TOPIC

REASONS BEHIND SICKNESS AND CLOUSER OF ENRON

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 Preface

This Project Report has been prepared in partial fulfilment of the requirement for the
Subject: FACTORS WHICH CAUSED CLOSUER of a UNIT AND MANAGEMENT
FAILURE (ENRON CORPORATION) of the programme B.B.A.L.L.B. in Principles and
Practises of Management (Sem. I) in the academic year 2014-15.

For preparing the Project Report, we have collected information on ENRON

CORPORATION during the suggested duration. The blend of learning and knowledge
acquired during our studies on the company is presented in this Project Report. The
rationale behind doing practical research and preparing the Project Report is to study
the Factors that caused CLOSURE OF THE UNIT and the MANAGEMENT FAILURE
for the above. We have tried a deep study in the growth and diminish of economy and
its functional areas like marketing department, services, human resource department
and financial department.

The Project Report starts with the basic information about the company, briefing of the
industry and Bodied by the study for the topic.

The information presented in this Project Report is obtained from sources like
Company websites, other websites, Company Reports and Literature.

Group-11

BBA LLB (B)

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 Acknowledgement

It was indeed an opportunity for us to do research and prepare a Project Report on

ENRON CORPORATION during the programme B.B.A.L.L.B. in PRINCIPLES AND
PRACTISES (Sem. I). during our work of collecting information about the company for
preparing this Project Report, we learnt many interesting things about the company,
along with the aspects of the industry as a whole. Preparation of such kind of report,
which is based on secondary information, requires data gathering from many sources
like Company Websites, Other Websites, Company Reports, NEWS and Other
Literature. We are thankful to Mr. Jayanta Bagchi, who given us the opportunity to
collect data about the company and allowed us to prepare the Report. We are also
thankful to the Company Website, NEWS Papers, other websites provided us the
required information. Moreover we thank all those who supported us directly or
indirectly in preparing this Report, without whose assistance, preparing this Report
might have been much difficult for us.

Group-11

BBA LLB (B)

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 Team Members

Sl. NO. Name Roll No.

1. Chittaranjan Mishra 1482095

2. Yash Raj 1482100

3. Choudhury Tapasya Das 1482104

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 Contents

Preface Page 1

Acknowledgement Page 2

Team Members Page 3

Contents Page 4

Introduction of the topic Page 5

Scope and purpose of the study Page 6

Importance of the Study Page 7

Facts of the topic Page 8

Discussion of the questions Page 9-10-11

My Recommendation Page 12

Conclusion Page 13

Bibliography Page 14

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 INTRODUCTION OF THE TOPIC

A unit is defined as sick industrial company where:

 A company is registered for not less than five years.
 If at the end of any financial year, it has accumulated losses equal to or
exceeding 50 per cent of its average net worth in the immediately preceding
four financial years.
 Failed to repay debts to its creditor(s) in three consecutive quarters on demand
made in writing for such repayment.

Enron Corporation (former New York Stock Exchange ticker symbol ENE) was an
American energy, commodities and services company based in Houston, Texas.
Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000
staff and was one of the world's major electricity, natural gas, communications,
and pulp and paper companies, with claimed revenues of nearly $111 billion during
2000.
Fortune named Enron "America's Most Innovative Company" for six consecutive
years.

The two important points are discussed in the Project:

1: FACTORS CAUSED THE SICKNESS FOR THE UNIT

2: MANAGEMENT FAILURE

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 SCOPE AND PURPOSE OF THE STUDY

Research/Study is important when conducted correctly because it helps us to

understand and possibly even solve existing or possible problems in the world.

The fall of the Enron Corporation was like the speedy collapse of a towering colossus.
The Enron bankruptcy will go down in history as a cautionary tale for big business.
From bureaucratic missteps to unfortunate accounting practices, the company's
downfall and declaration of bankruptcy stems from several sources.
Here is a wide scope to visualize the practical importance of the subject-PRINCIPLES
AND PRACTICES OF MANAGEMENT.

