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The Rise and Fall of Enron
Case Prepared by
Dr. Sarah Stanwick, Auburn University, School of Accountancy
Dr. Peter Stanwick, Auburn University, Department of Management
No part of this case may be reproduced without the consent of the authors.
The authors gratefully acknowledge the receipt of a 2002-2003 Daniel F. Breeden
Endowment for Faculty Enhancement Grant.
The Rise of Enron
The origins of Enron started with the 1985 merger of the Houston Natural Gas company
with InterNorth. This merger was management’s first attempt to develop a national
pipeline system for natural gas. The following year, the former CEO of Houston Natural
Gas, Kenneth Lay, became the chairman and CEO of Enron. In 1989, Jeffrey Skilling
became an employee of Enron. In 1996, Skilling became the president and Chief
Operating Officer of Enron. By 2000, Enron had announced total revenues of $100
billion which was double the revenues of 1999. This huge increase was due to the
increasingly complex energy trading sector of the company. Based on market
capitalization, Enron became the world’s sixth largest energy company. In February
2001, Jeffrey Skilling became Enron’s new CEO and Kenneth Lay retained his title of
chairman. By August of 2001, Jeffrey Skilling abruptly resigned as CEO and Kenneth
Lay retained both titles again (Houston Chronicle, 2002). During his tenure at Enron,
Skilling made it clear to his employees that he wanted to focus solely on revenue and
profit margin increases and had no interest in examining Enron’s cash flows (Fowler,
2002). It was through both Lay and Skilling that Enron was transformed from an
established pipeline operator to a dominant energy trader (Fink, 2002).
In October 2001, Enron reported in their third quarter results that investment partnerships
that had been developed by Enron’s CFO had generated $35 million in revenue, The
CFO, Andrew Fastow, was fired by Enron and an official inquiry began at the Securities
and Exchange Commission pertaining to these transactions. By November, Enron
announced that it had to revise the company’s earnings for the previous four years and for
all three quarters of 2001, with an initial estimated adjustment of $600 million (Houston
Chronicle, 2002).
During the month of November, another energy company, Dynergy considers merging
with Enron but then walks away from the deal. Dynergy had initially offered up to $8.9
billion in stock for control of Enron. Around the same time, Kenneth Lay refused a
severance package of over $60 million. By November 30th, the House of Representatives
has established a panel to review the financial transactions at Enron (Wuensche, 2003).
Causes of the Downfall at Enron
The performance of the employees was heavily concentrated towards bonuses and stock
options. One of Enron’s top goals was continuous increase in price, which had to been
based on continuously increasing levels of profitability. Rich Kinder, who was Enron’s
Chief operating officer from 1990 to 1996, reinforced this obsession with stock price.
Kinder left Enron in 1996 when he realized that he would not be able to become CEO
(Fowler, 2002).
The human resources department at Enron was told to hire strong outgoing ruthless
applicants. They had no problem hiring people from the top Ivy League Schools
(Ivanovich, 2002). Enron implemented a “rank and yank’ employee evaluation system
where employees ranked each other from 1 to 5 on their contribution toward the
company. Each division was required to rank 20 percent of their employees at the lowest
ranking. Employee were quick to rank others less favorable in order to increase their own
standings (Fowler, 2002).
This driven culture was established early at Enron. In 1987, Enron was accused of
manipulating oil-trading transactions in one of their New York offices. In addition, Enron
traders have been accused for years for generating false or incorrect transactions in order
to manipulate the volume levels. Kenneth Lay’s response to these accusations was not to
fire the traders but to continue to employee them. It is claimed that Lay stated that Enron
needed that “revenue” to continue their growth trends. However, Lay was forced to fire
the traders six months later when both Enron’s competitors and customers were
