Enron Case

2015/3/25

Key Problems Business Ethics: What Went Wrong With Enron

By George Gu Benjamin Chen Shadow Chiang 2015/03/25

• How Enron got to where they are today? • Why did Enron choose such a road? • What should Enron do at a time like that?

Key Issues

• Interior Factors: -Accounting Fraud -Corporate governance • Exterior Factors: -Audit -SEC -Public reputation

a. Ways to Make Profit

In 1985: - Gas Transmission (90%) - Liquid Fuels (7%) - Gas & Oil Exploration (3%) - In 1999: -Wholesale (64%) -Transmission (33%) -Exploration (3%)

Gas Bank

• The essence of the so-called “Gas Bank” is a trading market of future goods and share option which allows trading natural gas transportation contracts.

I

• Gradual deregulation of energy industry • Build tangible assets like power plant, water works and natural gas pipelines.

II

• A good income in the emerging market • Attract more corporates, let the market reach a specific scale. • Maturity market, fierce competition and fluctuation in market price • Drop tangible assets, use e-commerce platform and financial innovation to arbitrage.

III

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b.1. Why Did a so Innovative Corporate Go Astray?

Reduce cost of financing Hold high credit rate In order to hold Maintain dominant market position high credit rate, Enron couldn’t have Which is crucial to more liabilities or maintain dominant The ultimate goal of issue additional market position of Enron new stock. Enron.

• In the second half of the 1990’s, Enron step into further expansion, an enormous of money is needed. • Borrow debt: Since these investments could not generate satisfied profit and cash flow in a short period, Enron firmly believed which would come true in long term. • As a result, Enron yearned for cheap capital to support its high growth.

b.2. Corporate Governance

• Excessive pursuit of innovation • Risk preference-”“Higher risk means more profit” • Company culture turned aggressive • Goal Oriented

c....