Angel Desserie Valderama Doc.

Roberto Alagao
BSA-2A February 13, 2024

“The FALL OF ENRON”

CASE STUDY ANALYSIS

Brief Summary

Enron Corporation, once a well-known energy company, collapsed in 2001

due to a series of unlawful business dealings and financial mismanagement.
The company's transition from a natural gas pipeline operator to a speculative
energy derivatives dealer resulted in increased risk and rising debt. Enron
executives utilized dishonest accounting tactics, such as creating special-
purpose corporations, to conceal debts and losses. When Enron's stock price
dropped, creditors recalled loans, sparking a financial crisis. In the midst of
escalating criticism, Enron's CEO, Jeffrey Skilling, resigned, and the company
eventually declared bankruptcy. The incident resulted in the passage of the
Sarbanes-Oxley Act, which aims to strengthen corporate governance and
financial transparency.

Central Problem

Dishonest Accounting Techniques

Point of View

From my point of view, the Enron scandal serves as a sobering warning of the
dangers of unrestrained ambition and greed within organizations. It
demonstrates the disastrous effects that can occur when businesses choose
short-term profitability over long-term sustainability and ethical behavior. By
focusing primarily on short-term benefits, Enron risked the trust of investors
and stakeholders, resulting in its spectacular failure. This viewpoint
emphasizes the critical role of transparency, accountability, and ethical
behavior in all facets of corporate operations. Furthermore, it emphasizes the
importance of strong regulatory measures, such as the Sarbanes-Oxley Act, in
preventing corporate fraud and protecting the interests of investors and the
economy as a whole.

Objective

* To define the company's business challenge and the reasons for such
problems.

* To achieve what are possible alternative actions that Kenneth Lay may take
in his company.

* To determine the core strengths, weaknesses, opportunities, and threats of

the firm, Enron Company.

* To determine the conclusion, recommendations, and business lesson that

we can learn from the fall of Enron case study analysis.

Intention of the case writer

The case writer's aim in examining Enron's downfall is to highlight the

necessity of corporate governance and ethical responsibility in the business
sector. By emphasizing the negative repercussions of Enron's behaviors, such
as uncontrolled ambition and greed, the case writer hopes to warn other
organizations against similar behavior. Furthermore, the objective is to
highlight the importance of openness, accountability, and ethical behavior as
key foundations of effective and sustainable company processes. Furthermore,
by referring to the Sarbanes-Oxley Act, the author seeks to push for stronger
regulatory frameworks to prevent future catastrophes and protect the
interests of investors and stakeholders. Finally, the case writer hopes to raise
awareness about the dangers of unethical behavior in business settings and
foster a culture of integrity.

Alternative course of Action (ACA)

ACA 1

Transparent Reporting: Enron could have used transparent financial reporting

to accurately depict its financial state and performance. This would have
increased trust among investors and stakeholders.

ACA 2

Addressing Debt: Instead of concealing debts through special-purpose

corporations, Enron might have concentrated on debt reduction through
competent financial management and strategic decision-making.

Evaluation of ACA

ACA 1

Advantage: Building trust with investors and stakeholders through transparent

reporting can lead to stronger relationships, better access to capital, and
enhanced credibility for the organization.

Disadvantage: Transparent reporting may expose weaknesses or financial

challenges within the organization, leading to increased scrutiny, potential
negative reactions from investors or stakeholders, and pressure to address
issues promptly.

ACA 2

Advantage: Addressing debt directly through responsible financial

management can lead to a healthier financial position in the long term,
reducing the risk of bankruptcy or financial distress. It also demonstrates
integrity and transparency, which can attract investors and improve the
organization's reputation.

Disadvantage: Focusing on reducing debt may require significant financial

resources and strategic decision-making, potentially limiting investment in
other areas such as research and development or expansion. Additionally, it
may result in short-term financial challenges or constraints as resources are
allocated towards debt reduction efforts.

