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Enron Case Study Analysis

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Enron Case Study

Introduction and Background

Enron Scandal is a well-framed story that can be applied to understand the impact on the economy and the business world. The Enron scandal has affected the economy and the business world. Enron scandal was a series of important events that was a result of the insolvency of the famous company of commodities, energy and services (Petra and Spieler 2020). During the bankruptcy, there was a dissipation of Arthur Andersen LLP. This was the biggest company for accounting and auditing in the whole world. Enron corporation was founded in the year 1985 by Kenneth Lay during the consolidation of two natural gas transmission organisation – InterNorth Inc and Houston Natural Gas Corporation (history.com, 2021). The consolidated company HNG InterNorth was renamed as Enron in the year 1986 (Bradley Jr. 2018). During the time period of 1990s, the Congress of the United States embraced range of regulations to loosen its limitations on the supply of natural gas. After the imposition of this law, Enron lost its right to operate the pipeline. Enron altered itself to a trader of contracts for energy derivatives. They acted as the medium between the producers of natural gas and its consumers. Through this trade, the producers could reduce the risk of price fluctuations of energy by setting the selling value of the products through a negotiated contract by Enron. Gradually, the company started leading the world in terms of the contracts for natural gas. Thus, the company started gaining huge profits on the trades. The country wide reputation of Enron Corporation was based on the faster expansion of domestic business, increasing revenue and the incomes earned from trading. In the background of the track record. Kenneth Lay appointed Skilling as the Chief operating officer to transform Enron to portray the vision (govinfo.gov 2021). After witnessing the boom in dotcom, Skilling proposed that Enron corporation could generate business depending on the broadband network that could trade and supply bandwidth. Thus, Skilling started to fulfil this objective at a faster pace. However, this regulation in the country of California did not become successful. After this, Enron decided to build its worldwide presence in transforming into a worldwide leader in the water industry whereby they bought a huge water company in the country of United Kingdom. This was followed with a huge deal in the country of Argentina. After this water company became successful, the reputation of Enron corporation boosted and Skilling and Lay were considered to be the leading visionary thinkers and leader in business. However, as the booming years were on the verge of ending, the corporation faced rise in the competition in the energy-trading business. Thus, the profits of the company started decreasing. Moreover, the trouble in the operations of the company was shifted to Special Purpose Entities (SPEs) that has limited number of partnerships with other parties. On 2nd December, the company lodged for the Chapter 11 bankruptcy safeguarding (Sethuraman 2019). Under this filing of protection, many executives of the company were found to be responsible for multiple charges who were prisoned gradually. Arthur Andersen faced huge monitoring whereby he lost most of the clients of the company (Giannetti and Wang 2016). The loss in the number of clients brought huge issues in the reputation of the company and the company started dissolving itself. Moreover, numerous civil suits were lodged by the shareholders against Andersen and Enron. The Enrol scandal resulted in new legislations and regulation framed to boost the perfection of monetary reporting of the state traded organisations (Toms 2019). The most crucial measure that was taken to boost the monetary reporting was the Sarbanes-Oxley Act of 2002 that created huge penalties for changing, modifying and hampering the monetary records (Connell 2017). The act did not allow the auditing organisations for engaging in any simultaneous consulting organisations for the same customers. The Enron scandal has affected the economy and the businesses of different countries (Darwish and Abdeldayem 2019). We are also providing Honda Europe case study solution.

Effect of Enron scandal on the economy

The loss of the profit of Enron corporation has created huge effect on many employees  and has triggered the Wall Street. At the highest level, the shares of the company had the worth of $90.75 before the declaration of the bankruptcy on 2nd December, 2001 when the company was trading at $0.26. The main impact of the Enron scandal on the economy was the crumbling of Wall Street. After the fall in the profits of the company by the end of 2000, it was starting to deteriorate under its own weight. The monetary losses of the trading organisation and other operations of the company was hidden by Jeffrey Skilling with the help of mark-to-market accounting (fac.ksu.edu.sa 2021). This method measures the worth of the security depending on the recent market desirability. In the case of Enron corporation, the company would create an asset such as a power plant and incorporate that record in the books even without gaining anything initially. If the revenue achieved from the power plant is less than that of the estimated amount, they would incorporate that loss in another off-the-books corporation where the loss would remain unacknowledged (Lu, Sapra and Subramanian 2019). This method of accounting has enabled the Enron corporation to wipe off the unprofitable activities without any concerns in the bottom line. By the end of 2001, the business activities of Enron corporation deteriorated when Lay retired from his position. During this time, the analysts were starting to downgrade the rating for the stock of Enron which degraded to 52-week low of $15.04 (nytimes.com 2021). By the end of 16th October in 2001, the corporation reported their first quarterly loss whereby they closed their Raptor. The fall of Enron Corporation has imposed huge costs on the economy of the United States (Dibra 2016). The companies for the production of natural gas and electricity were facing huge costs. Various projects that were intended to build transmission lines, power plants and pipeline are put on hold. Moreover, in all the sectors of the economy, the companies with higher debts are feeling the problem of tighter credit. It has been found that more than $12 billion worth of investment in new power plants has been postponed in the recent times. This was because of the money markets that were demoralised by the sudden decent of the company into the bankruptcy. The cost of capital required for energy projects has increased considerably. Different plans to create deposits of natural gas are cut back in a dramatic manner. These cutbacks led to huge shortages in power and high costs in the upcoming years. In the upcoming years, the stress would be felt by the consumers, according to the claims of energy experts. Moreover, the mild weather and the recessionary situation are decreasing the demand for energy. However, the reduction in demand is also due to the fall of the Enron corp. The credit rating firms and lenders are examining the levels of corporate debt whereby they are forcing people to reduce plans for expenditures and enhance the balance sheets. These reaction was left unobserved under the administration of Bush. The energy industry of the United States is particularly much affected due to the collapse of Enron corp. We are also providing History case study solution.

