The Fall of Enron September, 2017 Name/Uni
Enron, founded in 1985, collapsed in 2001 in one of the fastest reversal of fortunes in corporate America. The purpose of this exercise is to evaluate your understanding of the key issues and opportunities missed by Enron’s management team. Enron had a Blue Chip board and the technical expertise to management its risks so what worked and what led to the rapid failure of Enron’s strategy.
- In 1985, the U.S gas market was going through a great deal of change through deregulation. How did Enron adapt to these changes?
- How did Enron use deregulation to improve their trading of gas and other commodity products?
III. The new president of Enron trading operations, Jeff Skilling, began to refine the trading model regarding “heavy” assets, such as pipelines. What impact did this have on Enron’s operations? Was it positive or negative and why?
- Enron began to make strategic acquisitions in the following countries
Choose all that apply:
- The United Kingdom
- Eastern Europe
- The Middle East
- Central & South America
- None of the above
- Enron’s strategy depended largely on deregulation and market fragmentation.
Select the strategic and proactive steps taken by Enron to grow their business in deregulated and fragmented markets. Choose all that apply:
- Enron made strategic investments in countries with little regulation and were highly fragmented
- Enron diversified into water and power plants.
- Enron sold assets in highly regulated markets
- Enron became a vocal advocate for deregulation of prices in the energy markets (large lobby effort)
- Enron pushed the envelope in accounting for their complex trading strategy because existing accounting standards did not fully incorporate the assumptions used by Enron and agreed to by their external auditors, Arthur Andersen
- Only A., C. and E. above
- All but C. above
- Enron was known for its risk management practices. Please explain how Enron managed risk?
- Enron’s Risk Assessment and Control group (RAC) employed Value at Risk (VaR) methods and supplemented that analysis with Monte Carlo simulations to evaluate sudden economic shocks to their model T/F
VII. How did Enron change the accounting standards to accommodate their interpretation of accounting for their complex trades? Place an “X” by your choice(s):
__________ Use present value accounting for long-term contracts (mark to market)
__________ Early recognition of revenue based on present value of future income streams
__________ Extensive use of forward contracts with exposure to counterparty credit risks
__________ Extensive use of special purpose entities (SPEs) which allowed off-balance arrangements while permitting income and losses to be recognized in income statements
VIII. Enron ran a relatively tight ship while managing a great deal of complexity. In your opinion what key actions led to Enron’s failure?
Prime Essay Services , written from scratch, delivered on time, at affordable rates!