Swot Analysis

STRENGTH
Ambition and Innovation: Enron demonstrated ambition and innovation in its
transition from a traditional natural gas pipeline company to a speculative
energy derivatives trader.

WEAKNESSES
Lack of Transparency: Enron's failure was primarily due to a lack of
transparency in financial reporting and accounting processes, which obscured
the company's true financial health.

OPPORTUNITIES
Regulatory changes: The Enron affair drove the development of regulatory
changes such as the Sarbanes-Oxley Act, which allowed for better corporate
governance and transparency.

THREATS
The Enron crisis caused enormous reputational harm to the firm and its
management, ultimately leading to bankruptcy and legal penalties.

Conclusion

Adopt Aca 1

I, therefore, concluded that the best alternative courses of action can be the
alternative courses of action number 1 which Transparent Reporting: Enron
could have used transparent financial reporting to accurately depict its
financial state and performance. This would have increased trust among
investors and stakeholders. Building trust with investors and stakeholders
through transparent reporting can lead to stronger relationships, better
access to capital, and enhanced credibility for the organization.

Recommendation

In this study, I recommend doing Alternative Courses of Action number 1

which Transparent Reporting: Enron could have used transparent financial
reporting to accurately depict its financial state and performance. This would
have increased trust among investors and stakeholders. Building trust with
investors and stakeholders through transparent reporting can lead to stronger
relationships, better access to capital, and enhanced credibility for the
organization.

Business Lesson

The Enron scandal serves as a reminder that short-term gains over long-term
sustainability and neglecting ethical responsibilities can lead to catastrophic
consequences. The company's pursuit of profit, unethical practices, and lack
of transparency led to bankruptcy and financial devastation. It emphasizes
the importance of integrity, transparency, and accountability for long-term
success. Companies must align their actions with stakeholders' interests and
build trust at all levels. The Sarbanes-Oxley Act was implemented to prevent
similar incidents, requiring businesses to comply with stricter governance
standards and financial reporting requirements. The Enron scandal serves as
a cautionary tale for businesses worldwide.
Lanie T. Mila
BSA-2A
Doc. Roberto Alagao
February 13, 2024

“The FALL OF ENRON”

CASE STUDY ANALYSIS
Brief Summary

In 2001, Enron Corporation, a large energy company, experienced a collapse due to

questionable accounting practices. The company's business model evolved from a
natural gas pipeline company to more complex energy derivatives and trading natural
gas commodities. This increased risk in operations and increased debts, which could
affect the company's stock price and stock options of corporate executives. Enron's
auditor committee members, including CEO Jeffrey Skilling, CFO Andrew Fastow,
and Board Chair Kenneth Lay, were found to receive significant perks from Enron.
These SPE transactions resulted in high revenues and a manageable debt level,
making investors and stock analysts believe Enron was doing well financially. Enron's
stock price declined, leading to creditors recalling loans and making it difficult to
maintain its financial position. In August 2001, CEO Jeffrey Skilling resigned,
causing controversies over Enron's ability to continue business operations and loss of
reputation. Enron's credit rating was downgraded to "junk" status in November, and
Dynergy and ChevronTexaco Corp. withdrew their purchase agreement, causing
Enron's collapse.

Central Problem

Poor Corporate Governance

Point of View

From my perspective, the Enron scandal was a multifaceted calamity that exposed
serious flaws in company culture, governance, and regulatory oversight. At its core, it
was an urgent warning about the risks of allowing greed and arrogance rule decision-
making at the price of ethical behavior and financial responsibility. The Enron scandal
serves as a cautionary tale about the dangers of prioritizing profit over ideals, as well
as the significance of strong ethical frameworks in corporate governance.

Objective

 Investigate and examine the underlying causes of Enron's failure, including

unethical actions.

 To learn the lessons from the demise of the Enron company.

 Understand the implications for company governance and business ethics.

 To determine what alternative steps Kenneth Lay may take in his organization.

 Determine the Enron Company's fundamental strengths, weaknesses,

opportunities, and threats.

