«Enron: The Smartest Guys in the Room» - Free Essay Paper
- When did Enron enter bankruptcy?
Enron entered bankruptcy in late 2001. Before Enron became bankrupt, it had employed about 20,000 employees. In addition, the company was considered the global player in pulp and paper, communications, natural gas, and electricity sectors. Moreover, the company had been named the most innovative company in the United States for six subsequent years. It is unimaginable that Enron would be declared bankrupt as it was considered the seventh largest corporation in the United States and had assets amounting to about $ 70 billion. The analysts had also praised the company for a novel business model. The combination of these factors raises even more questions as to why such a seemingly successful company could become bankrupt.
- How many jobs were lost? How much in pension and retirement funds was lost?
About 20,000 jobs were lost following the Bankruptcy of Enron. In addition, $2 billion dollars in retirement funds disappeared during the fall of Enron.
- When was the Sarbanes- Oxley Act (SOX) passed?
The Sarbanes-Oxley Act was passed on July 30, 2002 as a response to counter the increase in accounting and corporate scandals in the US such as the Enron case. SOX sought to establish new standards for the boards and management public companies, as well as public accounting companies. The law outlined the responsibilities of the boards of directors in public companies, including the criminal penalties associated with the particular forms of misconduct. It also provided the Securities and Exchange Commission with the mandate of establishing regulations that determine the methods of compliance with the law for the public companies cases.
- Who are the “smartest guys in the room”?
Ken Lay and Jeff Skilling were considered the “smartest guys” in the room. They were named “the smartest guys” in the room because they were heading the seventh largest corporation in the United States with the value of $70 billion. Ken Lay was the Chairman and Chief Executive Officer of Enron during the period of 1985-2002. Jeff Skilling was the CEO of Enron during all the years that Ken Lay was the chairman. Ken Lay and Jeff Skilling were considered the captains of a powerful ship (Enron) that was considered too powerful to sink.
- Why were they shredding documents at Enron? How did SOX deal with the shredding of document issue?
The shredding of the documents at Enron raised concerns regarding the evidence loss; this fact was considered as a reason to impede the investigation. It was reported that Arthur Andersen – the accounting company – shredded at least one ton of papers containing evidence that could have shed light on the Enron scandal. The SOX dealt with the documents issue by setting up the criminal penalties for individuals who knowingly destroyed, falsified, covered up, concealed, or mutilated any documents or objects with the intent of impeding the investigation.
- Who were Ken Lay, Skilling, and Fastow?
Ken Lay was the chairman and CEO of Enron during the period between 1985 and 2002. His tenure ended with his resignation from office. It is always presumed that the man played afore role in the scandal that resulted in the bankruptcy of Enron. Jeff Skilling was also a former President, CEO (during the period between February and August 2001), and chief operating officer of Enron. Andrew Fastow was the Chief Financial Officer at Enron.
- What was the background of Ken Lay?
Ken Lay was the son of a Baptist preacher and a tractor sales representative. When being a child, Ken Lay was involved in various jobs such as mowing lawns and delivering newspapers. In addition, Ken Law was ambitious and wanted to be a successful businessperson in order to improve his financial condition including that of his family. Ken Lay narrated a story about sitting on a tractor and having dreams about the world of business. He had a Ph.D. in Economics and was a staunch advocate of deregulation, which shaped his worldview on business. He envisioned the energy markets devoid of the government regulation especially in the natural gas sector. As a result, the man used his influence to ensure that the energy industry in the US was deregulated.
- What did Ken Kay advocate as to the energy market?
Ken Lay advocated the deregulation of the energy market. He was of the view that the government involvement in the energy market was developing the problem rather than solving it. Without the government involvement, he envisioned a profitable energy industry, which in turn, motivated him to invest in the energy market. In Washington, Ken Lay took part in the crusade aimed at liberating businesspeople from the government regulations and rules. According to Ken Lay, the societies that have reported broad-based economic growth within the shortest duration were not under tight government control, and were not necessarily those endowed with the vast natural resources or those with biggest economies. The power of deregulation played a crucial role in motivating Ken Lay to found Enron in 1965.
- Is the market for energy the same as the market for oranges? Why?
