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Assignment No.

Critical Analysis & Summary of Case Study

Submitted To: Dr Ali Tirmizi

Submitted By: Zain Ahmed Malik

Course: Financial Management

Program: MBA 3.5 Years (4th Semester)

Summary of Case Study

Historical Background

This case study revolves around Enron Corporation, an American energy and services based
company which was founded in 1985 by Kenneth Lay after merging Houston Natural Gas and
InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff of
executives that by the use of accounting loopholes, special purpose entities, and poor financial
reporting were able to hide billions of dollars in debt from failed deals and projects. The Chief
Financial Officer Andrew Fastow and other company executives also misled Enron’s Board of
Directors and Audit Committee on high risk accounting practices and pressured Arthur Andersen
(Founder of Auditing Firm) to ignore the issues as well.

Events of Bankruptcy

Enron shareholders filed a $40 billion law suit after the company’s stock price, which achieved a
high of US$90.75 per share in mid-2000, plummeted to less than $1 by the end of November
2001. The U.S. Securities and Exchange Commission (SEC) began an investigation. On
December 2, 2001, Enron filed for bankruptcy under United States Bankruptcy code. Enron’s
$63.4 billion in assets made it the largest corporate bankruptcy in U.S. history.

Ethical Assessment

Enron didn’t start out as an unethical business. As we have seen in this case study, what
introduced the virus was the pursuit of personal wealth via very rapid growth. This led to the
introduction of quite extreme incentive schemes to attract and motivate very bright and driven
people, which, in turn, led to an unhealthy focus on short term earnings.

The next step was, naturally, to look at how earnings could be massaged to achieve the
aggressive revenue and earnings targets. Since the massaged figures for growth in earnings still
left a shortfall in cash, Enron quickly maxed out on its borrowing abilities.

But issuing more equity would have hurt the share price, on which most of the incentives were
based. So schemes had to be created to produce funding secretly and this funding had to be
hidden. In this way, an amoral and unethical culture developed in Enron in which customers,
suppliers and even colleagues were misled and exploited to achieve targets. And the top
management, who were rewarding themselves with these same incentive schemes, boasted that a
pure, market-driven ethos was propelling Enron to greatness and deluded themselves that this
equated to ethical behavior. Lay even lectured the California authorities, whom Enron was
cheating, that Enron was a model of business ethics.
Critical Analysis

The flaws in Enron should have been spotted from early on, and indeed were periodically
commented on by various observers from the early nineties onward. If independent ethical and
corporate governance surveys had been conducted by independent parties they would have
highlighted the growing problems.

One would conclude from certain surveys in June 2000 that:

 Neither customers, suppliers, financiers nor local communities rated Enron’s morality in
terms of business ethics
 Customers and local communities thought they were breaking regulations
 Customers and suppliers thought they were probably bending their own rules
 Customers, shareholders, suppliers, financiers and local communities thought they were
not truly honest


It is clear with the benefit of hindsight that what started out as an imaginative and ground-
breaking idea, which transformed the natural gas supply industry, rapidly evolved into a
megalomaniac vision of creating a world-leading company. Intellectual self-confidence mutated
into contempt for traditional business models and created an environment in which top
management became divorced from reality.