 To draw conclusions, make recommendations, and gain business lessons from the
fall of Enron case study analysis.

Intention of the case writer

The case writer's objective is likely to inform readers on the events behind Enron
Corporation's demise, particularly the fraudulent methods used by its management
and the ensuing impact on the firm and the broader financial system. It also aims to
promote learning, critical thinking, and ethical awareness among students and
professionals, using lessons from one of history's most notable business scandals.

Alternative course of Action (ACA)

ACA 1

The Enron company should practice ethical Leadership. They might have decided to
lead with integrity, emphasizing ethical behavior and regulatory compliance. This
would have created a good atmosphere across the organization.

ACA 2

The Enron Corporation should practice transparency and disclosure by providing

stakeholders with accurate and timely information about its performance, financial
position, and risk exposures.

Evaluation of ACA

ACA 1

Advantage: They will sustain the trust and credibility of all stakeholders, including
investors, employees, consumers, and regulators. Ethical leaders increase stakeholder
trust by displaying integrity, honesty, and transparency in decision-making.

Disadvantage: They'll resist and oppose. Individuals or organizations within an

organization that emphasize short-term advantages over ethical considerations may
oppose ethical leaders. In the instance of Enron, when unethical behaviors were
strongly ingrained in the corporate culture, ethical leaders may have faced resistance
from executives and employees.
ACA 2

Advantage: Transparency and disclosure encourage accountability by giving

stakeholders, including as investors, regulators, and employees, with accurate and
timely information about the company's financial performance, operations, and
governance procedures. This transparency allows stakeholders to hold management
accountable for their actions and decisions, minimizing the possibility that fraudulent
or unethical behavior will go undiscovered.

Disadvantage: Transparently disclosing negative or damaging information, such as

financial losses, obligations, or unethical actions, can harm a company's reputation
and brand image. Transparent disclosure of Enron's false accounting techniques and
financial mismanagement would have most likely resulted in considerable reputation
damage, loss of investor trust, and public reaction.

Swot Analysis

Strengths:
 Formerly an influential company in the energy sector with a strong market
presence.
 Developed novel energy trading strategies and derivatives.
 Initially had a solid revenue stream and a high stock price.

Weaknesses:
 Reliance on deceptive accounting procedures to boost financial figures.
 Lack of openness in financial reporting and corporate governance.
 High debt burden and unsustainable corporate model.

Opportunities:
 There is potential for restructuring and re branding under new leadership.
 Adoption of tighter regulatory compliance steps to restore credibility.
 Expansion into burgeoning energy markets and renewable energy industries.

Threats:
 Legal consequences and lawsuits arising from the accounting fraud.
 Competitors are seizing on Enron's collapse to win market share.

Adopt Aca 1

I, therefore, concluded that the best alternative courses of action can be the alternative
courses of action number 1 which is the Enron company should practice ethical
Leadership. They might have decided to lead with integrity, emphasizing ethical
behavior and regulatory compliance. This would have created a good atmosphere
across the organization. They will sustain the trust and credibility of all stakeholders,
including investors, employees, consumers, and regulators. Ethical leaders increase
stakeholder trust by displaying integrity, honesty, and transparency in decision-
making.
Recommendation

In this study, I recommend doing Alternative Courses of Action number 1 which is

which is the Enron company should practice ethical Leadership. They might have
decided to lead with integrity, emphasizing ethical behavior and regulatory
compliance. This would have created a good atmosphere across the organization.
Furthermore, corporations should prioritize ethical behavior and integrity in all
financial transactions in order to maintain investor trust and avoid catastrophic
failures like Enron's.

Business Lesson

The Enron scandal taught business leaders the value of ethical behavior, transparency,
and accountability in corporate governance. Companies should prioritize financial
reporting integrity, minimize executive conflicts of interest, and maintain competent
accounting control. Furthermore, regulatory compliance and adherence to standards
are critical for building trust and credibility with investors and stakeholders.