Enron Case

Only available on StudyMode
  • Download(s) : 967
  • Published : August 2, 2009
Open Document
Text Preview
Part B:

What role did the CFO play in creating the problems that led to Enron’s financial problems? In order to prevent the losses from appearing on its financial statements, Enron used questionable accounting practices. To misrepresent its true financial condition, Andrew Fastow, the Enron’s CFO, takes his role involving unconsolidated partnerships and “special purpose entities”, which would later become known as the LJM partnership. Taking advantage from the SPEs’s main purpose, which provided the companies with a mechanism to raise money for various needs without having to report the debt in their balance sheets, Enron’s CFO directly ran these partnerships and designed them to purchase the underperforming assets (such as Enron's poorly performing stocks and stakes). Although being recorded as related third parties, these partnerships were never consolidated so that debt could be getting off its balance sheet and the company itself could boost and have not had to show the real numbers to stockholders. Andrew Fastow was using SPEs to conceal some $1 billion in Enron debt. Overall, according to Enron, Fastow made about $30 million from LJM by using these partnerships to get kickbacks which were disguised as gifts from family members who invested in them and enriching himself. His manipulation of the off-balance-sheet partnerships to take on debts, hide losses and kick off inflated revenues while banning employees' stock sales was one of the reasons triggered the collapse of the company and its bankruptcy.

Did Enron’s bankers, auditors and attorneys contribute to Enron’s demise? If so, what was their contribution? One part of the fallout from Enron's demise involves its relations with banker, auditor and attorneys. Although the banks knew there was a problem with Enron finance, their underwriting filings on debt issues sold to the public proved that wwithout its bankers, of course, Enron could never remained its schemes on the investing public. The auditors were also unethical in the failure of Enron. Enron’s auditor, Arthur Andersen was responsible for ensuring the accuracy of Enron’s financial statements and internal bookkeeping. Auditors failed to ask Enron to better explain its complex partnerships before certifying Enron’s financial statement. It is the major question raised by the startling disclosure that auditors from Arthur Andersen began destroying Enron documents and purging computer files in September and continued doing so while Enron collapsed. Houston's largest law firm, Vinson & Elkins, was also the one who related to the demise by involving in structuring its transactions, disclosing its financials to the public and conducting internal investigations of its alleged wrongdoing.(3)

How did the corporate culture of Enron contribute to its bankruptcy? In some ways, the corporate culture of Enron was the primary cause of the collapse. In many years, Enron had practiced its creative, high-risk but arrogant culture environment. Corporations are composed of cultures. In Enron’s culture, employees rewarded for succeeding at any cost. By using the organization’s appraisal system, known as ‘rank and yank’, Enron had forces its employees to battle each other in order to survive. Instead of assess value and contribution, this system encourages the increases in employee’s unwillingness to report misconduct, the reduction of team-work or helping peers and generally self-centered and self-serving actions. As a result, problems were covered up rather than being communicated to management. With the overwhelming aura of pride, the senior executives believed Enron would always be the best and its people will handle the risk without danger. There was a banner in Enron’s lobby proclaimed, “the world leading Company.” This pride let them down. When their business starts performing poorly, they tried to cover up their own failure in order to protect their reputations and their compensation as the most successful...
tracking img