No, they are not the same markets. Electricity cannot be treated as oranges as electricity is considered the lifeblood of the society. The concept of the free market can work for the case of oranges market; however, in the electricity market, it can be expensive for the end consumers because it is susceptible to manipulation.
- What did Fortune magazine think of Enron?
The Fortune Magazine considered Enron the most innovative company in the United States. For six subsequent years, the Fortune Magazine had chosen Enron as the most admired and innovative company in the country.
- Who is the reporter who raised questions about Enron? What was her problem with Enron?
It was Bethany McLean. Her problem with Enron was the company’s financial condition. She raised concerns regarding how Enron made money. After analyzing the cash flows, McLean asserted that the financials of Enron did not make any sense.
- Why did the Enron get away with its practices for as long as it did?
Enron managed to get away with its practices because, in its books of account, the company created a perception that it was performing well when in the real sense, it was experiencing serious financial troubles. The Enron chief financial officer, Andy Fastow, was the one who was covering up the actual financial position of Enron. At the surface, Enron was reporting profits when it was actually losing money each year. Fastow used structured finance in concealing the true financial position of the company.
- What is Mark to Market accounting? Why is it problematic?
Mark to market accounting involves using the actual/acquisition price in recording assets in the books of account. Essentially, the fair value associated with an asset is based on the prevailing market price; as a result, the values in the balance sheet can be changed to reflect the market conditions. The problem with this approach to accounting is that it is subjective and vulnerable to manipulation. Enron used this approach in accounting for manipulating the data in the books of accounts. For instance, mark to market profits can actually be losses. Under mark to market accounting, Enron could book prospective future profits after signing a deal, which provided an opportunity for the company to manipulate its profits.
- What kind of work environment did Enron have? How did the employees deal with each other? What is the Performance Review Committee or rank and yank?
The work environment at Enron was characterized by competition. The organization adopted a survival of the fittest approach in order to instill competition among the employees. The employees dealt with each other through competition. According to the Performance Review Committee (Rank and Yank), which required grading the employees on the scale from 1 to 5, 10 percent of employees had to be ranked 5, and they were annually fired.
- What was the culture of the traders?
Enron traders had adopted the Darwinism culture, which emphasized on the survival of the fittest. As a result, employees at Enron developed a tough and aggressive culture. As one employee in the documentary stated, he could stamp on a colleague’s throat if it guaranteed doubling his compensation. In addition, Enron traders had to be the “biggest, baddest house in town”. This is a clear indicator of how aggressive the Enron traders were.
- Who said “I am Enron”?
Jeff Skilling said these words as he considered Enron to be successful.
- Did the employees see Skilling as a role model? How do we know?
Yes, they did. The employees adopted Skilling’s and Ken Lay’s belief in the free market and developed it into an ideology. They perceived the free market ideology as a new economic religion.
- Who brought strippers to the Enron building? Was he cheating on his wife? Did he hide it?
Lou Pai, who was running the Enron Energy Services (EES), brought strippers into the Enron building. He cheated on his wife, as it later turned out that he divorced his wife to marry a stripper who had his child. In addition, he would use petrol in order to remove the perfume of the strippers as a mean of concealing his activities.
- Ken Lay said that the stock price should always be higher. What is the problem with this statement?
The problem with the stock price being always higher implies that there is no risk investing in the Enron stocks. It means it would create a perception among the potential investors that the Enron stocks are a guaranteed investment, which results in a “trust me” story compelling people to make investments in the company’s stocks.
- What is pump and dump?
Pump and dump involves using exaggerated, misleading, and false statements with the main objective of boosting the stock price. Those who use pump and dump usually have stocks in the company, and then begin selling their stocks after the stock price has soared. In the case of Enron, top executives pushed the stock price up and subsequently sold their stocks.
- Why was failure not an option on the India power plant project?
Failure was not an option because Enron had already paid several million in bonuses to the company executives. These payouts were based on the imaginary profits yet to be realized, which meant that Enron had to come up with an option that could generate income to recover the payouts.
- Why was John Olson fired? Did Merrill Lynch profit from firing him? What is the significance of the Olson episode?
John Olson was fired because he was the only analyst who was unconvinced about the Enron story of success and financial situation. Enron preferred analysts who would recommend buying the Enron stocks, something that Olson was against. Essentially, any analyst who did not agree with Enron was considered an enemy of the company.
