Case Study Enron the Rise and Fall of a Company

Explore the dramatic rise and fall of Enron in this comprehensive case study. Learn about its innovative trading strategies, corporate deception, and the catastrophic ethical failures that led to its collapse, reshaping corporate governance and regulations in the wake of one of America’s largest financial scandals.

The Rise and Fall of Enron: A Case Study (Old Edition)

Enron, once a titan of the energy sector, utilized innovative trading strategies and deregulation to soar in the 1990s. However, deceptive accounting practices and financial manipulation led to its dramatic collapse in 2001. The scandal exposed severe corporate ethics failures, resulting in bankruptcy and widespread investor losses. This Case Study analysis a company of Enron how they Rise and Fall.

Background:

Enron, originally known as Natural Gas Company in the 1930s, transformed into a major American gas company. Following its acquisition by InterNorth in 1979, the company merged with Houston Natural Gas in 1985 to form Enron. An early setback in 1987, where oil traders overextended the company’s account by $1 billion, leaving Enron in significant debt, prompted a need for innovative business strategies to generate profits and improve cash flow.

Strategic Innovation and Expansion:

In 1988, Enron opened its first overseas office in England. Faced with substantial debt, top executives, during a “Come to Jesus” meeting, decided to pursue unregulated markets alongside their existing pipeline business. CEO Kenneth Lay hired McKinsey and Company to develop strategic plans, bringing in Jeffrey Skilling, a consultant with a strong banking and management background. Skilling proposed a “gas bank” model, where Enron would buy gas from suppliers and sell it to consumers, addressing the company’s cash and profit issues.

The deregulation of energy markets allowed companies like Enron to trade gas and speculate on future prices. The “Gas Bank” model offered long-term supply at fixed prices, a concept that greatly interested Lay. In 1990, Lay appointed Skilling to head the newly created Enron Finance Corporation, which began offering financing for oil and gas producers. By 1996, Skilling was promoted to Chief Operating Officer (COO) and convinced Lay to apply the “gas bank” model to electric energy, a new strategy to boost revenue and profits. They actively promoted this concept to power companies and energy regulators nationwide.

Other Strategic:

Enron gained national attention for its advocacy of deregulating electric utilities. In 1997, it acquired Portland General Corporation for approximately $2.1 billion. By the end of that year, Enron had become the leading buyer and seller of electricity and natural gas, with revenue growing from its 1985 inception to $5 billion, and its workforce expanding from 200 to over 2,500. Driven by its success, Enron sought to expand into trading various commodities, including water, steel, coal, paper, and weather.

Andrew Fastow, a Kellogg School of Management MBA graduate with experience in leveraged buyouts, was hired by Skilling in 1990 and quickly rose to Chief Financial Officer (CFO) in 1998. Fastow developed a new financial structure for the company, utilizing off-book practices and selling portions of risk to access new capital.

The company’s broadband services (EBS) unit, a subsidiary, was a key enabler of Enron’s plans. In 1999, Enron launched its online trading website, Enron Online (EOL), which quickly became a significant financial development. Approximately 90% of Enron’s income came from trades on EOL, where Enron acted as a counterparty in every transaction. By providing valuable information and expertise in the energy sector, Enron attracted traders and partners, fostering confidence in EOL’s secure transaction environment. In 2000 alone, Enron Online facilitated over $335 billion in trades.

Enron’s Operations:

Enron’s business spanned three main markets:

• Wholesale Services (EWS): This was Enron’s largest business unit, responsible for wholesale trading and marketing. It offered a range of wholesale products, physical commodities, and financial risk management services. Enron delivered more than double the natural gas and electricity of its competitors. EWS provided flexible networks and solutions at predictable prices, and its online services offered real-time pricing for over 1,200 products, helping customers evaluate market opportunities.
• Global Services (EGS): This unit consolidated all of Enron’s asset-based businesses, including North American pipelines (e.g., Northern Natural Gas, Florida Gas Transmission, Portland General Electric, Transwestern Pipeline, Northern Border Partners) and international companies (e.g., Enron Wind, Azurix and Wessex Water, EOITT Energy Corporation). These global commodity transactions were accessible through Enron Online, which provided real-time trading tools and expert information.
• Energy Services (EES): Representing Enron’s retail segment, EES offered companies efficient ways to implement their energy strategies. It was the largest provider of energy services to industrial and commercial clients, signing contracts valued at $16 billion in 2000.

