Enron was a corporation founded in 1985, when a merger combined Houston Natural Gas and InterNorth (Thomas, 2002). Throughout the first five years of Enron’s existence, they had many struggles. According to Salter (2005), the first years had many “near death” experiences. Eventually Enron was able to prevail over their many “near death” experiences. In 1989, “Enron locked in its first fixed price contract to supply natural gas, to a Louisiana aluminum producer” (Salter, 2005, p. 2). They continued to promote and gain success by recruiting employees from MBA schools. Only the brightest and best were hired to maximize the success of Enron. Enron expanded to trading electricity in 1994. Since the breakthrough of trading electricity, Enron continued to grow and continued to become an incredibly successful corporation. However, due to unfortunate decisions both within and outside of the company Enron declared bankruptcy on December 2, 2001 (Salter, 2005). Workforce
Enron was a company made up of the elite group of workers. Enron focused on hiring the “best and brightest traders” (Thomas, 2002, p.42) to maintain their status of being the top energy trading company. MBA schools were the sole focus of recruiting for Enron. However, there was a screening process that each recruit was required to go through. Enron screened for a sense of urgency, intelligence, a strong work ethic, and problem-solving ability (Salter, 2005). The company set the standards high to ensure they employed the best the corporation could have.
The employment of MBAs was not solely due to recruitment. MBAs also showed a great interest in the company of Enron. This was primarily because Enron offered great benefits and compensation to their employees. Examples of a couple perks for working at Enron included, a gym open to only the company and concierge services for the employees (Thomas, 2002, p. 42). Enron according to Salter (2005): Put recruits on a pedestal ‘so they would develop a sense of superiority.’ Not only were many new recruits lured with $20,000 signing bonuses and prospects of annual bonuses of up to 100% or salary, but the two-week orientation program also strove to impress Enron’s newest elite with images of Enron as ‘a cosmopolitan, global company with unlimited possibilities.’ The downside to the perks and signing bonuses was a vigorous working schedule (Salter, 2005, p. 17). Management Practices
Enron used a risk management system to run the company. This system consisted of a committee of lawyers, business managers, and financial and risk-assessment analysts (Salter, 2005, p. 21). The committee became known as the RAC or Risk Assessment and Control. The RAC were responsible for “analyzing the financial and nonfinancial risks,” (Slater, 2005, p. 22).
Enron used market-to-market procedures to run the company. This allowed the company to adjust assets and liabilities on their balance sheets at a fair market value (Thomas, 2002). According to Thomas (2002) not recording the proper value of both assets and liabilities will cause incorrect totals on the income statement. In turn the corporation was according to Thomas (2002), “booking unrealized gains or losses to the income statement of the period.” However, the market-to-market strategy is supposed to avoid the misuse of accounting documents. Bowen and Heath (2005) state, It is neither the “mark-to-market” procedure nor the fair value concept but rather the lack of both external and internal adequate controls, designed to avoid misuses and abuses of accounting standards, that must be condemned in this case. Even though Enron used this system, the accounting records and standards were being abused due to the fact of the size of the corporation. Management Worries for Enron
There were many reasons for Enron to be worried about their downfall. Enron was excused from many regulations by the federal government, particularly the Clinton administration. In 1993, Enron was granted the privilege of having unregulated private derivative markets. Derivatives are “complex financial instruments that allow economic actors to hedge against extreme movements in prices and interest rates; if unregulated, however, they encourage further speculative behavior” (Schwartz, 2002, p.6). The approval of having unregulated private derivative markets exempted Enron from the Public Utility Holding Company Act (Schwartz, 2002).
The Clinton administration continued to exempt and excuse Enron from different laws, such as the Investment Company Act of 1940 (Schwartz, 2002). Being unregulated caused Enron to develop the beginning of their downfall. Enron’s foreign investments plummeted and therefore the price of Enron’s stock significantly decreased (Schwartz, 2002). These deregulations should have caused management to start to worry about the overall well-being of the company.
According to the annual report of Enron (Slater, 2005), management had little to worry about. Between the years 1991 and 2000, Enron’s sales increased by over $94,000,000. Also net income continued to increase over the nine years by over $700,000,000. Based entirely off of the annual statement, Enron only had one reason to worry. This reason was due to Enron’s total current liabilities. From 1991 to 2000, Enron’s current liabilities increased significantly by $26,000,000. The total current liabilities growth should have also given Enron’s management warning to their downfall. Totals of accounting ratios can be found in Appendix A. Fall of Enron
In the previous section, Management worries for Enron, many events were mentioned that affected the well-being of Enron. They were a very successful company until their bad bookkeeping showed through. Enron used off-balance-sheets for their accounting methods. These covered up many debts which eventually advanced their downfall. Kobrak (2009, p. 174) proclaims, “Enron’s critical failure, which led to the firm’s final downfall, was its reliance on dubious finance and deceptive accounting. With the introduction of off-balance-sheet companies, it slid from creative— to economic and social—destruction.”
The correct use of off-balance-sheets should not have guided Enron to their failure. However, within the company insiders were managing Enron’s stock. This meant Enron was capitalized by insuring itself.
Other contributors to the collapse of Enron were the top managers. The top managers were able to find loopholes in their stock-option plan. With these loopholes managers could drive up the share price. This high share price allowed the company to continue running its profit at any price (Kobrak, 2009). Enron attempted to continue to present a profitable company. However, “Enron’s problems were evident to investors using more forward-looking information. The stock was declining long before the disclosures” (Gordon, 2004, p. 134). Lessons to be Learned
The success and fall of Enron has taught other corporations different lessons. Enron demonstrated that there can be too much freedom in regulations. The regulations for companies have been positioned in the federal law for specific reasons. The Enron collapse has also educated companies to keep accurate accounting books and records. Making too many mistakes, or abusing the use of accounting balance sheets, will ultimately lead to the downfall of any company or major corporation. Conclusion
Enron was a victorious company. They were the conquerors of energy trading. From 1997-2000, they were untouchable and unstoppable. Enron only hired the best and brightest employees to guarantee the success of the corporation. They turned to MBA schools for recruiting their brightest employees. However, due to poor choices by the government many regulations were excused for Enron. This ultimately gave Enron the flexibility to find loopholes in many systems. As a company, Enron also made unfortunate choices, by inappropriately using off-balance-sheets. Many warning signs were present to signify the collapse of Enron. The deregulation of laws and acts were the primary symbols. Enron can help future and current companies gain knowledge of the destruction of inaccurate bookkeeping and having excessive flexibility around federal laws.