In this corporate competitive environment each unit have to follow PPM for an
affirmative reaction, faulting of which will result in a great trouble for the unit.

Here discussion is on the reasons of sickness in the unit and the stand of Management
failure for above. Purpose is to understand the importance of PRINCIPLES AND
PRACTICES OF MANAGEMENT to sustain in the progressing business environment.

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 Importance of the Study

Management is a universal phenomenon. This art is as old as human

civilization. It is all pervasive and is concerned with all the aspects of the working of a
unit in the public or private sectors. It is virtually present in all works of life. Absense
of proper management invariably results in wastage of time, money and effort. The
productive efficiency of business firms depends a great deal on the quality of
management. Also, effectiveness of management is a major factor determining the
growth and prosperity of business on which rests the process of economic growth.
That is why it is necessary to study the principles and practises of management with
particular reference to business activities.

Importance of management is universally accepted in business. Management

acts as a driving force to make the best possible utilization of men, money and
materials efficiently to manage today’s diverse, dynamic and highly-competitive
modern business.

Here refer to above the importance of the discussion can be felt to avoid an
unfortunate sickness/closure of a business. The realistic case with correct discussion
the points can be rectified efficiently.

1- Reasons of sickness/closure of the unit.

2- Management failure responsible for the above.

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 Facts of the Topic

Brief timeline:

 Enron was a Houston-based natural gas pipeline company formed by merger

in1985.

 By early 2001. Enron had morphed into the 7 th largest US Company, and the

largest US buyer/seller of natural gas and electricity.

 Enron was heavily involved in energy brokering, electronic trading, global

commodity and options trading, etc.

 On October 16, 2001, in the first major sign of trouble, Enron announces a huge

third-quarter loss of $618 million.

 On October 22, 2001, the Securities and Exchange Commission (SEC) begins

an inquiry into Enron’s accounting practices.

 On December 2, 2001, Enron files for Bankruptcy.

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 Reasons of the closure of Enron:

Investments

 Enron dealt in energy. According to Infinite Energy, the first and main cause of Enron's
collapse was failed investments. Enron invested money in fiber-optic networks, a
power plant in India and water distribution in the United Kingdom, to name a few. While
a company the size of Enron could afford occasional losses, the mounting, failed
investments added up and created a plethora of debt.

Hidden Losses

 Infinite Energy states that the second and most shady reason for Enron's collapse was
the hidden losses within the company. The company allegedly enriched itself and
formed partnerships specifically designed to hide $500 million in company losses.
Because these losses were hidden, many continued buying Enron stock. According to
the Journal of Accountancy, the bottom fell out underneath this plan in early 2001
when stock prices plummeted. Enron used false and deceptive methods to creatively
hide its dealings, which led to losses of investors and creditor trust.

Competition

 In the late 1990s, Enron started receiving stiff competition from other energy
companies such as Duke Energy, Dynegy and El Paso, according to the Journal of
Accountancy. With each new competitor, Enron profited less and less. Enron had
previously thrived on large, rapid trading, which became less frequent with more
competition and reduced energy costs.

Reasons of the closure of Enron:

Examining whether or not they should adjust their trading habits, the company
continued on the same track they had previously operated on without regard to the
changing environment around them.

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 Energy Price Collapse

 The collapse in energy prices and the end of the California energy crisis was the death
nail for Enron, according to Infinite Energy. In early 2001, California consumed less
energy than it did in two previous years and the government introduced price caps for
power companies like Enron. These caps meant that Enron could no longer collect as
much money per kilowatt of energy, according to Infinite Energy. The Journal of
Accountancy states that on October 16, Enron announced its first losses in more than
four years. After this announcement, it was a rapid fall to bankruptcy. A merger was in
the works with Dynegy in mid-November, but Dynegy pulled it on November 28
because of Enron's lack of disclosure. November 30 saw Enron's stock closing at 26
cents per share. The Journal of Accountancy states that once Enron was known as a
junk stock, bankruptcy followed on December 2, 2001.

