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.

2.  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.

5.  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.

6.  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

7.  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.

8.  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.

10.  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.

11.  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.

12.  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.

13.  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.”

14.  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.

15.  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.

17. 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.

18.  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.

19.  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.

20.  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.

21.  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.