The eclipse of enron
... with the using of SPEs, by donation or lobby. Well, such a lack of board of directors’ independency and oversight might be a main reason why Enron was able to use SPEs. And, at that time, poor corporate governance by government could be one factor that made a kind of atmosphere for Enron to manipulate accounting by using SPE. 2. Discuss potential benefits and costs when a SPE is ran and partially owned by Enron’s executives. During the 1990’s, Enron’s growth was driven by large investments in energy trading & energy, water and broadband asset. Instead of issuing equity, Enron chose borrowing through SPEs to finance growth and Enron made promises to lender to secure capital for itself and SPEs. Benefits It appeared that Enron engaged in a range of manipulative accounting transactions. Enron took full advantage of accounting limitations in managing its earning and balance sheet. SPEs simplified this process, known as securitization. Enron would transfer assets, such as a pool of loans, to an SPE, in return for cash, accounting for the deal as a sale. Its motivation was to minimize losses in financial statement and volatility, accelerate profits and avoid adding debt to its balance sheet which could have a bad effect on Enron’s credit rating and damaged Enron’s credibility in energy-trading business. Enron used SPE to hedge certain its investments. In a typical transaction, Enron would transfer its own stock to an SPE in exchange for a note or cash, and also directly or indirectly guarantee the SPE’s value. The SPE, in turn, would hedge the value of a particular investment on Enron’s balance sheet, using the transferred Enron stock as the principal source of payment. In addition, Enron must have been able to control the stock price to be stable through earning management. And sponsoring firm (Enron) should have not control SPE operation, but Enron’s executives owned SPE so that Enron could control SPE as Enron wanted. Enron benefited from SPE for the purpose of sheltering foreign-source income from taxes, but more frequently and suspiciously, to conduct business with itself. Costs If Enron’s manipulating accounting was disclosed, Enron should restate its financial statement and make consolidated financial statement with SPEs and this restatement would take a lot of cost. If Enron made consolidated financial statement, loss incurred by SPEs could be potential costs to Enron. After huge amount of contingent liabilities through SPEs was revealed, Enron’s credit rating would be down and it would lead to an increase of capital cost. Conflict of interest could be a factor causing potential cost to Enron. If Enron’s executives got benefits from SPEs’ operation result, it was easy for them to focus much more on SPEs and it means that they paid less attention to managing Enron’s operation. It could be described as a kind of potential cost because Enron should spend additional expenses to fill up invisible lost executives’ effort for Enron’s normal operation. 3. In the case illustrated above, what information should Enron disclose as contingent liabilities? Enron should include SPEs’ liabilities in its consolidated balance sheet because they were obligations which Enron should redeem eventually. When SPEs borrowed money, lenders required Enron to guarantee the debt. So, Pledged stock and options to secure borrowings for SPEs should be transferred into contingent liabilities in Enron’s consolidated financial statement. 4. Can you speculate about what forced Enron to seek bankruptcy protectio...