became a non-factor within the culture at Enron.  This lack of integrity was a serious flaw within the organizational structure and culture of the company for while important group members, like Andrew Fastow, began encountering situations requiring the honest disclosure of financial information; few employees or group members were provided with the external motivation from Skilling’s leadership to tell the truth about Enron’s real financial situation.  Those individuals that did have the integrity to speak honestly about Enron’s financial losses were dismissed, demoted, or summarily fired by those in power in a process known in the Enron lexicon as “rank and yank” (Free, Macintosh, and Stein, 2007, p. 7).  The overall lack of integrity on the part of leadership helped to foster a “me-first” and “dog-eat-dog” attitude within the rank and file of Enron.  As time passed, those attitudes crystallized into cultural values and norms heavily influencing narcissistic patterns of behavior demonstrated, most vividly, by the cut throat environment of Enron’s financial trading floor.

Transformational theory is another perspective from which to view the development of Enron’s culture via its leadership.  According to Northouse (2004), transformational leadership is,

…a process that changes individuals.  It is concerned with emotions, values,

ethics, standards, and long-term goals, and includes assessing followers’ motives,

satisfying their needs, and treating them as full human beings.  Transformational

leadership involves an exceptional form of influence that moves followers to

accomplish more than what is usually expected of them.  It is a process that often

incorporates charismatic and visionary leadership (p. 169).

The term transformational leadership was coined by Downton in 1973 but the concept appeared, most significantly, in the work of political sociologist James MacGregor Burns and his book entitled Leadership (1978).  In the book, Burns identified two distinct types of leadership: transactional and transformational.  For Burns, transactional leadership represented the majority of leadership models and involved exchanges that occurred between leaders and their followers.  Transformational leadership, on the other hand, was a leadership process whereby the individual leader engaged with the follower in such a way as to create a connection that increased the motivation and morality in both leader and follower alike (Northouse, 2004, p. 170). 

            While many consider transformational leadership to be one of the most effective ways of influencing others to follow a given path in pursuit of a common goal, there are criticisms of the theory.  One weakness is that it is elitist and antidemocratic. In this interpretation of the theory, the transformational leader acts independently and places his or her needs above their followers’ needs, leading to less than participative decision making processes and, potentially, authoritarianism.  Another criticism is that the theory suffers from a “heroic leadership” bias.  In this instance, it is the leader who initiates all of the momentum influencing followers to do great things.  Rarely, if ever, do the followers have the opportunity to reciprocate this momentum and impact the leader in a genuine fashion.  A final, and likely the greatest, criticism of transformational leadership theory is its potential for abuse by leaders.  In the words of Northouse (2004), “Transformational leadership is concerned with changing people’s values and moving them to a new vision.  But who is to determine if the new directions are good and more affirming?  Who decides that a new vision is a better vision” (p. 187)?

            In terms of assessing the development of Enron’s culture, transformational leadership theory offers a unique perspective.  Clearly, Kenneth Lay, Jeffrey Skilling, and Rebecca Mark were transformational leaders at Enron.  They led the company to unprecedented heights that few believed could be achieved by a natural gas company.  Innovation, creativity, and risk-taking were all positive cultural values imbued in Enron’s workforce by its leaders.  Even as late as 1999, Enron was being hailed by Fortune magazine as, “American’s Most Innovative Company,” “No.1 in Quality of Management,” and Skilling as, “The #1 CEO in the USA” (Free, Macintosh, and Stein. 2007, p. 2).”  One must ask, however, for whose benefit and to what ends were Enron’s transformational leaders acting on behalf of?  Outside of Rich Kinder, how many of Enron’s brass really thought about the impact their short-term personal behaviors were having on the long-term health of the company and with it the lives and futures of thousands of company employees, shareholders, and U.S. energy consumers? 

Few will argue that Enron’s hierarchy of leadership abided by the kind of moral standard, other than making money as quickly as possible, that has become a central tenet of the transformational leadership model.  In this respect, the moral-less transformational leadership present in Enron’s organizational culture can be viewed as both an asset and a weakness for it was primarily through the charismatic personas of Lay, Skilling, and Mark that the company was driven to its greatest financial heights and deepest valleys.  At Enron, however, this morally absent form of transformational leadership became a double edged sword that eventually cut off executive leaders like Lay from the financial reality existing around them. This disconnect with reality, coupled with the general lack of integrity on the part of leadership, ultimately fed into a culture of narcissism; a culture that permeated throughout the entire organization. 

Ethical Theories of Leadership

            In the following paragraphs two ethical frameworks will be utilized to help explain what was missing in the leadership at Enron that allowed its particular culture to develop.  From an ethical perspective, one need look no further than the tradition of ethical egoism to help explain how and why a culture of narcissism emerged within Enron.  According to Pojman (2006), ethical egoism is loosely defined as, “the doctrine that it is morally right always to seek one’s own self-interest” (p. 81).  Within the broad parameters provided by that definition, Pojman argues that there are roughly four different types of ethical egoism: psychological egoism, personal egoism, individual egoism, and universal ethical egoism (pp. 81-82). 

