The Enron and WorldCom scandals
#1. The segment that put Enron in difficulties was the LJM1. That SPE was the worst of all four SPE’s. This one had no independant investor that could put up the 3% that they needed for the controlling investor, where CHEWCO would work as a counterparty accounting to the U>S> guidelines. Enron already owned 97% of CHEWCO, where if they had a controlling investor, the profits from CHEWCO would go directly to Enron’s assets. Later, they did not find a controller investor, and invented another SPE, which was LJM2. The problems in LJM1 still was there that affected LJM2. Arthur Anderson, the auditor for Enron, went ahead and approved of this SPE, knowing that the financial statements had to be restated. The LJM1 provided the market for assets which made false profits off the balanced sheet, liabilities were hidden, and the equity was overstated by 1.2 billion. Along with LJM1 and LJM2, CHEWCO was making profits for Enron by doing syndicated investments, which showed that the balance sheets were off by the liabilities that were hidden by 628 million. The revenues were recognized early and Enron was making profits on their own shares. #3. The board of directors was unable to rely on the information that they were receiving from Enron and Arthur Anderson. They even could not rely on the companies policies, because they knew later that they were not getting followed. The board trusted what they received, but they failed to understand their role that included a challenge and compliance cycle, which in turn, they had trusted too much even though the red flags were flying. The board did get pay offs with cash, restricted stocks, phantom stock units, and stock options. The total equity compensation of Enron’s board members was 350,000, so they would not talk and reveal the mishaps within the company. #5. When Lay was confronted with a letter from Sherron Watkins, stating that the governance rule and company...
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