- Who called Enron a “black box”? What does that mean?
Bethany McLean is the reporter who referred to Enron as a Black Box; she meant that Enron was trading in an overvalued stock. The Black Box refers to a situation involving perceptions, according to which, the numbers appear good on the surface and conceal what is actually taking place. Financial statement may be used to indicate financial health when, in fact, the company is struggling with the cash flows, reporting losses, and is in debt as with the case of Enron.
- Who is Bethany McLean?
Bethany McLean was a Fortune reporter; she was the first to raise concerns regarding the financial situation of Enron. Bethany questioned the manner, in which Enron made money. For McLean, the Enron financial statements did not indicate fraud; however, she maintained that something did not add up although she was not able to prove it.
- What is the question raised by McLean that Skilling could not answer?
Bethany McLean asked Jeff Skilling, “How does Enron make its money,” to which Skilling was unable to answer and got very upset. Skilling maintained that he was not in a position to answer the question raised by McLean because she asked questions that were specific to the accountant, and he was not in a position to answer them because he was not an accountant.
- Who is blamed more for the fraud is it Skilling or Fastow? Why?
Fastow is considered the maestro of the Enron downfall. He was tasked with devising a way to make sure that the stock price remained high despite the dismal financial performance of the company. In order to ensure that the stock price was high, he had to cheat constantly for each quarter in order to cover up the previous cheating until it reached a point where the cheating could not be stopped. In addition, Fastow set up numerous special companies to boost the Enron stock through making the debt look like it had disappeared. For the outside investors, it looked like Enron was cashing in while, in the real sense, Enron was distributing its debt to the companies created by Fastow.
- What did Fastow think of Skilling? How does that help us understand the fraud?
Fastow was a protégé of Skilling, who was the boss. Fastow tried to please Skilling. In addition, Fastow idolized Skilling; as a result, in order to please Skilling, he had to come up with a way of making sure that the Enron stock price remained high despite the fact that the company had debt amounting to $30 billion.
- Who are the gatekeepers who “signed off” on the fraud?
Many players signed off on the fraud including the lawyers that represented the company (Elkins and Vincent), the banks involved including the Citibank, JP Morgan and Chase, and Arthur Andersen – the accounting firm.
- Why did Skilling call an investor an “asshole”? How did the employees react to that?
The investor was raising concerns with respect to why Enron, as the financial services company, was not publishing its balance sheet as the other financial services firms did. This situation resulted in consternation among the employees and across the Wall Street; people were dismayed by the fact that the CEO of the Fortune 500 company publicly called an investor an “asshole.”
- At Enron there was contempt for all values except one- what was it?
The audio tapes of traders at Enron revealed that the company had contempt for any value with the exception of making money.
- What was Arthur Andersen charged with?
Arthur Andersen, the accounting firm, was charged with obstructing justice, which can be attributed to its shredding of documents that could have helped with the investigation.
- Whose responsibility was the failure of Enron? Could it happen again?
Enron should not be considered solely responsible for its downfall. Arthur Andersen, the lawyers, and bankers involved were responsible for the Enron downfall, as well. Yes, it could happen again.
- Why did Congress hold hearings on Enron?
The Congressional hearings on Enron had the main objective of finding people responsible for the Enron downfall; the process required some time
- With the California market manipulation what are the questions that, McLean stated, Enron did not ask itself?
Enron did not ask itself on how the manipulation of the Californian market will affect the price of power.
- What is the significance of the Milgram experiment? What percentage of participants were willing to shock to death as long as the direction came from a seemingly legitimate source?
The Milgram’s experiment had the objective of determining the characteristics that made people evil. Simply stated, the experiment sought to determine whether common people could actually do bad things or whether there was an evil strain that compelled people to do bad things. As soon as a person embraces inhumane behavior, he/she can do anything. Milgram found out that 50 percent of the participants were ready to shock to death provided the commands appeared to be from a legitimate source.
- Who said we are the good guys, on the side of the angels?
Jeff Skilling said these words.
- What is FERC? Who recommended the chair? How did the chair react to the Californian energy crisis?
FERC refers to the federal agency that is charged with the responsibility of regulating the energy market in the United States. Ken Lay recommended the chair of the FERC. FERC responded to the Californian energy crisis by imposing regional price caps, which helped in ending the energy crisis.
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