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Enron case study

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This presentation talks about the various problems that Enron faced. It also gives a 10 point solution for how not to become the next Enron.

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Enron case study

  1. 1.  American energy, commodities, and services company based in Houston, Texas.  Employed approximately 20,000 staff.  Claimed revenues of nearly $101 billion during 2000.  Enron filed for bankruptcy protection in late 2001  Attained its greatest value of $90 and to less than $1 per share at the end of 2001.
  2. 2.  More commonly known as rank and yank system.  A rating system used by companies to evaluate their employees. The system requires the managers to evaluate each individual, and rank them into one of three categories.  This system is widely-used, but remains controversial due to the competition it creates, and also the reality that not all employees will fit neatly into one of the categories and might end up in a category that does not reflect their true performance.
  3. 3.  Creates negative competitive spirit between the employees.  They start working for the benefit of themselves and not the company.  A certain percentage of employees loose their jobs every year.  It makes employees more competitive.  It is a transparent system for evaluating employees. DISADVANTAGES ADVANTAGES
  4. 4.  In the case of Enron, the forced ranking distribution scheme created negativity amongst employees as they became more and more greedy.  Traders no longer worked in the interest of the company but worked for personal benefits.
  5. 5.  The basic method to prevent this kind of employee behavior, at micro and macro level will be simply to not implement this scheme.  Even if this scheme is implemented, company should see that whether this scheme is positively motivating the employees to perform better.  A few companies that successfully use this scheme are Microsoft and GE.
  6. 6.  There were huge issues with the way that the organization did their auditing and accounting work.  There was no transparency in their work.  Also they did not prepare true and fair balance sheets and cash flow statements.
  7. 7.  Enron sponsored a retirement plan – a “401(k)” – for its employees to which they can contribute a portion of their pay on a tax-deferred basis.  As of December 31, 2000, 62% of the assets held in the corporation’s 401(k) retirement plan consisted of Enron stock.  Many individual Enron employees held even larger percentages of Enron stock in their 401(k) accounts.  Shares of Enron, which in January 2001 traded for more than $80/share, were worth less than 70 cents in January 2002.  Consequently, the company’s bankruptcy has substantially reduced the value of its employees’ retirement accounts.  The losses suffered by participants of the 401(k) plan have prompted questions about the laws and regulations that govern these plans.
  8. 8.  The board of directors had a major role to play in the company’s destruction.  They promoted unfair practices to fill their pockets, instead of stopping them.  This promoted corruption in the organization.
  9. 9.  Securities analysts employed by investment banks provide research and make “buy,” “sell,” or “hold” recommendations for the use of their sales staffs and their investor clients.  Analyst support was crucial to Enron because it required constant infusions of funding from the financial markets.  On November 29, 2001, after Enron’s stock had fallen 99% from its high, and after rating agencies had downgraded its debt to “junk bond” status, only 2 of 11 major firm analysts rated its stock a “sell.”
  10. 10.  Banking companies, notably Citigroup and J.P. Morgan Chase, were involved in both the investment banking and the commercial banking businesses with Enron.  These companies suffered a lot due to Enron’s fall.  They wanted to earn as much as possible.  They totally disregarded the fact that there was no transparency in the business.
  11. 11.  These issues could have been easily prevented at both, micro and macro levels.  At a micro level, the companies can have people who are committed to the company and want to work with transparency and sincerity.  At a macro level, the governing boards should promote fair practices in the organization. They should design policies that will make the organization more transparent and less prone to scrutiny.
  12. 12. A measure of the fair value of accounts that can change over time, such as assets and liabilities. Mark to market aims to provide a realistic appraisal of an institution's or company's current financial situation. The accounting act of recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value. When the net asset value (NAV) of a mutual fund is valued based on the most current market valuation.
  13. 13.  Enron used this scheme to appreciate their share value.  They showed profits that were only an assumption and never existed in reality.  This way they were able to window dress their share value.  They exploited the scheme.
  14. 14.  Preventing the wrong use of such schemes is really important so as to present a realistic picture of the company.  At a Micro level, the board of directors should have forced the CFO, Andrew Fastow, to resign.  At a Macro level, the government should have made new policies so as to prevent companies from misusing the mark to market accounting technique.
  15. 15.  Examine ethical climate and put safeguards in place.  Don't just print, post and pray.  Build a robust ethics infrastructure that is self- sustaining.  Publicly commit to being an ethical organization.  Separate auditing from consulting functions.
  16. 16.  Talk with employees at all levels often.  Build ethical conduct into corporate systems.  Establish an Ethics Committee to constantly keep the organization focused on the seven main provisions of the Federal Sentencing Guidelines of 1991 in mind.  Live your corporate values.  Keep the lines of communications open.

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