The Fall of Enron

The Fall of Enron

1. Why was Enron such an admired company prior to 2000? What innovation do they bring to the table? Be specific and support your statement with concrete information.

By 2000, Enron Company was one of the most admired company by taking the first place in the deregulated energy market. With the help of new regulation in 1985, Company transformed into a business that provides energy services as a bundle which involves delivery and gas purchase at spot price. Enron was able to offer long term fixed price contracts to the clients which allows them to avoid the risk of future gas price fluctuations during the contracts. Besides, The Company effectively used their financial derivatives to manage the risk of commitment to their suppliers.

In attempt to future growth, the company successfully used the energy-trading model. It expanded and diversified globally by acquiring alternative energy plants. At the same time, Enron modified its innovative business model along the natural patterns of the markets especially in locations where the deregulation of energy exists. They also targeted the new markets with unstable characteristics to meet the the long term contract commitments by providing asset construction business.

The drive for innovation, high level employees and the decentralized decision making principles provided company to build a strong risk management system. Thus, the company as the one of the earliest adopters of value at risk analysis model, guaranteeing company to estimate the potential loss on investment in any case of volatility.        Besides, the company diversified the trading portfolios by using Risk Rac System that allows to make decisions whether to trade, hold or hedge the particular investment.

The company has encouraged the employees to move freely in the various positions as long as they can add value and generate revenue. They have further developed a performance evaluation system to drive employee compensation. In summary, Enron bring to the table a transformational approach that is not just a new strategy implementation but also an innovative business model pathway.

2.Why did Company fail? Comment on each of the following areas:

A. Accounting issues B. Firm Governance C. Incentive system D. Conflict of interest between different parties? E. And…?

Regarding to these issues, Enron has failed mainly because their financial statements was intentionally distorted in order to create a false image of highly profitable organization involving the affected parties, the stockholders and the clients. The company adopted the present value accounting strategy to settle the long term fixed rate contracts. With this system, Company was able to have accurate information of cash inflows written down as revenues or expenses in balance sheet. However, by referring the present value accounting, the estimates of the cost fulfillment of the contracts were extremely subjective due to the misleading reports.