Of the four kinds of egoism proposed by Pojman, universal ethical egoism most closely aligns itself with how Enron’s culture developed.  The theoretical basis for universal ethical egoism consists of, “a theory that everyone ought always to serve his or her own self-interest.  That is, everyone ought to do what will maximize one’s own expected utility or bring about one’s own happiness, even when it means harming others” (p. 87).  In order to become theoretically grounded, universal ethical egoism makes use of a sophisticated argument that consists of individuals giving up their short-term interests in pursuit of long-term ones.  At the core of the argument lies the concept that everyone is encouraged to seek their own self-interest, however, in order to do so, some compromises are necessary.  This type of rationalized self-interest forms the basis of the universality of ethical egoism and helps to conceptualize, at least from an egoist perspective, the basic foundations of Hobbesian liberty.

Remarkably, the leaders at Enron (i.e. Lay, Skilling, Mark, et. all) were all complicit in the propositioning of this inimitable form of ethical egoism.  They surmised that the short-term compromises promulgating the long-term development of self-interest within the company’s organizational culture were indeed derivative of ethical corporate behavior.  At Enron, the pursuit of rationalized self-interest was taken to such an extent that the concept of compromise, even at the expense of other ethical considerations like integrity, became nomenclature for how to do ethical business in a capitalistically based free market economy.  The effect of leadership’s validation of this type of business philosophy was the development of a narcissistic corporate culture.  In an article by Gini (2004), business ethicist and accountant John Dobson comments that in this way, “Ethical guidelines are viewed in the same way as legal or accounting rules: they are constraints to be, wherever possible, circumvented or just plain ignored in the pursuit of self-interest, or in the pursuit of the misconceived interests of the organization” (p. 2).

The overt application of the universal ethical egoistic framework subverted any attempts within Enron’s organizational structure to maintain other ethical principles or the integrity of accountability systems of management such as the Peer Review Committee (PRC).  Self-interest and ethical compromise provided the platform for Enron’s leaders and employees to justify behavior like the PRC’s policy of “rank and yank” that should not have been condoned.  As mentioned above, integrity was a non-factor and a complete missing link for leadership when it came to establishing a bottom line for subordinates, a bottom line based solely on profit maximization and performance increase in the market share value of the company.  Without an honest system of accountability or practiced standard of ethics in place within the leadership hierarchy at Enron, group members fell prey to a culturally reinforced mentality of serving their own rationalized self-interests at the expense of the overall health of the company and its shareholders.  

Another ethical perspective from which one may view the development of the culture at Enron is from the framework provided by mixed deontological ethics.  The architect of mixed deontology was the University of Michigan philosopher William Frankena.  In Frankena’s philosophical model, the opposing systems of teleology and deontology were reconciled through the principles of beneficence and justice (Pojman, 2006, p. 150).  According to the first principle, human beings were to strive to do good without demanding that there be a measurement or weight put on good and evil.  Frankena further provided four subprinciples arranged hierarchically to help explain the principle of beneficence:

• One ought not to inflict evil or harm.
• One ought to prevent evil or harm.
• One ought to remove evil.
• One ought to do or promote good. 

The second principle in Frankena’s system of mixed deontology is the principle of justice (Pojman, p. 150).  In the words of Pojman (2006), the principle of justice, “…involves treating every person with equal respect because that is what each is due…there is always a presumption of equal treatment, unless a  strong case can be made for overriding this principle” (p. 150).  Of the two fundamental principles, the principle of justice is considered a priori within the Frankenaian system.

            Although Frankena’s innovative approach provides fertile territory for the reconciliation of the competing systems of utilitarianism and deontological ethics, one major criticism of the theory rests with how one adjudicates between the two principles amidst a moral conflict or ethical dilemma.  In response to this criticism, Frankena offered an intuitive approach to resolving moral conflict and competition between the principles of beneficence and justice.  Pojman states (2006), “We need to use our intuition whenever the two rules conflict in such a way as to leave us undecided on whether beneficence should override justice” (p. 151). 

In the case of Enron and its cultural development as an organization it seems that the principles of beneficence and justice were neither in conflict nor markedly present despite the company’s robust motto of, “Respect, Integrity, Communication, and Excellence,” and vision and values statement of, “We treat others as we would like to be treated ourselves…We do not tolerate abusive or disrespectful treatment.  Ruthlessness, callousness and arrogance don’t belong here” (“Ruined by Enron”, 2002).  Enron’s leadership simply did not live out the ethics they claimed to have valued.  Not surprisingly, this disconnect between words and action developed into a major cultural problem for leadership within the organization.  In reference to ethical corporate leadership, Roger Leeds, the Director of the Center for International Business and Public Policy at the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University, states that,

These are the individuals who set the behavioral tone for their legions of employees…Their personal behavior ultimately defines the ethical culture for everyone in the company and they inflict untold damage when they fail to recognize the enormity of this responsibility (pp. 78-79). 