It starts at the top

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Management Failure

THE ORGANIZATIONAL FRAUD TRIANGLE

1. Risk Assessment and Control Group: An integral part of Enron’s

management control system was the Risk Assessment and Control group
(RAC). RAC was responsible for approving all trading deals and managing
Enron’s overall risk. Every deal put together by a business unit had to be
described in a Deal Approval Sheet (DASH), which was independently
assessed by RAC analysts. Deals required various levels of approval from
numerous departments, including approval from the most senior levels, even
from the board of directors.
2. Enron’s Performance Review System: Another vital link in Enron’s
management controls was the Peer Review Committee (PRC) system. The
intention of the PRC system was to align employee action with the company’s
strategic objectives, retaining and rewarding superior performers on a fair and
consistent basis. Under the PRC system, every six months each employee
received a formal performance review, based on formal feedback categories
including revenue generation, and was assigned a final mark from one to five
(the employee’s photo was displayed on a screen). Feedback came from
various sources including the employee’s boss, as well as from five co-
workers, superiors or subordinates that the employee selected. The bottom 15
percent, no matter how good they were, received a “5” which automatically
meant redeployment to “Siberia,” a special area where they had two weeks to
try to find another job at Enron. If they did not – and most did not – it was “out
the door.”
3. Code of Ethics: Enron’s code served as a behavioral control intended to
prohibit a range of unethical behaviors. The code stressed the following four
key principles: communication, respect, integrity and excellence, and included
phrases such as “we treat others as we would like to be treated ourselves”,
“we do not tolerate abusive or disrespectful treatment” and “we work with
customers and prospects openly, honestly and sincerely”. The code, which
each employee signed on joining Enron and annually re-affirmed, proved to
be of wide interest – so much so that the political history division of the
Smithsonian National Museum of American History acquired it for its
permanent exhibit of exemplary business practices.

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 My Recommendation

1. You make money in the new economy in the same ways you make money in

the old economy - by providing goods or services that have real value.

2. Financial cleverness is no substitute for a good corporate strategy.

3. The arrogance of corporate executives who claim they are the best and the

brightest, "the most innovative," and who present themselves as superstars

should be a "red flag" for investors, directors and the public.

4. Executives who are paid too much can think they are above the rules and can

be tempted to cut ethical corners to retain their wealth and perquisites.

5. Government regulations and rules need to be updated for the new economy,

not relaxed and eliminated.

6. The Enron case demonstrates the need to reform the accounting and corporate

governance practices in the United States.

7. Enron case made government officials to pay close attention to deregulated

energy market.

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 Conclusion

I think that another Enron can very well happen – it is incredible how blind people

can get when they attain huge power and have so much more to lose than the

average person. The Enron case served as a good lesson to many for a decent

period of time, yet we still have corruption in business and government. Obviously,

not enough people have learned from Enron’s disaster.

All of these behaviours were initiated to some extent, due to the highly competitive

market in which Enron was competing and the ever increasing demands of its

shareholders. Therefore although more regulations have been put in place to prevent

such behaviour, we still reside in a society that fosters such actions. Although people

may have temporarily been wary of companies and top executives, I believe that we

easily forget. I also think, that even if we are distrusting, we aren’t necessarily

preventing these sorts of FINANCIAL collapses from happening again.

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 Bibliography:

http://www.bsu.edu/mcobwin/ajb/?p=126

http://management.about.com/cs/generalmanagement/a/Enron091902.htm

http://editingbysuzy.yolasite.com/why-enron-failed.php

http://www.studymode.com/subjects/enron-what-caused-the-ethical-collapse-

page1.html

https://www.studymode.com/signup?redirectUrl=%2Fessays%2FLeadership-

Failures-Of-Enron

http://stratton-praxis.blogspot.in/2012/03/enron-case-questions.html

http://dineshperspective.blogspot.in/2011/05/enron-case-question-answer-1-what-

lead.html

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