ALEEM MANSOOR

FA18-BAF-019

CORPORATE GOVERNANCE

ASSIGNMENT NO .2
 Question no.1
I believe Enron's administration has acted unethically. The unethical manner can be seen the
way management is operating the company’s operations. Following are unethical manners
that the Enron management has made:
 There were six auditors in the company 3 of them were located outside the US. Management
was not transparent, since it was dishonest and invisible to all audit and accounting functions
of Enron.
 The board could not consider the financial usage of unconsolidated affiliates and unregulated
authority was exercised by the CEO. The board has permitted the corporation to leave out its
balance sheet for $27 billion and the company was in the borrowing scheme with its
companies and was not prepared to repay the loans.
 The Enron management also excluded considerable debt from its records by the establishment
of a variety of sheet companies, which hid the corporation from its balance sheet, in order to
give a much greater appearance to the financial reports than they really were.
 Even the company profit was decreasing, and the debt was increasing. The company EPS was
increasing, or we can say they were exaggerating their EPS. This means that they are cheating
with their accounting numbers.
A proper corporate governance checks and balances mechanism may have recognized their
dishonest behavior, stopping the company from disbanding. A team that is balanced without
the double roles of President and CEO could have been hired to prevent such an individual's
unrestricted control. To properly supervise the management measures of the company, the
management board should have been established as external non-executive managers.
Another better position for the auditors may have been a transition or rotation (Arthur
Anderson), as they did not challenge or report on corrupt actions in Enron, which had already
earned significantly from other services they rendered to Enron. Both board members should
have had restrictions on the actions of other Enron enterprises. In order to effectively track
progress with the targets, strong internal management systems have had to be in place.
Question no.2
The Enron pipeline corporation was founded and eventually became a business in multiple
types of extremely complex operations, by diversification. This included a number of
unconventional and complex activities between related parties in which Enron financial
leadership had profitable financial interests. The management team has encountered a variety
of professional and distinguished personalities, including its board and its audit committee.
Enron was continually changing its core competency. The firms core competency is
actually naturally gas. Its trading and growth of natural gas is successful. Firms core
competency are logistics, trading and risk management which creates flexibility in other
commodities like electricity. The economy of the United States was the longest economic run
in the 1990s. Lay deleted Enron's executive executives, which mostly had young people who
had no big bear market. New investment opportunities have opened up everywhere, including
oil futures.
Enron's chief executive officer was Skilling in 1996. He persuaded Lay that the concept
of the gas bank could also be applicable to the electricity market. Skilling and Lay traveled
around the country and sell the idea to utility managers and regulators. In the United States,
the corporation is a key power force in advocating for electrical utility deregulation. In 1997,
Portland General Electric Corp. purchased Enron for about $2 billion. By the year end,
Skilling had transformed the Enron Capital and Trade Resources division to be the largest
wholesale natural gas and electricity supplier and seller in the country. From 2 trillion dollars,
the revenue rose to 7 trillion dollars and over 200,000 workers in the division expanded. They
were prepared to build demand for something that someone would want to sell, using the
same idea that they have succeeded so well with the gas bank: potential coal, paper, steel,
water and even the weather contracts.
Question no. 3
Arthur Anderson played important part in collapse of Enron. One of the main failures of
Arthur Anderson auditing company was the collapse of Enron. The first blunder he made was
that he didn’t follow the rules and regulations of GAAP (Generally Accepted Accounting
Principles). The Principle doesn't allow to record the issued shares unless they are paid in
cash. The auditors didn't realize to use this rule which resulted as a major aspect in the
downfall. This blunder cost $67 billion loss for shareholders. Another problem game when
Arthur Andersen auditors could not inform Enron that their chief financial officer had
conflicts with his team regarding their ideas which also created a problem for Enron. Another
mistake made by the auditors was that they could not inform Enron that their policies we're
not in the right direction that would benefit the shareholders.
Arthur Andersen wouldn't have made this blunder if it was off few people. The people
who should be punished are the people handling the accounts of Enron. These are the people
over in direct contact or had the direct Association when the failures were being recorded.
Other people from the company should not be blamed because they didn't had any much of
the information so they cannot be blamed the main punishment should be given to people
handling the accounts.
The auditors should always make the decisions in favor of the public rather than the
management or the shareholders of the company. They should make all the information
available to the public. The main mistake made by the auditors was that they published the
fake results in the financial reports which favored the shareholders and the management. This
thing created a false image of the company. This thing created a good image off the company,
but they were cheating.
Question no.4
Enron, the power deregulation leader who has been one of the top ten corporations of the
world, has failed. Then, the fall of Enron begs the dilemma of how directors should be
strengthened and can challenge dubious transactions by corporate managers. Due to Enron's
ruins, many corporate compliance issues have arisen. Overall, Enron's corporate governance
was almost in every respect lax. If we have seen, the United States and the United Kingdom
were strongly reacted to the fall of Enron and corporate governance. This is because of the
shortcomings in the organizational management structure of Enron. In addition, it is important
to continuously update corporate management codes and to systematically monitor corporate
governance controls and balance sheets to prevent future Enron's from developing elsewhere.
 Well, all governance mistakes are important when you become a big company. So I
think every mistake had an impact. But I think that following mistake might have a greater
impact on the company. Checks and balances in company governance can only detect corrupt
behaviors, not eradicate them. The subjective aspect of cheating is a complicating element in
the problems of fraud and moral collapse.
Question no.5
Yes, Enron success was based on unethical bases. Managers of companies and managers play
an important role which directly affects the company's ethical management. The managers
were permitted to be guided by actions that would profit themselves rather than really benefit
the organization in its entirety. The Enron controversy entails unlawful and immoral
operations exacerbated by unethical conduct on behalf of executives, which is permitted by
lack of accountability and negligence in external auditing. While Enron has a code of ethics,
management and managerial staff did not observe and did not give workers a good example to
pursue, they were advised only to follow suit and do whatever they needed to maximize
money.
Market accounting is one of the different disappointment tactics that Enron employs to
mask the reality of the company. This approach permitted them to include potential predicted
profits in their accounts even though there had not yet been earned revenue, which made
investors dependent on this deceptive information because of differences in estimates. This
allowed them to predict returns on a developed asset without thinking about the demand in the
future.
The usage of a special entity is one of Enron's tactics of disappointment that seems
more successful than it was. Special purpose companies are supposedly legitimate
corporations that have been formed to do a particular or temporary mission, but Andrew
Fastow used that to cover his debts and overestimate his capital.
Enron was characterized as having a community in which everyone is highly
competitive so as to do everything possible to conclude an agreement. This is due to
compensation and rewards offered as cash or stock options right after a contract has been
concluded regardless of the result of the deal. Everybody at work became very aggressive
with this mentality. The appraisal of success for all Enron workers has led to their
productivity as well and they have to do well because they have to do their thing if they're not
successful enough because they'll risk their work in a short period of time. This made the staff
aggressive. The incentive scheme of Enron also promoted the use of non-standard accounting
methods. Employees then took and respected the culture requested by the representatives of
the group.