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 parts. They published misleading financial reports. They could not get wind their bridge financing commitment with Barclay Bank because outside investors were not found. Because of this, they restated activities of JEDI and Chewco SPEs so they could be retroactively consolidated into Enrons accounts. The SPEs helped to hide the inaccurate accounting records.Enrons legal department wrote contracts that helped interpret a bury for clapperclaw of funds regarding the SPEs. Future revenue was reported as original revenue. Stocks were remunerative with promissory notes instead of cash. They also engaged in off-the-books activities and excessive administrator compensation. Enrons maturate of directors every last(predicate)owed the executives, accountants and legal department to use Special heading Entities (SPEs), a t ype of partnership, in an attempt to camouflage their debt and create a facade of financial stability (Brooks, 2007). 3. Enrons directors understood how profits 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 bout of interest. When Enron began experiencing financial problems in October 2001, the board of directors began holding special meetings. They were paid with cash, qualified gestate, phantom stock units and stock options. The Senate Subcommittee level, dated July 8, 2002, found that the Enron board of directors was sure that employees participated in management of the SPEs which was a contravene of interest.The directors ignored the inaccurate accounting, massive unrecorded 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 pe rmitted consulting services, internal audits, and extraneous 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 order Causey to sell 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 dishonorable 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 affirm that full disclosure of Enrons earning be made available to the domain and the shareholders. They allowed inaccurate reports to be published. Since they di d not challenge management involvement 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 grade 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 flow and income by inaccurately reporting line costs. controversy costs were a major outlay to WorldCom.They were payments WorldCom made to third political pa rty telecommunicator network providers for the right to access their networks. These costs should fetch been shown as an expense rather than appearing on the income statement (Brooks, 2007). 2. WorldComs board of directors could have prevented the usance of revenue that management used 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 working for WorldCom they had worked for Arthur Andersen. Arthur Andersen was the hearer for WorldCom. T hat is why the accountants did not say or do anything to prevent Ebbers manipulation of WorldComs financial reports (Brooks, 2007). . Ebbers sure $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). Business & professional ethics for directors, executives, & accountants (4th ed. ). 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