To explain the Enron’s scandal, it is important to replace the context of the story. Enron was an energy company, operating almost exclusively in America. The company was based in Houston, Texas. The company was founded in 1985 and directed by Kenneth Lay, CEO of Enron.
The company was very successful indeed, in 1995,Enron has been considerate as the world’s leading company. Moreover, from 1993 to 2000, Enron was listed in the Fortune 500 as the 7th most innovative company with revenue superior to $ 100 billion. And finally, in 2001, Enron is the largest energy group operating mainly in the United States.
The scandal started in 1997 with the beginning of partnerships called LJM (LJM was an acronym of Lay’sfamily’s members). Those partnerships turned out to be fake, and the loans made to Enron’s were perceived as sales. The accountant of the company, Watlkins, is the whistleblower, the one who reveal the scandal.
In October 2001, Enron’s recorded a loss of $618 million and in December of the same year, Enron declared the bankruptcy.
Question 1: Relative risks of substantial intangible assetsFirst, the substantial intangible assets of Enron are: intellectual property, talent to innovate, financial acumen and finally the reputation. We can say that the value of intangible assets is more variable than the value of tangible assets. The risk of intangible assets is higher than the risk of tangible assets because the company can’t sell these assets on a secondary market so they might not beliquidated at a reasonable price.
The examples of decreasing value of intangible assets of Enron are: reputation of Enron could change; Enron could lose patent and after a scandal, the brand could have a bad image.
Question 2: Phrases « train crash » and « house of cards »
In order to describe Enron’s collapse, the commentators used the phrases “train crash” and “house of cards”.
The expression“train crash” refers to the financial situation of the company. We can say that the driver of this train was not acting in the best interests of the company and knew the train would crash at some point. That is why he preferred to jump out of the train before it was too late, meaning before the train crashed. Thus, Jeff Skilling left the company before the scandal became public.
Several times inthe article the commentators used the expression “house of cards”. The “house of cards” represents Enron’s financial situation. Indeed, its financial situation was as weak as a house of cards. When the sandal became public it was like removing a card and the house collapsed. Indeed, Watkins started to reveal the accounting issues of the company which generated a sort of mass panicked effect amongthe stakeholders. The stock price decreased significantly and Enron had to start paying back its debt.
Question 3: Would shareholders have been willing to invest in Enron knowing the LJM partnership agreements?
The scandal started with Andrew Fastow, the Chief Financial Officer of Enron who has been responsible for the realization of three partnerships called LJM 1, LJM 2 and LJM 3. The idea wasthe following: Enron received cash from LJM; this cash was loans, but it was considered in Enron’s treasury, as sales. Therefore, it allowed an increase in Enron’s revenue, and therefore the profit, and at the same time, a decrease of the debt. It is true that from an external view, this situation seems attractive. That is the reason why shareholders kept on investing. If Enron’s shareholderswould have been aware of this weak financial situation, they would not have invested.
Question 4: Potential problems in being the CEO of Enron as well as chairman
In the Enron’s case, Kenneth Lay is the CEO and the chairman. He cannot monitor the company’s activities in an objective way. Indeed, he tempts to satisfy his own interests. Furthermore, the executives received substantial benefits,...
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