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 weren’t aware of them.
3. Regulators: There was no proper regulation between the Federal Energy Regulatory Commission and Enron’s practice. The FERC seemed to let Enron “slip between the cracks” and did not oversee Enron’s 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 Enron’s operational and financial activities and could only