February 17, 2013
The Enron and WoldCom Scandals
1. The segment of Enron’s operations that got them into difficulties had several parts. They published misleading financial reports. They could not meet their bridge financing commitment with Barclay Bank because outside investors were not found. Because of this, they restated activities of JEDI and Chewco SPEs so they could be retroactively consolidated into Enron’s accounts. The SPEs helped to hide the inaccurate accounting records. Enron’s legal department wrote contracts that helped provide a cover for misuse of funds regarding the SPEs. Future revenue was reported as current revenue. Stocks were paid with promissory notes instead of cash. They also engaged in off-the-books activities and excessive executive compensation. Enron’s board of directors allowed the executives, accountants and legal department to use Special Purpose Entities (SPEs), a type of partnership, in an attempt to camouflage their debt and create a façade of financial stability (Brooks, 2007).
3. Enron’s directors understood how profits were made. They also knew management’s activities were dishonest. Andrew Fastow was active in forming the SPE partnerships and his affiliation with LJM2 was a conflict of interest. When Enron began experiencing financial problems in October 2001, the board of directors began holding special meetings. They were paid with cash, restricted stock, phantom stock units and stock options. The Senate Subcommittee Report, dated July 8, 2002, found that the Enron board of directors was aware that employees participated in management of the SPEs which was a conflict of interest. The directors ignored the inaccurate accounting, extensive unrecorded activities and excessive executive compensation. The Senate report discovered that the board of directors knew of financial activities between Enron and some of the...