Enron Case 1.

Which parts of the corporate governance system, internal and external, do you believe failed Enron the most? The internal failures of Enron include corrupt activities such malfeasance, illegal activities and fraudulent reporting. More importantly, there was a lack of competence among senior managers and a lack of responsibility and reputable people throughout the organization as a whole. Externally, a major reason the corporate governance system failed was that outside employees hired by Enron (such as the auditors and legal counsel) failed to look out for the interests of stakeholders. Since Enron was paying them, they looked out for their own self-interests and may have ignored certain warning signs. 2. Describe how you think each of the individual stakeholders and components of the corporate governance system should have either prevented the problems at Enron or acted to resolve the problems before they reached crisis proportions. There are so-called Big Five major individual stakeholders and components of the corporate governance system that have contributed to the problems. 1. The Auditor: Arthur Andersen, was hired by Enron itself so he could not provide them with a poor audit or both him and his firm would lose out on a large proportion of money and business. 2. The Legal Counsel: The law firm, Vinson & Elkins of Houston, were hired by the firm and had a similar issue to Arthur Andersen. They claimed they were not aware of all the details and information of the management and ownership of the Special Purpose Entities and therefore could not advise Enron to avoid certain ideas and practices because they werent aware of them. 3. Regulators: There was no proper regulation between the Federal Energy Regulatory Commission and Enrons practice. The FERC seemed to let Enron slip between the cracks and did not oversee Enrons overall activities. 4. Equity Markets: The Securities and Exchange Commission (SEC) and the New York Stock Exchange (NYSE) seemed to rely on second-hand information, such as what the auditor Andersen provided, and not do any first-hand investigating. If they had done the research themselves they could of seen the lack of compliance between Enron and the rules and regulations of these equity markets.

5. Debt Markets: Credit rating agencies were hired by Enron to provide the company with the credit rating they needed for debt securities to be issued and traded in the marketplace. They claimed to not know the full details of Enrons operational and financial activities and could only provide an analysis on what they did know, which resulted in the false ratings. Also, banks and bankers continued to provide debt capital to Enron, despite questioning the need for the continuous flow of external capital because they were making millions of dollars from interest and income fees. 3. If all publicly traded firms in the United States are operating within the same basic corporate governance system as Enron, why would some people believe this was an isolated incident, and not an example of many failures to come? Some people believe it was an isolated incident because it included many things that went wrong, referred to as the feeding the beast or contributing to the downfall of Enron as a whole. Although the internal and external corporate governance seemed to fail Enron, the executive leaders were also to blame. It was an issue of how they unethically chose to deal with the situation and others can avoid this to prevent many failures to come. In addition to this, the government passed the Sarbanes Oxley law in 2002 which ensures that things that went wrong with Enron do not continue to go wrong with other practices such as: the CEO or CFO of each organization must sign off on financial statements before they are issued, auditors must be independent and not hired by the company itself, and also when there are warning signs that fraud, it is assessed properly.