Timeline of Key Developments:

• Early 1980s: Enron argued for deregulation, which the US government began to implement, lifting restrictions on energy production and sales. Enron capitalized on this, aiming to be a middleman offering stable prices. It expanded its focus to electricity, water, and even London weather.
• Late 1980s: Enron started trading futures and natural gas commodities, profiting from gas contracts and soon dominating the natural gas market. Its increasing market power allowed it to predict future prices and bet on price movements, guaranteeing future profits or losses.
• 1990s: Enron built an energy commodity business by trading in unregulated markets, becoming a significant competitor and controlling over a quarter of the gas business. It provided smaller companies with hedging opportunities against price movements. Enron also secured the Securities and Exchange Commission (SEC) approval for Mark-to-Market accounting, which valued assets and liabilities at fair value rather than actual cost, allowing Enron to report estimated profits as actual ones.
• Early 2000s: Inspired by the Dot-Com Boom, Enron ventured into a high-speed broadband telecom network, aiming to create video-on-demand services and a new trading market. This innovative idea, coupled with a soaring economy, attracted investors, driving Enron’s share price to over $90. Income rose by over 40% in a few years to an estimated $100 billion, and Enron was widely recognized as one of the most admired and innovative companies globally.

The California Energy Crisis:

Enron’s troubles began in 2000 when the Federal Energy Regulatory Commission (FERC) launched an investigation into manipulated electricity prices in California. Enron exploited the state’s poorly deregulated electricity sector, gaining control of the power grid and increasing electricity prices by 800% amidst widespread blackouts.

In 2001, Enron reported over $400 million in earnings, a 40% increase from the previous year. However, FERC’s subsequent implementation of an electricity price cap in California eased the crisis, preventing Enron from charging exorbitant rates. This significantly impacted Enron’s stock, marking the beginning of the company’s collapse.

The Collapse of Enron:

• August 14, 2001: CEO Jeff Skilling resigned, and former CEO Kenneth Lay retook the position. Skilling’s departure followed growing concerns about fraudulent accounting and poor management. Sherron Watkins, an executive, warned Lay of the company’s irregularities in a letter, leading investors to sell off millions of shares, causing a $4 stock decrease. Despite the dramatic drop from a high of $90 at the end of 2000 to under $40, Lay and Enron insisted the company would recover.
• November 2001: Enron filed documents with the SEC, revising its financial statements for the past four years and revealing significant debt. Dynegy, a smaller rival, announced an agreement to acquire Enron for $8 billion but later terminated talks due to Enron’s failure to disclose its off-balance-sheet debt.
• December 2001: Enron filed for Chapter 11 bankruptcy protection and sued Dynegy for terminating the merger agreement. Its stock plummeted to less than $1 a share, and Kenneth Lay resigned as chairman.
• January 2002: The United States Department of Justice initiated a full criminal investigation after Andrew Fastow and Kenneth Lay invoked the Fifth Amendment and refused to testify. Enron, once a global corporate giant, became bankrupt. Employees and investors were outraged by the executives’ actions, and auditors, banks, credit rating agencies, analysts, and regulators were criticized for their complicity. The final factors contributing to Enron’s downfall included internal policies, the involvement of investment banks and advisors, criminal activity, and poor rating and auditing practices.

Illegal Practices and Deception:

Enron’s success was ultimately built on inflated profits, money laundering, fraud, and illegal accounting practices. Many of its operations and companies were losing money, but these losses were concealed from investors and shareholders through structured finance vehicles. These illegal accounting techniques were designed to maintain a high share price, attract investments, and project a façade of success, rather than to transfer risk or achieve economic goals. For example, Enron falsely reported a $110 million profit from a failed video-on-demand project with Blockbuster.

Enron established independent partnerships to legally remove losses from its balance sheet by categorizing them as assets. Investment money flowing into these partnerships was then presented as Enron’s profits, effectively reducing losses, increasing reported profits, and keeping debt off its financial statements. This was done to enhance its credit rating and protect its market reputation. Enron would fund these partnerships with its own stock, and the partnerships, in turn, would create Special Purpose Entities (SPEs).

