The case study discusses how Enron evolved as a company. It tackles the strategies and processes employed by Enron in its business innovations, personnel management, and risk management. This study also delves into the downfall of the company including the problems and breakdowns it encountered and had to deal with. Finally, this case study gives a view of the fall of Enron as a company and leads the students into understanding governance and management problems that affect the company as a whole.
Paul M. Healy; Krishna G. Palepu
Harvard Business Review (109039-PDF-ENG)
November 19, 2008
Case questions answered:
Case study questions answered in the first solution:
- Enron’s stock price began in 2000, trading at around $43. By late August, it reached $90 – a 107% return in 8 months – and it closed 2000 at $83 – up 91% for the year. While Enron was up 91% for 2000, the S&P 500 Index declined by about 10% during the year. Knowing what you know from the case, would you have invested in Enron at the end of 2000? Why or why not?
Case study questions answered in the second solution:
- Briefly provide a history of the company.
- The Enron debacle created what one public official reported was a “crisis of confidence” on the part of the public in the accounting profession. List the parties who you believe are the most responsible for that crisis. Briefly justify each of your choices.
- Identify and list the governance principles and guidelines that were breached.
- Can Audit firms truly be independent consultants?
- Who was most affected by Enron’s Fall?
- Identify and list five recommendations that have been made recently to strengthen the audit function after Enron’s scandal.
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The Fall of Enron Case Answers
Executive summary – The Fall of Enron
As an individual investor, I would have invested in Enron at the end of 2000. Of all the six reasons that will be discussed later in the analysis section, I believe the first two, (1) The high profile of Enron and (2) The assurance of an external auditor, have the most influence on my decision to invest in Enron, and the last one, (6) The blurry big picture, prevents me from seeing the real problems of Enron.
Had I known more about Enron’s corporate governance weaknesses and linked them with the conflicts of interest of other external parties, my answer would have been different.
Analysis
1. The high profile of Enron
Enron was one of the biggest companies, and its expansion into energy trading to take the opportunities of deregulation was a smart strategic move. As one of the first movers, Enron had a huge potential to prospect in the new markets. Evidently, Enron’s revenue in 2000 was booming compared to its revenue in 1999 (increased by 151%).1
Also, Enron’s recruitment policy, which attracted many sophisticated and highly skilled employees, made me even more confident to invest in Enron. It stated in the case study that Enron’s risk management team worked efficiently, and Enron’s business expansion was also based partly on this.
Enron’s Board of Directors, especially the Audit Committee, consisted of many high-profile members and had more expertise in accounting and finance. The company also established the Code of Ethics, which was supposed to prevent potential conflicts of interest. This, of course, would strengthen investors’ investment decisions.
Finally, Enron compensated its managers with heavy stock options, which might help to minimize conflict of interest because the managers now owned part of the company.
With such a promising company like Enron and its attempt to mitigate the risk of conflict of interest through corporate governance, I think it’s reasonable to invest in this company. The next reasons will strengthen this investment decision.
2. The assurance of a highly reputable external auditor
Enron’s auditor is Arthur Andersen, one of the most trustworthy accounting firms at that time (among the “Big Five”). As an outsider, I would heavily…
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