Overall, the ways in which Enron’s leaders responded to the kind of moral conflict alluded to in Frankena’s hybrid system of mixed deontological ethics helped to define the cultural atmosphere at Enron.  Considering the complete absence of the leadership trait of integrity in Skilling, the abuse of transformational and charismatic leadership by Lay and Mark, the overindulgence of rationalized self-interest and universal ethical egoism on the part of the traders, and the lack of either a utilitarian or a deontological system of practiced ethics at Arthur Anderson, it should come as no surprise that an organizational culture deeply rooted in narcissism developed at Enron. The corporate behavior engendered from this kind of cultural environment compromised the long term health of the company and eventually led to Enron’s demise.  In the following paragraphs the paper will examine the United States Congress’ policy response to the implosion of Enron as well as identify and apply two policy theories to help explain whether or not the legislative response in dealing with the development of this kind of corporate culture was effective. 

Policy Response

The Sarbanes-Oxley Act

            The Sarbanes-Oxley (SOX) legislation came into being on July 30 th of 2002 and brought about major changes to corporate governance and financial practice in the United States.  The Act was developed in response to a rash of corporate scandals involving companies like Enron, Tyco, and WorldCom and was named after the former U.S. Senator from Maryland, Paul Sarbanes, and the current U.S. Congressman from Ohio’s Fourth Congressional District, Michael Oxley.  In addition to creating the quasi-public agency, the Public Company Accounting Oversight Board (PCAOB), whose job it is to oversee, regulate, and inspect accounting firms in their roles as auditors of public companies, the SOX legislation established the creation of 10 other titles or sections addressing the oversight of all U.S. public company boards, management, and accounting firms (“The Sarbanes-Oxley Act Summary and Introduction,” 2006).  The 11 titles can be categorized as follows:

• Public Company Accounting Oversight Board (PCAOB)
• Auditor Independence
• Corporate Responsibility
• Enhanced Financial Disclosures
• Analyst Conflicts of Interest
• Commission Resources and Authority
• Studies and Reports
• Corporate and Criminal Fraud Accountability
• White Collar Crime Penalty Enhancement
• Corporate Tax Returns
• Corporate Fraud Accountability

Within these eleven titles, the most important sections in terms of compliance are sections: 302, 401, 404, 409, and 802 (“The Sarbanes-Oxley Compliance,” 2006).  Section 302 appears as a subsection to Title III of the SOX Act and deals specifically with the issue of Corporate Responsibility for Financial Reports.  Among the highlights of section 302 are certifications requiring that CEO’s and chief financial officers accurately disclose financial statements and fairly represent the financial condition and operations of the company on a quarterly basis in order to establish accountability.  Organizations are also prohibited from circumventing the certifications spelled out in section 302 by reincorporating or transferring their activities outside of the United States.  Furthermore, under section 302, there are criminal sanctions for intentional false certification (“Sarbanes-Oxley Section 302,” 2006). 

Section 401 appears within Title IV of the SOX Act and addresses the Disclosure of Periodic Reports.   A summary of this section reveals that, “Financial statements published by issuers are required to be accurate and presented in a manner that does not contain incorrect statements or admit to state material information” (“Sarbanes-Oxley Section 401,” 2006).  Also appearing in section 401 is language requiring that financial statements include all material off-balance sheet liabilities, obligations, or transactions.  Section 404 of the Sox legislation is also listed under Title IV of the Act and pertains to the Management Assessment of Internal Controls.  In summary, section 404 states that, “Issuers are required to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting” (“Sarbanes-Oxley Section 404,” 2006).  In section 409, the legislation clearly mentions that, “Issuers are required to disclose to the public, on an urgent basis, information on material changes in their financial condition or operations” (“Sarbanes-Oxley Section 409,” 2006).  The final section of major importance in terms of compliance with the SOX Act is section 802 appearing in Title VIII.  Section 802 addresses the issue of Criminal Penalties for Altering Documents and states,

This section imposes penalties of fines and/or up to 20 years imprisonment for altering, destroying, mutilating, concealing, falsifying records, documents or tangible objects with the intent to obstruct, impede or influence a legal investigation. This section also imposes penalties of fines and/or imprisonment up to 10 years on any accountant who knowingly and willfully violates the requirements of maintenance of all audit or review papers for a period of 5 years (“Sarbanes-Oxley Section 809,” 2006).

