1.

Discuss the relative risks of companies with substantial physical assets compared with
companies which have substantial intangible assets.

Answer: Substantial physical tangible assets tend to be owned by companies in industries such
as engineering, property, manufacturing and retailing. On the other hand, substantial intangible
assets tend to be owned by companies where copyrights, patents, research and development
activities and intellectual capital are important components of their operations. These latter
characteristics are often found in technology, media and telecommunications TMT industries. In
practice, firms possess a mixture of tangible and intangible assets. For instance, pharmaceutical
companies have substantial amounts of physical assets, but also invest heavily in intangible
assets, particularly research and development. The curious point about Enron was that it was
located in the energy sector, which is traditionally associated with physical assets. But the
strategy of Enron under Kenneth Lay and Jeffrey Skilling was to focus on energy and commodity
trading, rather than investing in large amounts of fixed assets. The danger was that this business
model sometimes referred to as asset light could be easily copied by Enron’s rivals and there was
no convincing reason why Enron could expect to maintain its competitive advantage over the
longer term. Also, a large part of Enron’s intangible assets consisted of its highly skilled
employees. If they Ultimately, Enron’s share price depended on the market’s unrealistic
expectations about the generation of future cash flows. Once the market realized that the
generation of cash flows could not be sustained, the share price quickly fell, and, as the company
faced bankruptcy, there were insufficient physical assets available to meet the claims of
creditors.

2.The phrases ‘train crash’ and ‘house of cards’ have been used by commentators to describe
Enron’s collapse. Do you believe these analogies are useful in this case?

Answer: The analogies in the Wearing Enron Case are apt when it has been called “train crash”
or house of card because the fall of Enron was also just like a house of cards. Such a big corporate
profit-making company fell off within a year because of major accounts and financial problems.
Just like a house of cards which falls by a light blow of air same way just a whistle blower resulted
in the fall of Enron, so the comparison is totally correct. Same way as in train crash hardly anyone
survives same way out here top management to all the companies associated with Enron also
suffered because of Enron.
3.If Enron shareholders had been fully aware of the LJM partnership agreements, do you believe
they would have been willing to continue investing in Enron?

Answer: Had the shareholders known the fact and figures related to LJM partnership agreement
they would have never continued investing in Enron, the reason being they knew that the SPV or
Special Purpose Vehicles created by Fastow were merely temporary hideouts for Enron just to
cover their debts and portray them as sales this means increase in profit and revenues of Enron
but in reality, it was Loans in disguise.

4.Discuss the potential problems with Kenneth Lay taking over as CEO and president in August
2001 (as well as continuing to be chairman).

Answer: The potential problems with Kenneth Lay taking over as CEO and president of Enron in
August 2001, were that at that time the company’s stock prices were at the lowest during the
whole lifetime of Enron and there was no proper and authentic justification available with
Kenneth about the whole situation. Moreover, during this time, the whistleblower Watkins had
sent the anonymous memo too to Lay about the concerns and the problems within Enron. The
Raptor transactions and Condor vehicles showed the valuation issues of the assets and with the
resignation of Skilling’s there were severe accounting problems too arising in Enron.

4. Identify the stakeholders who suffered as a result of the Enron bankruptcy.

Answer: The major stake holders who suffered due to Enron bankruptcy were:

-Portland General electric: It was sold off for just $3.1 billion

-Prisma Energy International Inc.: The major employee pool was reduced and Prisma was left
with just 5000 employees in 14 countries with just few power assets and mixture of pipelines.

-Arthur Anderson: The key auditor and major non-audit service provider for Enron also was
reduced to trashes due to Enron Collapse.

-JP Morgan Chase: It was fined $300 million for dealing with Enron.

Citigroup: It was fined $300 million for dealing with Enron

-Merrill Lynch: It was fined $80 million for doing a transaction with Enron where it earned a profit
of just $500, 00.
6.Discuss whether potential whistleblowers should be encouraged to report their concerns of
poor corporate governance. Should they report their concerns within or outside the
organization?

Answer: Potential whistleblowers should be definitely encouraged as they help in lifting the
curtain off from the big corporate giants like Enron; just like in case of Enron Sharron Watkins the
whistleblower took the courageous step to take her concerns to the top management. They
should report their concern within and outside the organization, because corporate generally
take them as bad people trying to harm the interests of the company. But they should take legal
help and help from media too to raise awareness amongst people and shareholders about the
issues of corporate governance.

7. What particular features about Enron’s board of directors reduced the likelihood that the
company’s problems would be properly addressed?

Answer: The main features of the board of directors which resulted in not addressing eth
company’s problems properly were an audit committee was set up and that too very strategically
to avert the financial disaster on behalf of the board of directors. They were situated at remote
and far locations and did not have the nerves to challenge the engineers beforehand. They were
too much dependent on the management and during the meetings with management they did
ask many questions and did not bother to challenge the decision taken by management. All this
led to collapse of Enron.