ECON3340 (1241.O01)
Case 4 – Enron
Tanner Visser
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What factors led to the collapse of Enron?
o
Creative in it's financial arrangements
o
Transferred assets/borrowings/profits/losses to partnerships
o
Kept losses off of its balance sheet
o
Failure to obtain financing
Should Enron have used partnerships in the manner it did? What, if anything, is
wrong with using partnerships such as the Raptors, Chewco, and the LJMs?
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o
Should not have used the partnerships in this matter
o
Hiding the losses opened up Enron to risks
o
Unethical
o
Corrupted employees
o
Defrauded their shareholder's
What responsibilities does the board of directors have in such situations? What
responsibilities did and should Enron and its directors have for its employees’
401(k) plans?
o
Responsible for the performance of the company
o
Fiduciary Duty to the shareholder's
o
The board did not block the questionable transactions/financial
arrangements
o
Board should have done more review into the details of the
transactions/financial arrangements
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o
Employees 401K's were matched by Enron with Enron shares
o
Enron shared 65% of the assets
o
During Enron's collapse the 401K's were decimated
o
Enron should have:
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Given the employees the option of shares or liquid monetary funds
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Paid out the 401k's once bankruptcy was settled
Why did Arthur Andersen and Vinson & Elkins not conclude that there were
problems with Enron’s structuring of transactions?
o
o
Vinson & Elkins:
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Accounting had been creative and aggressive
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Appeared to be an air of secrecy
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No evidence of illegal activity
Arthur Anderson
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Claimed they were not given access to Chewco's data
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Claimed adjustments to be made were not material and therefore
not needed
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Adjustments were less than 8% of normalized earnings
Is there an inherent conflict of interest for an outside auditor that also provides
other services to its client?
o
Yes there is
o
Slight biases towards their clients
o
With the knowledge of auditing they can then find ways around it with
some creative accounting
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What, if anything, was wrong with Enron’s political contributions and lobbying?
What assistance did the contributions buy Enron when it was collapsing?
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o
Nothing wrong with their contributions and lobbying
o
Did not gain any assistance from their contributions
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Asked the Secretary of Commerce
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Asked the Secretary of Treasury
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Tried to plead with the President of the United States of America
How much of its financial arrangements should Enron have disclosed?
o
Enron should have disclosed all of it
o
They should have used legal and less risky ways to avoid taxes and
losses
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What responsibilities does an audit firm have?
o
Maintain that the companies are operating books legally
o
Unbiased opinion
o
Evaluation of a company