            Reviews of the SOX Act have been mixed.  Some believe that the changes made by the legislation were necessary and helped to address some of the accounting issues that surfaced out of the Enron, Tyco, and WorldCom scandals.  On the other hand, some legislators like Ron Paul have argued that SOX has been detrimental to U.S. firms and has placed many American companies at a competitive disadvantage with foreign firms.  The following paragraphs will analyze the SOX legislation from two perspectives provided by the policy theories of punctuated equilibrium and Edelman’s symbolic politics and political spectacle.

Punctuated Equilibrium

            One of the policy theories that may be utilized to help analyze the overall development of the SOX legislation is a social and political theory known as punctuated equilibrium.  Frank Baumgartner and Bryan Jones first presented punctuated equilibrium in 1993.  Baumgartner and Jones theorized that U.S. policy development was characterized by long periods of stability punctuated by large, but rare, changes due to societal or governmental shifts best described by a leptokurtic curve.  In this model, policy changes occur incrementally due to the bounded rationality of individual decision makers and the lack of institutional change most typically found in subgovernments.  Policy change, however, becomes punctuated or spiked when governments change in their political control or when large shifts in public opinion occur (Tyner, Krach, and Foth, p. 1).  Examples in American history of punctuations in policy development include the New Deal, the Great Society, and the Reagan Revolution (p. 2).

At the theoretical core of punctuated equilibrium are the dual components of stability and punctuation.  Policy stability exists for long periods of time when little or no attention is given to an issue.  In the stability model of policy formation, political issues become disaggregated into policy subsystems or iron triangles composed of Congress, interest groups, and bureaucratic agencies (p. 2).  Iron triangles help to stabilize the interests of various constituent groups and hegemonize power into the hands of the elite.  Punctuation, on the other hand, takes place in the development of policy when acute attention is directed at a particular issue.  Policy punctuation occurs when shifts to macropolitical considerations are made and serial attentiveness are given to specific problems or sets of issues.  Overall, serial attentiveness is the result of a variety of factors including the impact of the media, changes in the definition of the issue, or internal or external forces that help to focus attention on the problem.    

The SOX legislation is an excellent example of the kind of punctuation that can occur within Baumgartner and Jones’ social and political model for policy change.  In the case of the SOX Act, the iron triangle of legislators, special interest groups, and the Securities Exchange Commission (SEC) quickly responded with legislation to the instability created by external forces in the media and shifts in public opinion over the rash of corporate scandals that had taken place at companies like Enron, Tyco, and WorldCom.  In this way, the SOX legislation was a response from lawmakers to reestablish investor confidence in the United States’ securities markets.  A quote from President Bush further establishes the relevance of punctuated equilibrium as a theory describing policy change with, “This act includes the most far-reaching reforms of American business practice since the time of Franklin D. Roosevelt” (“Sarbanes-Oxley Act,” 2008).   

In the case of the Enron scandal, serial attentiveness via the media was directed at the issue of corporate malfeasance in such a way as to create a macropolitical shift in the public opinion of corporate America.  Investor’s simply did not trust the markets after having lost billions of dollars in market share value due to the collapse of Enron and others.  People watched on television, as thousands of people lost their jobs as well as their pensions at Enron while corporate leaders walked away with millions of dollars.  Additionally, the political image created by the media of CEO Kenneth Lay having supported President Bush’s presidential campaign also helped to focus attention on the issue of Enron’s corporate malfeasance and Lay’s close ties to the White House.  This media pressure, in effect, became one of the primary casual agents for Congress’ quick legislative response to Enron’s collapse and helps to explain how external factors swayed public opinion in such a manner as to elicit and justify major legislative reform in the area of corporate governance. 

Edelman’s Symbolic Politics and the  Political Spectacle

Another policy theory that helps to explain the legislative response to the fall of Enron is the political theory proposed by Murray Edelman.  Working within the framework provided by his seminal works entitled The Symbolic Uses of Politics (1964) and Constructing the Political Spectacle (1988) Edelman successfully crafted a unique theoretical position on how policy develops.  At the heart of Edelman’s theory is the concept that politics is a spectacle, reported by the media and witnessed by parts of the public.  With respect to this political spectacle, Edelman (1964) argues that, “It attracts attention because, as an ambiguous text, it becomes infused with meanings that reassure or threaten.  The construction of diverse meanings for described political events shapes support for causes and legitimizes value allocations” (p. 195). 

