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ACC 260 Week 2 Assignment

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Week 2 ACC 260 Assignment
Enron
Question 1: The segment of Enron’s operations that got it into difficulties was its
SPE’s. Enron used these Special Purpose Entities to hide it true financial condition.
Question 3: Enron’s entire board of directors did not understand how profits were
being made in the SPE’s. Andrew Fastow proposed that he be appointed to manage
one of the SPE’s temporarily until an outside investor could be found. When lawyers
advised against this, Michael Kopper was appointed. It was known by only one board
member, Jeffery K. Skilling, that Kopper was an employee of Fastow’s at Enron.
Skillings himself was directly involved in some of the questionable practices at Enron
and subsequently resigned. Other executives claimed loss of memory, ignorance, or
the Fifth Amendment.
Question 5: Since Ken Lay was chair of the board and CEO of Enron at the time of
its financial troubles, he was a contributor to its lack of governance. His goal was for
personal gain and not for the public’s interest. Because of his personal interest and
gain, he did not insure that GAAP were being followed. It was based on the

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suggestion of Lay and Greg Whalley, Enron COO that the Raptors were terminated.
These actions led to other questionable activities performed by Enron.
Question 6: Aspects of Enron’s governance system that filed to work properly
included its Board of Directors. The Board of Directors failed to exercise proper
oversight. If this governance had been in place, SPE’s would not have been allowed
to falsify financial reports and mislead investors. The auditors, Arthur Andersen, were
also accountable for contributing to the lack of governance and further contributed to
their culpability by deliberately shredding documents important to the government’s
investigation.
Question 9: Conflicts of interest in the Enron activities occurred from several levels.
Instead of being the legal, above board entities they are created to be, the SPE’s at
Enron were created for the financial gain of just a few persons involved in their
creation. They were also used to hide the true financial picture of the company from
the public and stakeholders. Arthur Andersen also failed to protect the public’s
interest. Instead, they received huge salaries for very little work. The audited their
own work as SPE consultants. Executives in the Enron case placed their own
employees and other people they could control in positions of power to further
enhance their personal financial gains.
WorldCom
Question 1: WorldCom’s management transferred profits by improperly reporting
fees that should been expenses. These were fees paid to third party
telecommunications network providers. They were offset by capital transfers or
charged against capital accounts which placed their impact on the balance sheet
rather than the income statement. They also created excess reserves or provisions
for future expenses that they later released or reduces. This added to profits.
Question 3: The manipulations that WorldCom used were designed to cover five
straight quarterly net losses and present a profitable company. The board of directors
should have insisted on honest accounting that reflected the best interest of the
public. Changes should have been made after the first quarter losses to restructure

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and prevent or minimize future losses. They should have sought sound advice from
financial advisors and auditors that did not have a personal stake in the company.
Question 4: WorldCom’s accountants would have gone along with any questionable
practices because the company did not have a code of ethics. The CEO of the
company felt that a code of ethics was a waste of time. Without fear of punishment
or any governance from management, compliance was to be expected, especially
when the accountants stood to gain financially.
Question 5: The loans made to Bernard Ebbers, CEO of WorldCom were to have
been used to buy WorldCom stock or for margin calls as the stock prices fell.
Instead, he used the funds to purchase a cattle ranch in Canada, construct a new
home, pay personal expenses of a family member, and to make loans to family and
friends.

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