Ironically, Andrew Fastow, a senior Enron executive, also served as the principal for these SPEs, receiving substantial returns and compensation for his role in favoring Enron. The SPEs would agree to contracts that paid Enron if its investments declined in value. These payments from the SPEs were then recorded as profits on Enron’s balance sheets. These practices, known only to senior executives, were inadequately disclosed. The self-enrichment of Enron’s senior executives through these misleading and illegal actions constituted fraud and a conflict of interest.

📈 Enron Corporation: The Rise and Fall – Case Study (2025 Edition)

“We are the good guys… white hats.”
— Jeff Skilling, CEO, 6 months before bankruptcy

1. Humble Pipes to Wall-Street Darling (1985-2000)

• 1985: Merger of Houston Natural Gas + InterNorth → birth of Enron.
• 1990s: Pioneered “Gas Bank” trading model and EnronOnline (first web-based commodity exchange).
• Revenue rocket: $31 B (1998) → $100 B (2000); 7th largest US firm; Fortune “Most Innovative Company” 6 years straight.
• Stock peak: $90.75 (Aug 2000); market cap $70 B.

2. Innovation or Illusion? – The Machinery of Fraud

Mechanism	What It Did	Scale
Special Purpose Entities (SPEs)	Off-balance-sheet debt; mark-to-model revenue	$27 B hidden liabilities
Mark-to-market accounting	Booked 20-year contract profits Day 1	Inflated income $1 B+
Pre-pay swaps	Loans booked as operating cash	$8 B debt disguised
LJM1 & LJM2	CFO Fastow runs SPEs → self-dealing	$45 M personal profit

Arthur Andersen audits AND consults on same SPEs → conflict of interest; shreds 1 ton of docs when SEC probe begins.

3. Timeline of Collapse

Date	Milestone
14 Aug 2001	CEO Skilling resigns suddenly; Lay returns.
16 Oct 2001	$618 M Q3 loss; $1.2 B equity write-down.
8 Nov 2001	Restates earnings 1997-2000 ↓ $591 M; admits SPEs not independent.
2 Dec 2001	Files Chapter 11 – largest US bankruptcy at the time; $74 B assets .
Jun 2002	Arthur Andersen indicted; surrenders CPA licence → dissolved .

Stock nosedive: $90.75 → $0.26 in 24 trading days; 59,000 employees lose pensions worth $2 B.

4. Human & Economic Fallout

• 25,000 employees laid off; $2 B pension wiped out.
• Creditors recover ~20 ¢ per $; $40 B+ in claims.
• Market confidence shock: Dow ↓ 11 % in “Enron week”; S&P volatility +35 %.

5. Regulatory Earthquake

• Sarbanes-Oxley Act 2002 – CEO/CFO certification, audit committee independence, Sec. 404 internal-controls audit.
• PCAOB created – auditor oversight removed from self-regulation.
• FASB Interpretation 46 – SPE consolidation rules tightened; off-balance-sheet vehicles > 10 % equity must consolidate.

6. Strategic & Ethical Lessons

1. “Innovation” ≠ Integrity – mark-to-model became mark-to-myth.
2. Board governance failure – audit committee approved high-risk accounting & CFO conflict deals.
3. Auditor independence matters – Andersen earned $27 M audit + $25 M consulting; economic bond > professional skepticism.
4. Cash-flow statement is king – Enron’s operating cash was negative while reported EPS rose; red flag ignored by analysts.
5. Whistle-blower systems work – Sherron Watkins’ memo to Lay (Aug 2001) was ignored; SOX now mandates anonymous hotlines.

7. Exam / Interview Take-aways

• Event-study: −18 % abnormal return in 10 days post-Oct 22 SEC announcement.
• Agency theory: executives’ stock-option gains ($750 M bonuses in 2000) > entire net income ($975 M) .
• Reg-tech catalyst: SOX compliance cost$1.4 M/yr per large firm but restored investor confidence; IPO pipeline re-opened by 2004.

Bottom line:

Enron turned energy trading into a casino and auditing into a rubber stamp—a textbook case of how aggressive innovation, weak governance, and conflicted auditors can vaporise $70 B in 24 days, prompting the most sweeping corporate-governance reform since the Great Depression.