In Edelman’s policy theory, political reality is a construction of the media.  There are no facts, only constructs of what the media chooses to portray.  Additionally, people do not react rationally to media-related depictions of political events, leaders, and problems.  Rather, people respond emotionally to events and perceived problems on the basis of their feelings which constitute individual perspectives of phenomenon.  These individual perspectives are rooted in social situations that create condition-specific signifiers that evoke mutually constructed meanings and interpretations of subject-object relationships.  Edelman further argues that critical differences in: race, class, gender, language, ethics, morals, history, and culture are embedded in each social situation.  These differences are, in turn, polarized by power elites who then fortify existing political inequalities and perpetuate hegemonic ideologies (pp. 1-11).  The cumulative effect on policy formation is what Edelman (1988) describes as, “…a spectacle which varies with the social situations of the spectator and serves as a meaning machine: a generator of points of view and therefore of perceptions, anxieties, aspirations, and strategies” (p. 10).

Additionally, Edelman theorizes that taxonomy exists within the political spectacle for the construction and uses of social problems.  Of the 15 constructions and uses of social problems outlined by Edelman, two most closely parallel the development of Congress’ policy response to the Enron, Tyco, and WorldCom scandals.  First, Edelman argues for the construction of problems to justify solutions.  In this way, solutions, “…typically come first, chronologically and psychologically.  Those who favor a particular course of governmental action are likely to cast about for a widely feared problem to which to attach it in order to maximize its support” (Constructing the Political Spectacle, 1988, p. 22). 

With respect to the corporate scandals that occurred in the wake of Enron’s collapse, media attention focused heavily on the personal stories that emerged, ranging from investors who lost money to Enron employee’s who lost their jobs and pensions.  From an Edelmanian perspective, the media circus surrounding the fall of Enron provided an opportunity for legislators like Sarbanes and Oxley to push through their proposed legislation and do so with the broad support of public opinion.  Congress was able to establish support via appealing to the public’s ideological and moral concern’s regarding the scandals.  Interestingly enough, Edelman also theorizes that, “Actions justified as solutions to a problem of wide concern often bring consequences that are controversial” (p. 23).  This may be true in the case of the SOX Act as evidenced by the high levels of criticism the legislation has received in recent years due to unusually high costs for corporate compliance with the law. 

A second way that Edelman theorizes about the construction and uses of social problems is by way of the perpetuation of problems through policies to ameliorate them.  In reference to policy driven responses to social problems, Edelman states, “Proposals to solve chronic social dilemmas by changing the attitudes and the behavior of individuals are expressions of the same power structure that created the problems itself” (Constructing the Political Spectacle, 1988, p. 27).  Although Edelman’s perspective on this aspect of policy formation is highly pessimistic, one wonders to what extent the SOX Act was merely an ill-fated attempt by the iron triangle of Congress, interest groups, and the SEC to “fix” the symbolic image of corporate America by dictating to public corporations how they should behave in terms of governance, internal auditing, and public reporting.  It could be, from an Edelmanian viewpoint, another attempt by the constituent groups forming subgovernments to further hegemonize their control over the structural aspects of business practice thereby increasing the privatization of publicly held companies.  In the wake of the rising compliance costs associated with SOX, many companies have been forced to go private.   

In one article, Jeff Thomson, vice president of research and applications development for the Institute of Management Accountants in Montvale, said that Sarbanes-Oxley is “absolutely needed and well-intentioned,” but that “the implementation has been a disaster” (“Corporate America’s Criticism of Sarbanes-Oxley,” 2006).  Evidently, the lack of practical guidance in accounting standards has been an issue inhibiting the proper implementation of the legislation.  According to Thomson, this is resulting in, “tremendous economic costs to corporations, destroying shareholder value and impacting U.S. global competitiveness” (“Corporate America’s Criticism of Sarbanes-Oxley,” 2006).  Taken from this perspective, Edelman’s political spectacle has helped to create a policy that has not only failed to provide the appropriate policy solution but has intensified the acuity of the problem.  In fact, many companies have simply found loopholes in the legislation and have chosen, for example, to simply raise share prices to help offset the costs incurred by complying with the SOX Act.  Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, College Park, called Sarbanes-Oxley a “typical legislative response” from Congress following any kind of scandal.  He went on to say that, “Frankly, a CEO can walk away a billionaire if he can jack up the share price and that's a very bad way to do business.  The symptom has been addressed but not the disease” (Hopkins, 2006).  This would seem to support Edelman’s theory regarding the construction and uses of social problems as the perpetuation of problems through policies to ameliorate them.

In conclusion, one can see that a variety of perspectives can be applied to the Enron scandal.  Policy perspectives such as punctuated equilibrium and Edelman’s symbolic politics and constructing of the political spectacle help to frame the issue politically and symbolically.  Viewpoints such as mixed deontology and universal ethical egoism help to understand how the culture of narcissism at Enron developed from an ethical framework.  Trait and transformational theories help us to make sense of what went wrong at Enron from a leadership perspective.  Historical, economic, and political conditions aid in making sense of the situational factors contributing to the rise and fall of Enron.  In the end, there is no one answer why Enron became the largest bankruptcy in the United States history.  Perhaps, that is part of the reason why people continue to find the story so fascinating. 

