Deloris Alston
November 26, 2011
Enron and WorldCom scandals chp#2 1. Which segment of its operations got Enron into difficulties?
They didn't have a governance system as we know them today
They spent more time trying to find loopholes in tax law rather than how to make legitimate operations profitable 3. Did Enron’s directors understand how profits were being made in this segment? Why or why not? I believe they knew that the company was cheating on the books to make profit for themselves they were using different books for the company and themselves.
5.Ken Lay was the chair of the board and the CEO for much of the time. How did this probably contribute to the lack of proper governance? He was ultimately in charge on Enron. He allowed a free-wheeling, high-risk environment. Governance means how the company was run/operated/supervised. So if he was running it he pretty much knew what was going on inside the company.
6. What aspect of the Enron governance system failed to work properly, and why? I believe poor management of the company in the accouting office, and poor keeping the books and reporting profit and hiding things that were taking place in the company.
9. Identify conflict of interest in: * SPE activities * Arthur Andersen’s activities * Executive activities

THE FALL OF ENRON has understandably generated significant interest in the professional literature as well as in the popular press. The activities and events underlying Enron's collapse are manifold, but several stand out as particularly noteworthy. One is the use of special purpose entities (SPEs). Although SPEs often serve legitimate economic purposes and are still in use today, Enron used several of them to hide debt and to overstate equity and earnings. Accounting standards required that third parties own at least 3 percent of the assets in SPEs. This rule was violated. Enron also represented that the SPEs helped it to hedge downside risk. This turned out not to be the case, because the SPEs used Enron's stock and financial guarantees to carry out the hedges. While Arthur Andersen, Enron's outside auditor, initially raised objections, the accounting firm ultimately softened its position. Andrew Fastow, Enron's former CFO, became a partner in several SPEs and profited personally, which poses serious questions as to whether he breached his fiduciary duty to Enron stockholders. In late 2001, Enron was forced to restate its financials for 1997 through 2000 after consolidating the SPEs, resulting in a decline in earnings of approximately $600 million and an increase in debt of approximately the same amount. Equity fell by $1.2 billion (see Healy and Palepu 2003 for a fuller description).
A second procedure Enron used was mark-to-market accounting, in which a firm that signs a long-term contract can, under certain circumstances, recognize as current revenue the present value of the expected stream of future inflows and expense the present value of expected future costs. While such a process is appropriate in some situations, Enron used mark-to-market accounting to book future revenues as current revenue even when serious questions existed as to whether the long-term revenues would in fact materialize.
As the price of Enron stock declined, some Enron executives exercised their stock options and sold their shares, in some cases out of public view through loan repayment plans, while at the same time encouraging employees to hold and even to buy the stock. Many employees who tried to sell the stock in their 401(k) plans were barred from doing so and lost not only their jobs but most or all of the asset value of their retirement plans. To rap it up is that all of these people lost what really counts in this buisness is to be trust worth and good ethics, thye were all out to make money and they were not looking out for the invester.