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Effect on the business world

The sudden demise of Enron corp. has led to worldwide consequences for different insurance companies, banks and companies that are involved with the supply and trading activities of energy. The most affected section are the insurers who underwrote huge proportion of the debt securities of the company. The loss in the business world started with the $500 million loss of J.P. Morgan Chase, the biggest monetary backer of Enron corp (govinfo.gov 2002). Other bank losses involved 4100 million of Barclay, $165 million of United Kingdom’s Abbey National, $100 million of Royal Bank in Scotland, $98 million of ABN-Amro in Holland, $250 million of Credit Lyonnais in France and loss between $50 million and $100 million for the four banks in Australia. Netherlands Aegon NV that was the parent company of Transamerica Corp. was highly involved in the European energy trading roles of Enron corp. They experienced a gross loan exposure of around $300 million. The ING group of Holland also experienced considerable loan exposure of $195 million. In the United States, the life insurers such as John Hancock had a predicted exposure of around $320 million. The Principal Financial Group has the gross loan exposure of worth $172 million and MetLife had gross loan exposure of worth $63 million. The exposure to surety bonds of Chubb Corp issued by the Enron Corp was around $220 million. Standard and Poor’s has predicted that the aggregate international exposure to the derivative of Enron was almost as high as $6.3billion. Moreover, the XL Capital and ACE Ltd of Bermuda has faced with considerable exposures from the liabilities. We are also providing Kelloggs case study solution.

Conclusion

The case study concludes that Enron scandal wwas started after the bankruptcy protection was filed on 2nd December. The scandal has led to lots of losses to the economy around the world especially in the United States. The power plants and the energy and natural gas production firms were also heavily affected by the scandal of Enron. The worldwide economy and the business world were heavily impacted by the scandal. The businesses and the banks of some countries incurred huge losses due to the scandal. The most famous economic consequence due to the scandal was the fall of the Wall Street. Enroncase study help offered by Assignmenthelp.us.

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References

Bradley Jr, R.L. 2018. Enron ascending: the forgotten years, 1984-1996. John Wiley & Sons.

Darwish, S. and Abdeldayem, M.M. 2019. Risk Management and Business Ethics: Relations and Impacts in the GCC. International Journal of Civil Engineering and Technology10(10), pp.489-504.

Dibra, R. 2016. Corporate governance failure: The case of Enron and Parmalat. European Scientific Journal12(16).

fac.ksu.edu.sa 2021. Enron Scandal: The Fall of a Wall Street Darling. [online] Fac.ksu.edu.sa. Available at: <https://fac.ksu.edu.sa/sites/default/files/enron_scandal_the_fall_of_a_wall_street_darling.pdf> [Accessed 1 July 2021].

Giannetti, M. and Wang, T.Y. 2016. Corporate scandals and household stock market participation. The Journal of Finance71(6), pp.2591-2636.

govinfo.gov 2002. - THE ROLE OF THE FINANCIAL INSTITUTIONS IN ENRON'S COLLAPSE. [online] Govinfo.gov. Available at: <https://www.govinfo.gov/content/pkg/CHRG-107shrg81313/html/CHRG-107shrg81313.htm> [Accessed 1 July 2021].

govinfo.gov 2021. THE ROLE OF THE BOARD OF DIRECTORS IN ENRON'S COLLAPSE. [online] Govinfo.gov. Available at: <https://www.govinfo.gov/content/pkg/CPRT-107SPRT80393/html/CPRT-107SPRT80393.htm> [Accessed 1 July 2021].

history.com 2021. Enron files for bankruptcy. [online] HISTORY. Available at: <https://www.history.com/this-day-in-history/enron-files-for-bankruptcy> [Accessed 1 July 2021].

Kecskés, A., 2016. The Sarbanes-Oxley act from a legislative viewpoint. The Theory and Practice of Legislation4(1), pp.27-43.

Lu, T., Sapra, H. and Subramanian, A. 2019. Agency conflicts, bank capital regulation, and marking-to-market. The Accounting Review94(6), pp.365-384.

nytimes.com 2021. Once-Mighty Enron Strains Under Scrutiny (Published 2001). [online] Nytimes.com. Available at: <https://www.nytimes.com/2001/10/28/business/once-mighty-enron-strains-under-scrutiny.html> [Accessed 1 July 2021].

Petra, S. and Spieler, A.C. 2020. Accounting scandals: Enron, Worldcom, and Global Crossing. In Corporate fraud exposed. Emerald Publishing Limited.

Sethuraman, M. 2019. The effect of reputation shocks to rating agencies on corporate disclosures. The Accounting Review94(1), pp.299-326.

Toms, S. 2019. Financial scandals: a historical overview. Accounting and Business Research49(5), pp.477-499.

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