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Home » Management Case Studies » Case Study: The Collapse of Enron

Case Study: The Collapse of Enron

Enron Corporation is an energy trading, natural gas, and electric utilities company located in Houston, Texas that had around 21,000 employees by mid-2001, before it went bankrupt. Its revenue in the year 2000 was more than $100 billion and named as “America’s most innovative companies for six consecutive years by Fortune. Enron was a company that was able to profit by providing the delivery of gas to utility companies and businesses at the fair value market price. Enron was listed as the seventh largest company in the United States and had the domination in the trading of communications, power, and weather securities. In 2002, the company used to be a member of the top 100 fortunes companies but later on after facing an accounting scandal, the company started to collapse. The scandal of Enron has been the largest corporate scandal in history, and has become emblematic of institutionalized and well-planned corporate fraud; the Enron scandal involves both illegal and unethical activities.

Enron has transformed its company from being an old economy company focusing on hard assets to a new economy firm focusing on a strategy of creating new markets HFV (Hypothetical Future value). Enron’s strategy to differentiate in the market was through reducing physical assets, keeping key assets (peak demand generators) and developing a core competence of risk arbitraging. With its core competency on risk management, managing the risk of commodities through purchasing electricity at a fixed price with suppliers and then sell electricity to customers with the new price, Enron was able to increase its profits, some thing Enron called M2M ( Marked to Market Accounting ).

Enron also parked some of its debt on the balance sheet of its SPVs and kept it hidden from analysts and investors. When the extent of its debt burden came to light, Enron’s credit rating fell and lenders demanded immediate payment in the sum of hundreds of millions of dollars in debt. It means that Enron’s decision makers saw the shuffling of debt rather as a timing issue and not as an ethical one. They maintained that the company was financially stable and that many of their emerging problems really were not too serious, even though they knew the truth and were making financial decisions to protect their personal gains.

Now the question is how Enron has collapsed? The collapse of Enron was the largest bankruptcy in the US history. The stock’s price dramatically collapsed from $80 per share to 30 cent per share. The collapse was mainly due to the management’s fraudulent practices. Enron lied about its profits and when the deception was unfolded, investors and creditors pull back their financial resources, which finally cause the company to face bankruptcy. Over expansion and excessive borrowings have also contributed to the company’s eventual demise. The finances were a disaster, this happens because of poor management and due to intentional deception and fraud. Poor management, we referred this as a systemic corporate governance failure.

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Hiding Loss With MTM

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Enron Scandal and Accounting Fraud: What Happened?

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Before its demise, Enron was a large energy, commodities, and services company based in Houston, Texas. Its collapse affected over 20,000 employees and shook Wall Street. At Enron’s peak, its shares were worth $90.75. When it declared bankruptcy on Dec. 2, 2001, shares traded at $0.26.

Key Takeaways

• Enron’s accounting method was revised from a traditional historical cost accounting method to a mark-to-market (MTM) accounting method in 1992.
• Enron used special-purpose vehicles to hide its debt and toxic assets from investors and creditors.
• The price of Enron’s shares went from $90.75 at its peak to $0.26 at bankruptcy.
• The company paid its creditors over $21.8 billion from 2004 to 2012.

Gregory Smith  / Contributor / Getty Images

Enron's History and Accounting Method

Enron was formed in 1985 following a merger between Houston Natural Gas and Omaha, Neb.-based InterNorth. Houston Natural Gas' chief executive officer (CEO) Kenneth Lay became Enron’s CEO and chair. Deregulation of the energy markets allowed companies to place bets on future prices, and Enron was poised to take advantage. In 1990, Lay created Enron Finance and appointed Jeffrey Skilling, to head the new corporation.  

Skilling transitioned Enron’s accounting from a traditional historical cost accounting method to a mark-to-market (MTM) accounting method, for which the company received official U.S. Securities and Exchange Commission (SEC) approval in 1992.

MTM measures the fair value of accounts that can change over time, such as assets and liabilities. MTM aims to provide a realistic appraisal of an institution’s or company’s current financial situation, and it is a legitimate and widely used practice. However, in some cases, the method can be manipulated, since MTM is not based on actual cost but on fair value , which is harder to pin down.

Enron's Investments

During the 1990s, the dotcom bubble was in full swing, and the Nasdaq hit 5,000. Most investors and regulators accepted spiking share prices as the new normal. Enron created EnronOnline in October 1999. It was an electronic trading website that focused on commodities. Enron was the counterparty to every transaction on EOL; it was either the buyer or the seller. Enron offered its reputation, credit, and expertise in the energy sector to entice trading partners.

In July 2000, Enron Broadband Services and Blockbuster partnered to enter the burgeoning video-on-demand market. The VOD market was a sensible pick, but Enron started logging expected earnings based on the estimated growth of the VOD market, which vastly inflated the numbers.

