Enron and Worldcom Scandals Essay

1. Which segment of its operations got Enron into difficulties?

The guaranteed loans that were intended to bridge the financing for investments from outside investors that could not be found would be the segment of operations that caused Enron difficulties.

2. Did Enron’s directors understand how profits were being made in this segment? Why or why not?

Enron’s directors did not understand how profits were being made in this segment because they were kept out of the loop of everything until all the issues became public.

3. 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?

Key Lay allowed many things to happen that were not ethical. He was in charge of all of Enron’s activities. Because Ken Lay allowed deals to go on that were unethical and did not think about the consequences, it caused a sever lack of governance.

4. What aspects of the Enron governance system failed to work properly, and why?

Enron’s board members only allowed a slight amount of informations on the company’s earnings to be seen by the public and the investors of the company.

Because the board members did not question management when needed it failed to protect the interests of the shareholders of the company.

5. Identify conflicts of interests in:

• SPE activities

Enron was not reporting their losses off the end of the year reports, so to offset their other dealings that were not profitable.

• Arthur Andersen’s activities

Arthur Andersen’s did not report all of the earnings and helped Enron cover up losses that caused a conflict of interest.

• Executive activities

While the company’s employees were barred from cashing in there 401(k) retirement plans the executives were selling off Enron’s shares before the collapse and made a lot of money off of them.

WorldCom

1. Describe the mechanisms that WorldCom’s management used to transfer profit from other time periods to inflate the current period.

Worldcom released reserves held against the operating expenses improperly and improperly recharaterized some of the operating cost as capital assets.

2. How should WorldCom’s board of directors have prevented the manipulations that management used?

WorldCom’s board of directors should have reviewed and questioned reports. They should have had someone oversee the accounting department that was not so closely involved with the company.

3. Bernie Ebbers was not an accountant, so he needed the cooperation of accountants to make his manipulations work. Why did WorldCom’s accountants go along?

WorldCom hired Scott Sullivan and David Myers which had both worked for Arthur Andersen. With knowing that they had worked for Arthur Andersen prior they were more motivated to make sure that profits looked good regardless if it was unethical or not.

4. Why would a board of directors approve giving its Chair and CEO loans of over $408 million?

The board approved giving Ebber’s the $408 million loan to purchase or pay margin calls on WorldCom stock, which he did not do.

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