Enron

5. Which parts of the corporate governance system, internal and external, do you believe failed Enron the most?

The failure of appropriate internal governance failed Enron, especially since the SPE’s were specifically designed to write-off bad assets and hide poor profits. The focus on revenue above real earnings was the fault of upper management. Of course, external governance failed to acknowledge warning signs. Clearly at fault, the auditors and legal counsel did not serve the Enron community of stakeholders well. Rather, both accounting and legal entities overlooked discrepancies and errors and favored the relationship with Enron to continue the revenue streams for their own professional services companies. Without appropriate financial information from the auditors and legal counsel the SEC and SYSE (external corporate governance systems) cannot be held accountable for their failure to notice Enron’s illegal practices.

6. 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.

• Auditor: Arthur Anderson had both auditing and consulting businesses tied up with Enron, and a poor audit for Enron could result in a concomitant loss of consulting business. In this sense, Arthur Anderson could not write needed qualified or adverse opinions for fear of losing millions of dollars of business.

• Legal Counsel: Vinson and Elkins poorly advised Enron, or at least did not foretell of the potential implosion of Enron. Essentially, the law firm advised away Enron’s future interests.

• Regulators: A gap existed between the regulators for trading energy and what the company actually did. The regulation of Enron was non-existent.

• Equity Markets: The market did not police itself in the case of Enron.

• Debt Markets: Lenders issued debt instruments wildly to Enron without much consideration...