Enron Collapse Case Study

In 1984, Kenneth L. Lay became the Chief Executive Officer of

Houston Natural Gas Corporation, a pipeline operator. Soon after he

took position, his firm merged with Internorth, another pipeline company. Lay became the CEO of the merged firm, and the name of the

firm was changed to Enron. As deregulation of energy became more

widespread (Lay influenced the rate of change) the mission of Enron

widened to include the trading of energy contracts.

Shortly after the merger with Internorth, Lay hired the consulting firm, McKinsey & Co., to help develop a business strategy for

Enron. One of the consultants assigned to the Enron study was Jeffrey Skilling. Lay subsequently hired Skilling to develop new business activities for Enron. Skilling successfully launched Enron's highly

profitable business of trading energy derivatives.

Andrew Fastow was hired by Enron in 1990 from Continental Illinois Bank in Chicago and was appointed Chief Financial

Officer (CFO) of Enron in 1998. Fastow was thought to complement Skilling's interests and abilities. Appointing Fastow as CFO was

Enron's second biggest mistake (it probably would not have been

made if the first mistake of allowing the departure of Rich Kinder had

not been made).

1ACCOUNTING/FINANCE LESSONS OF ENRON - A Case Study

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2 Accounting/Finance Lessons of Enron: A Case Study

Rich Kinder

In November 1996, Enron announced that Rich Kinder was leaving Enron. Shortly before that announcement the Enron Board of

Directors (and Ken Lay) had failed to appoint Kinder as the CEO.

The decision not to appoint Kinder as the President of Enron had very

little to do with Kinder's acknowledged managerial abilities.

Kinder was (and is) a world-class manager, one of the few effective

hands-on managers at Enron. The departure of Kinder was the most

significant negative event for Enron during the 1990s. It would likely

have