Question

The Enron Board was absolutely responsible for the collapse of Enron.

Critically discuss the above statement!

Due date: 12^th September 2018.

Maximum 5 typed pages plus one for references. Use Times New Roman font 12, spacing 1.5. Provide footnotes where necessary.

Answer 1

The following are the factors for which the Enron Board was absolutely responsible for the collapse of Enron.

1.Fiduciary Failure. :The Enron Board of Directors failed to safeguard Enron shareholders and contributed to the collapse of the seventh largest public company in the United States, by allowing Enron to engage in high risk accounting, inappropriate conflict of interest transactions,extensive undisclosed off-the-books activities, and excessive executive compensation. The Board witnessed numerous indications of questionable practices by Enron management over several years, but chose to ignore them to the detriment of Enron shareholders, employees and business associates.

2.High Risk Accounting:The Enron Board of Directors knowingly allowed Enron to engage in high risk accounting practices.

3)Inappropriate Conflicts of Interest. :Despite clear conflicts of interest, the Enron Board of Directors approved an unprecedented arrangement allowing Enron' s Chief Financial Officer to establish and operate the LJM private equity funds which transacted business with Enron and profited at Enron's expense. The Board exercised inadequate oversight of LJM transaction and compensation controls and failed to protect Enron shareholders from unfair dealing.

(4)Extensive Undisclosed Off-The-Books Activity:The Enron Board of Directors knowingly allowed Enron to conduct billions of dollars in off-the-books activity to make its financial condition appear better than it was and failed to ensure adequate public disclosure of material off-the-books liabilities that contributed to Enron's collapse.

(5)Excessive Compensation:The Enron Board of Directors approved excessive compensation for company executives, failed to monitor the cumulative cash drain caused by Enron's 2000 annual bonus and performance unit plans, and failed to monitor or halt abuse by Board Chairman and Chief Executive Officer Kenneth Lay of a company-financed, multi-million dollar, personal credit

line.

(6)Lack of Independence:The independence of the Enron Board of Directors was compromised by financial ties between the company and certain Board members.The Board also failed to ensure the independence of the company' s auditor, allowing Andersen to provide internal audit and consulting services while serving as Enron' s outside auditor.