The Falling of Enron Company. Essay Example.

2021-06-01 15:25:22
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Harvey Mudd College
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Enron is a former energy company that was based in Houston, Texas. It was founded in 1985 from a merger between Inter North and Houston Natural Gas. The company managed to take the award of Americas Most Innovative Company six year in a row. There total revenue collection per year stood at over US$ 100 billion. One of Enrons original companies, Inter North was a major producer and distributor of natural gas. Unlike its counterpart, Houston Natural Gas was undergoing some financial difficulties at the time of the merger. The new laws imposed upon Natural Gas and the rise in gas prices resulted into a period of decline. The merger a way of Inter North trying to avoid a harsh takeover. HNG was their poison pill to fend off takeover attempts. Although the merger helped in reducing the takeover attempts from other companies it had also resulted into the new company inheriting problems from the former companies.

According to (Gordon, 2002) Enron still had debts owed to other companies. Debts in excess of 300 million dollars. However the new CEO managed to consolidate the companys assets and sold off those that he thought would not be needed by the new company. He managed to bring the company into profitability and provided stability. In the late 1990s the rise of increased internet usage created an opportunity for Enron to venture into the fibre optic business. They were going to apply the same model they used in selling natural gas to selling internet to consumers. For quite some time it seemed to have worked as their shares skyrocketed. However the companys officials greed is what would ultimately lead to their downfall. In an attempt to gain more market share they bought dark fibres with the hopes of making profit when the prices of these cables rise. They were counting on these prices to rise because of increased internet usage. Using estimates, they included the worth of these dark fibres into their current income creating an exaggerated income. In 2001 Enron Broadband sector was reporting losses sabotaging a deal that they were to sign with Blockbuster Inc. for distribution of movies.

Enron had decided to enter the energy business through its subsidiary Azurix. The new business ended up plunging them into 2 billion dollars in debt. The company executives sought to cover this up by manipulating the account books to show profits while trying to isolate the losses as only limited to offshore assets. Eventually the public would get wind of what was going on inside the company and this led the investors to dumping shares of the company. The company main assets were eventually bought out by other investors from Omaha. The company had only managed to stay afloat because of their good marketing which resulted into their profits and assets being inflated.

Enron was a case of tough performance goals that pushed the company executives to cheating. One of Enrons goals was to gain bigger market share in the electricity power generation. Unfortunately this was also the time that were still paying off some of their huge debt. The selling off of some of the company assets was a smart move from the management however they sought to expand too fast too big. The ramping up of electric generating units all over the country was creating strain on the company account books (Healy, & Palepu, 2003).

Jefrey Skilling gas bank strategy was a good move as it allowed the company to handle the strain imposed upon it by the ramping up of electricity generating units. However no sooner had they stabilised than they sought to achieve another goal of increasing their presence overseas massively. They had acquired quite a substantial amount of assets overseas. The problem was none of these assets proved to be very profitable in the long run. At the end of the day they came back to depend on their assets at home to offset the deficit created by their overseas assets. Taking a loan to invest in a non-profitable venture was hurting the company finances.

The company sought to move away from being an energy company to becoming an investment firm. Their confidence bolstered by the success of the Gas Bank, they wanted to make profits from the margins of products they traded (Fusaro & Miller, 2002). However this proved profitable in the gas bank only and it had made the company executives to be profit hungry.

The company had a goal of becoming a major player in the electricity generation business and took a gamble in California by acquiring Portland General Electric. They were trying to capitalise on the Energy Policy Act of 1992 that provided for energy deregulation. They tried offering discounts in an attempt to lure customers to switch from their electrical supplier but they had to shut down the retail section of this business. Another huge investment made by the company looking for short term returns that didnt pay out.

They also had a goal of big participation into the information technology business. Their entry was rushed and did not employ enough precautions in their acquisitions. Up to this point Enron had survived by cashing in quick at instance opportunities where they get instant returns. In the ICT sector they however changed strategy. They were looking at the long-term gain. The purchase of the dark fiber was a testament to that. However they were applying the same investment tactics of short-term gain into long-term gain. Dumping every coin they had into one thing.

The company sought to exclude the management failures from their accounting books by hiding the losses. They did this in order to maintain the share prices high. Looking at the time of these management failures, the company stock was trading at almost $ 90 a share. The company executives were making millions by selling off these shares. They were directly gaining from this. Blowing the whistle on the failures would have dropped the price of company shares quite drastically. To them the best way to continue the marketing and alter the account books.

Although its still a point of dispute the company leaders argued that they were not aware of the company operations that were designed to conceal liabilities and inflate profits. This clearly shows there was a serious lack of communication among the company officials. As the leaders they had a responsibility of knowing everything that was taking place in the company but for some reason they claimed to have been caught off-guard by the revelations and were just as stunned as the rest of the public (Cunningham & Harris, 2006).

Project management would have helped foresee certain investment mistakes and prepare for them. An investment such as Azurix that ended up bankrupting the company could have been avoided if proper planning procedure was adapted. The fact that those in charge failed to notice the aging infrastructure of Wessex Water means that proper project management procedures were not followed. On top of this is that those in charge were not aware of the requirement of 12% reduction in rates by the British authorities. Critical chain project management could have been used to counter the uncertainties of the project. The company had limited resources in terms of funding which they should have taken into consideration.

References

Gordon, J. N. (2002). Governance failures of the Enron board and the new information order of Sarbanes-Oxley. Conn. L. Rev., 35, 1125.

Healy, P. M., & Palepu, K. G. (2003). The fall of Enron. The Journal of Economic Perspectives, 17(2), 3-26.

Cunningham, G. M., & Harris, J. E. (2006). Enron and Arthur Adndersen: The Case of the Crooked E and the Fallen A. Global Perspectives on Accounting Education, 3, 27.

Fusaro, P. C., & Miller, R. M. (2002). What went wrong at Enron: Everyone's guide to the largest bankruptcy in US history. John Wiley & Sons.

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