Case Analysis - Enron

CASE ANALYSIS

Submitted to: Prof. (Dr.) Gajavelli V S

Submitted by: Ben C Kurian 2009067

EXECUTIVE SUMMARY

Only months before Enron Corp.’s bankruptcy filing in December 2001, the firm was widely regarded as one of the most innovative, fastest growing, and best managed businesses in the United States. With the swift collapse, shareholders, including thousands of Enron workers who held company stock in their retirement accounts, lost tens of billions of dollars. Investigations of wrongdoing raised many questions, but Enron’s failure primarily raises financial oversight issues with wider applications. This analysis provides an overview of risk management and how the various hedging instruments in particular derivatives, were used by Enron and other companies help manage risk. A delineation of Enron’s unique hedging schemes is done to provide insights with respect to their structure as well as the motivation for their creation. In addition, the analysis highlights how the SPEs were used to keep losses out of Enron’s financial statements, how investors in the SPEs were provided with massive financial returns on modest investments, and why Enron’s declining stock price ultimately exposed the questionable activities of the CFO and others. A section is also dedicated to address the specific, improper accounting employed by Enron, including consolidation rules.

INTRODUCTION

Formed in 1985 from a merger of Houston Natural Gas and Internorth, Enron Corp. was the first nationwide natural gas pipeline network. Over time, the firm’s business focus shifted from the regulated transportation of natural gas to unregulated energy trading markets. The guiding principle seems to have been that there was more money to be made in buying and selling financial contracts linked to the value of energy assets (and to other economic variables) than in actual ownership of physical assets. Until late 2001,...