By mid-2000, EOL was executing nearly $350 billion in trades. When the dot-com bubble began to burst, Enron decided to build high-speed broadband telecom networks. When the recession hit in 2000, Enron had significant exposure to the most volatile parts of the market. As a result, many trusting investors and creditors found themselves on the losing end of a vanishing market capitalization .

Skilling hid the financial losses of the trading business and other operations using MTM accounting. This technique measures the value of a security based on its current market value instead of its book value.

The company would build an asset, such as a power plant, and immediately claim the projected profit on its books, even though it didn't reap positive returns. If the revenue from the power plant proved less than the projected amount, the company would transfer the asset to an off-the-books corporation instead of taking the loss. The loss would go unreported. This type of accounting enabled Enron to write off unprofitable activities without hurting its bottom line .

The MTM practice led to schemes designed to hide the losses and make the company appear profitable. To cope with the mounting liabilities, Andrew Fastow, chief financial officer (CFO) in 1998, developed a deliberate plan to show that the company was in sound financial shape even though many of its subsidiaries were losing money.

Enron orchestrated a scheme to use off-balance-sheet special purpose vehicles (SPVs), also known as special purpose entities (SPEs), to hide Enron’s debt and toxic assets from investors and creditors.

Enron would transfer some of its rapidly rising stock to the SPV in exchange for cash or a note. The SPV would subsequently use the stock to hedge an asset listed on Enron’s balance sheet. Enron would guarantee the SPV’s value to reduce apparent counterparty risk.

The SPVs were not illegal but differed from standard debt securitization in several significant—and potentially disastrous—ways. SPVs were capitalized entirely with Enron stock. This directly compromised the ability of the SPVs to hedge if Enron’s share prices fell. Enron also failed to reveal conflicts of interest. While Enron disclosed the SPVs’ existence to the investing public, it failed to adequately disclose the non-arm’s-length deals between the company and the SPVs.

In addition to CFO Andrew Fastow, a major player in the Enron scandal was Enron’s accounting firm, Arthur Andersen LLP, and partner David B. Duncan. As one of the five largest accounting firms in the United States at the time, Andersen had a reputation for high standards and quality risk management. Despite Enron’s poor accounting practices, Arthur Andersen approved Enron's corporate reports. By April 2001, many analysts questioned Enron’s earnings and transparency .

In 2001, Lay retired in February, turning over the CEO position to Skilling. In August 2001, Skilling resigned as CEO, citing personal reasons. Around the same time, analysts began to downgrade their rating for Enron’s stock, and the stock descended to a 52-week low of $39.95. By October 16, the company reported its first quarterly loss and closed its Raptor I SPV. This action caught the attention of the SEC.

A few days later, Enron changed pension plan administrators, essentially forbidding employees from selling their shares for at least 30 days. Shortly after, the SEC announced it was investigating Enron and the SPVs created by Fastow. Fastow was fired from the company that day. The company also restated earnings back to 1997. Enron had losses of $591 million and $690 million in debt by the end of 2000. Dynegy, a company that previously announced it would merge with Enron, backed out of the deal on November 28. By Dec. 2, 2001, Enron filed for bankruptcy.

$74 billion

The amount that shareholders lost in the four years leading up to Enron’s bankruptcy.

Enron's Bankruptcy and Criminal Charges

Enron’s Plan of Reorganization was approved by the U.S. Bankruptcy Court, and the new board of directors changed Enron’s name to Enron Creditors Recovery. The company’s new sole mission was “to reorganize and liquidate certain of the operations and assets of the pre-bankruptcy Enron for the benefit of creditors.” The company paid its creditors over $21.8 billion from 2004 to 2012. Its last payout was in May 2011.

• In June 2002, Arthur Andersen LLP was found guilty of obstructing justice for shredding Enron’s financial documents. The conviction was overturned later on appeal but the firm was deeply disgraced by the scandal and dwindled into a holding company .
• Kenneth Lay, Enron’s founder, and former CEO was convicted on six counts of fraud and conspiracy and four counts of bank fraud. Before sentencing, he died of a heart attack in Colorado.
• Enron’s former CFO, Andrew Fastow, pleaded guilty to two counts of  wire fraud  and securities fraud for facilitating Enron’s corrupt business practices. He ultimately cut a deal for cooperating with federal authorities, served more than five years in prison, and was released in 2011.
• Former CEO Jeffrey Skilling received the harshest sentence. He was convicted of conspiracy, fraud, and insider trading in 2006. Skilling received a 17½-year sentence which was reduced by 14 years in 2013. Skilling was required to give $42 million to the fraud victims to cease challenging his conviction. Skilling was released on Feb. 22, 2019.

