What Happened at Enron?

WHAT HAPPENED AT ENRON?

Enron was formed in 1985 when InterNorth of Omaha acquired Houston Natural Gas. The combination named as “Enron” created a single largest operator of gas pipeline in the U.S. Jennetg J. Lay was named CEO of the combination in February 1986.

The emerging nature of the Enron explained by the 3 events

1. The organization’s response to the ethical crises
2. The interest in the new business development ideas sourced from consultants
3. Readiness of organization to use new financial reporting technique as a part of commercial strategy

With the above events, the organization grown tremendously over the years, It’s annual revenues rose from $ 9 billion in 1995 to $ 100 billion in 2000. Fortune Magazine selected Enron as "America's most innovative company" during 1999. Despite all the success company filed for bankruptcy protection under chapter 11 on December 2, 2001 – Let’s look at what happened during amidst of years.

What was happened during 1990 - 2001?

• Skilling Joined Enron in 1989, changed the culture by giving more freedom to employees then by developed a very loose culture, one which encouraged risk taking, deal making but simultaneously didn’t expect any loyalty – only performance.
• Skilling has implemented “mark-to-market” accounting techniques across Enron in Jan 1992, which is very common to financial services but not to energy industry – This has led to many issues in future like frauds in profit figures in the balance sheet, undervalued stocks (as actual sales and profits in this method actually will not occur until way into the future).
• Enron in the rush to sign and deliver deals , inadequate due diligence became common, overly aggressive bidding promised unprofitable margins, and a growing disdain for the costs and complexity of project execution characterized deals (The Dabhol, Idian project).
• During 1996 to 2001, Enron diversified its business into trading water, weather derivatives, bandwidth, and coal to name but a few.
• Rebecca Mark accepted big challenge to be Chairman and CEO of newly created water business, Azurix. Mark planned to make Azurix public on June 9, 1999 raising $ 700 million, of which only $ 300 million was available for the business after Enron itself funnelled much of the cash back into the corporate parent. The utility acquisition plan was failed and Mark tried Azurix as trading company for water rights, and this strategy also got failed as water is not a commodity by traditional standards. Finally it lead to shut down of Azurix. We can infer and attribute this failure to the way company evaluating its employees i.e. only depending on the deal done or not – no way the past performances are taken into consideration.
• The SPEs created by Andy Fastow and his assistant Michael Kopper by selling troubled assets to LJM1 and LJM2, Enron removed them its balance sheet, and simultaneously hiding underperforming investments. But most of the SPEs purchased were troubled or underperforming. Lot of accounting manipulations happened in the same as well.
• All these faults accumulated and the share price of Enron began falling.

Whom to Blame?

We can’t blame any individual in this organization as the faults were at the core level of the business, the company was not clear with its business policies and accounting system. Proper validation didn’t happened on yearly basis. The performance review system itself motivating employees to take risks which in turn leading to aggressive decisions. But most of the damage can be attributed to the implementation of “mark to market” accounting system.