CASE ANALYSIS

The fall of Enron

Group AC2:-
Amitava Chatterjee(13505)
Anabadya Neogi(13506)
Ayush Garg(13512)
Joe Kurian(13521)
Madhuri Mahipati(13524)


Problem Statement
To create a system of review & control and enforce a code of ethics in order to avoide its
subsequent downfall
PEST ANALYSIS
Political:
1. Change in legal standards
2. Personal connection with class of politician from all parties of Enrons C.E.O.

Economical:
1. Deregulation in the U.S. Market
2. Different types of financial products

Technological:
1. Creation of Enron Online Web based transaction system
2. Emergence of internet as a medium of business


SWOT of Enron
Strengths
Built on innovation
Best and brightest talent from Top B-
schools Creation of Web Based
transaction system Enron Online
Effective energy-trading model
Active international energy-asset
construction business
Performance based employee
compensation
Biannual feedback system based on 360
degree reviews of employees
Weaknesses
Loosely defined service contract
quality and standards
Complex distribution channels
Cost estimation was
complicated since many states
were yet to deregulate energy
Estimates of cost of contract
fulfilment were highly
subjective



Opportunities
High price volatility in the energy
sector
Enrons gas trading innovation
can be extended to other markets
as well
Expansion in international arena
was possible by through
acquisition
Threats
Junk bond status given to Enron
Creation of too many SPE with
different objectives
Currency fluctuations and default
probabilities in capital intensive
international deals


CRITICAL FACTORS:
1. Organizational tolerance for controversial SPE dealings
Enron did not have strong deterrent against such controversial deals especially those
involving the Special Purpose Entities (SPEs). Even if the management knew about it, they
chose to ignore as it was adding to the organizations bottom line and shareholder value.
2. Performance based compensation system
Enron had a compensation system which was based on the value adds that the employees
provided to the company. This value add could come in the form of new business ideas to
make money or from doing the old business well and maintaining the organisation properly.
Benefit of doubt was given for trying something new. This performance evaluation system
led the senior executives to invest in more and more industries, which led to increase in the
value addition to the firm and ultimately increase in their compensation. The implied risk
from this diversification was not thought over. This ultimately contributed to the fall of
Enron.
3. External auditing
For any organization it is extremely important to catch the misconduct. An independent
auditing agency that reports to outside directors provide less comfortable but more
convincing review of how managements success is achieved . Increased frequency of audits,
irregular, unannounced audits can prove to be highly beneficial but there will be always a
question on cost effectiveness of these audits.
4. Organization Culture
Enrons leaders encouraged company personnel to focus on the current bottom line and to be
innovative and aggressive in figuring out how to grow current earnings-regardless of the
methods. Enrons annual rank and yank performance evaluation process, in which the
lowest ranking 15 to 20 percent employees were let go, made it abundantly clear that bottom-
line results were what mattered most. The name of the game at Enron became devising clever
ways to boost revenues and earnings, even if this sometimes meant operating outside
established policies. In such a scenario even the stated values of integrity and respect, the
code of ethics, etc. lost all the emphasis and were not given any importance.

5. Performance management system
Every employee was expected to continuously add value to Enron, else they faced the risk of
ending up among the bottom 20% issues category and risked getting fired. So in their own
interest, many employees of Enron tried to experiment with the accounting standards and
get involved in shady deals. The rigorous performance evaluation standard greatly
demotivated its employees.
Alternatives:
1. Set a more stringent code of conduct.
2. Set up an independent auditing agency
3. Modify the current auditing system

Action Plan:
Conduct a meeting for the Board of Directors and the Senior Management and discuss
the areas where violations are observed for ethical code of conduct and accounting
practices
For strict regulation of any unfair practices, inculcate a culture of questioning. This
enables free flow of information and if there are any discrepancies in the model code
of conduct, it could be brought to the notice of the top management.
Set up an independent audit body and introduce transparency
Modify the existing audit systems, especially the internal ones to make them more
effective