The Enron and Worldcom Scandals

E. Boos Week 2 Assignment February 17, 2013 The Enron and WoldCom Scandals ENRON 1. The segment of Enrons operations that got them into difficulties had several(prenominal) parts. They published misleading financial reports. They could not meet their bridge financing commitment with Barclay Bank beca wont outside investors were not found. Because of this, they restated activities of JEDI and Chewco SPEs so they could be retroactively amalgamate into Enrons accounts. The SPEs helped to hide the inaccurate accounting records.Enrons legal department wrote contracts that helped provide a cover for misuse of funds regarding the SPEs. Future revenue was account as current revenue. Stocks were paid with promissory notes instead of cash. They also engaged in off-the-books activities and excessive executive compensation. Enrons gore of directors allowed the executives, accountants and legal department to use Special Purpose Entities (SPEs), a type of partnership, in an attempt to camoufl age their debt and create a facade of financial stability (Brooks, 2007). 3. Enrons directors understood how internet were made.They also knew managements activities were dishonest. Andrew Fastow was active in forming the SPE partnerships and his affiliation with LJM2 was a conflict of interest. When Enron began experiencing financial problems in October 2001, the add-in of directors began holding special meetings. They were paid with cash, confine stock, phantom stock units and stock options. The Senate Subcommittee Report, dated July 8, 2002, found that the Enron board of directors was aware that employees participated in management of the SPEs which was a conflict of interest.The directors ignored the inaccurate accounting, extensive live activities and excessive executive compensation. The Senate report discovered that the board of directors knew of financial activities between Enron and some of the boards members. The board permitted consulting services, internal audits, an d external audits to be performed by the same company, namely, Arthur Andersen (Brooks, 2007). 5. Ken Lay was chairperson of the board. He reassumed the position of CEO after Skilling resigned. As CEO he oversaw all of Enrons activities.Lay and Whaley directed Causey to give the Raptor SPEs. The sale price of was privately negotiated between Fastor, on behalf of Enron, and Kopper on behalf of LJM2. Lay did not interfere when Arthur Andersen directed Enron to record the buyout excess money as income. He knowingly allowed fraudulent activities and false information to be included in the financial reports. This was unethical. The Powers Report identifies seven questionable accounting issues concerning the sale of the Raptors (Brooks, 2007). 6.The board of directors did not insist that full disclosure of Enrons earning be made available to the public and the shareholders. They allowed inaccurate reports to be published. Since they did not challenge management familiarity in fraudulent activities, this meant the shareholders interests were not protected (Brooks, 2007). 9. Conflict of interest concerning SPE activities occurred because Enron employees were active in managing certain SPEs. Losses were not reported in end of socio-economic class reports to offset other nonprofitable dealings.Arthur Andersen did not report all of the earnings and helped Enron cover up losses. When Andrew Fastow, wanted to manage the SPE, Chewco, he was advised by Jeffrey Skilling who was on the board of directors, that he should not manage Chewco because it would be a conflict of interest. Instead, Fastow appointed Michael Kopper who worked for him at Enron, to manage Chewco (Brooks, 2007). WORLDCOM 1. To inflate their profit in the current period, WorldCom created overstatements of cash fertilize and income by inaccurately reporting line costs. Line costs were a major expense to WorldCom.They were payments WorldCom made to third party telecommunicator network providers for the rig ht to entrance fee their networks. These costs should have been shown as an expense rather than appearing on the income statement (Brooks, 2007). 2. WorldComs board of directors could have prevented the manipulation of revenue that management employ if they had not been intimidated by Bernie Ebbers. They allowed themselves to be intimidated by Bernie Ebbers when he did not want their questions answered or give them more definitive explanations. Eventually, they demanded Bernie Ebbers resignation and he resigned.The board of directors scheduled periodic meetings with WorldCom. The directors should have been more involved and familiar with WorldComs activities and efforts to manipulate expenses and decreased income (Brooks, 2007). 4. Bernie Ebbers was the CEO of WorldCom, the CFO was Scott Sullivan and David Myers was the Controller. Prior to on the job(p) for WorldCom they had worked for Arthur Andersen. Arthur Andersen was the auditor for WorldCom. That is why the accountants di d not say or do anything to prevent Ebbers manipulation of WorldComs financial reports (Brooks, 2007). . Ebbers received $408. 2 million dollars as a loan to buy WorldCom stock or for margin calls as the stock price fell. Instead of using the money for the purpose he received it, he used it to buy a cattle ranch in Canada, build a new home, pay for personal expenses of a family member, and provide loans to family and friends (Brooks, 2007). Reference Brooks, L. J. (2007). trading & professional ethics for directors, executives, & accountants (4th ed. ). 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