Enron’s collapse and the financial havoc it wreaked on its shareholders and employees led to new regulations and legislation to promote the accuracy of financial reporting for publicly held companies. In July 2002, then-President George W. Bush signed the Sarbanes–Oxley Act into law. The act heightened the consequences for destroying, altering, or fabricating financial statements and for trying to defraud shareholders.

The Enron scandal resulted in other new compliance measures. Additionally, the  Financial Accounting Standards Board (FASB) substantially raised its levels of ethical conduct. Moreover, company boards of directors became more independent, monitoring the audit companies and quickly replacing poor managers. These new measures are important mechanisms to spot and close loopholes that companies have used to avoid accountability.

Did Anyone Profit From Enron's Demise?

Jim Chanos of Kynikos Associates is a known short-seller . Chanos said his interest in Enron and other energy trading companies was “piqued” in October 2000 after a Wall Street Journal article pointed out that many of these firms employed the “gain-on-sale” accounting method for their long-term energy trades. His experience with companies using this accounting method often showed that “earnings” were created out of thin air if management used highly favorable assumptions. Chanos said that this mismatch between Enron’s cost of capital and its return on investment (ROI) became the cornerstone of his bearish view of Enron. His firm shorted Enron’s common stock in November 2000 and netted Chanos and his Kynikos firm hundreds of millions in gains when Enron went under.

Who Is Sherron Watkins?

Sherron Watkins, a vice president at Enron, wrote a letter to Lay in August 2001 warning that the company could implode in a wave of accounting scandals; a few months later, Enron had collapsed. Watkins’ role as a whistleblower in exposing Enron’s corporate misconduct led to her being recognized as one of three Time “Persons of the Year” in 2002.

Does Enron Still Exist?

Enron no longer exists. It sold its last business, Prisma Energy, in 2006.

Enron’s collapse was the biggest corporate bankruptcy in the financial world at the time. It has since been surpassed by the bankruptcies of Lehman Brothers, Washington Mutual, WorldCom, and General Motors. The Enron scandal drew attention to accounting and corporate fraud, as shareholders lost $74 billion in the four years leading up to its bankruptcy, and its employees lost billions in pension benefits.

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U.S. Commodity Futures Trading Commission. “ CFTC Charges Enron with Price Manipulation and Other Illegal Acts .”

U.S. Department of Justice. “ Two Enron Executives Charged with Fraud, Conspiracy and False Statements .”

U.S. Securities and Exchange Commission. “ SEC v. Jeffrey K. Skilling, Richard A. Causey .”

Federal Bureau of Investigation. “ Former Enron Chief Financial Officer Andrew Fastow Pleads Guilty to Conspiracy to Commit Securities and Wire Fraud, Agrees to Cooperate with Enron Investigation .”

U.S. Securities and Exchange Commission. “ SEC v. Andrew S. Fastow .”

Duke Law Scholarship Repository, via University of Cincinnati Law Review. “ Enron and the Use and Abuse of Special Purpose Entities in Corporate Structures .”

U.S. Securities and Exchange Commission. “ Securities and Exchange Commission v. David B. Duncan, Civil Action No. 4:08-CV-00314(S.D. Tex.)(January 28, 2008) .”

U.S. Securities and Exchange Commission. “ SEC v. Kenneth L. Lay, Jeffrey K. Skilling, Richard A. Causey ,” Pages 29–38.

LinkedIn. " The Rise and Fall of Enron: A Tale of Corporate Greed and Corruption that Collapsed an Empire ."

UNSW Sydney. " Inside this insider trading loophole: What shareholders need to know ."

Enron Creditors Recovery Corp., via Internet Archive. “ About ECRC .”

Bloomberg. " Enron Creditors Get 53 Percent Payout, Aided by Lawsuit Accords ."

Business Standard. " Enron creditors get 53% payout ."

U.S. Securities and Exchange Commission. “ SEC Statement Regarding Andersen Case Conviction .”

Cornell Law School, Legal Information Institute. “ Arthur Andersen LLP v. United States (04-368) 544 U.S. 696 (2005) .”

U.S. Department of Justice. “ Federal Jury Convicts Former Enron Chief Executives Ken Lay, Jeff Skilling on Fraud, Conspiracy and Related Charges .”

U.S. Department of Justice. “ Former Enron CEO Jeffrey Skilling Resentenced to 168 Months for Fraud, Conspiracy Charges .”

The New York Times. “ Jeffrey Skilling, Former Enron Chief, Released After 12 Years in Prison .”

U.S. Congress. “ H.R.3763 — Sarbanes–Oxley Act of 2002 .”

U.S. Securities and Exchange Commission. “ U.S. Securities and Exchange Commission Roundtable on Hedge Funds: Panel Discussion: “Hedge Fund Strategies and Market Participation” .”

National Whistleblower Center. “ Sherron Watkins: Corporate Whistleblower .”

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