Which parts of the corporate governance system, internal or external, do you believe failed

Enron the most?

The failures of Enron occurred as the faults of many people at many levels, including both
internal and external governance system. It is extremely extensive problem and each of them has
affected each other, so both internal and external governance system have shares of failing
Enron; however, to say what contributed to fail Enron the most, I believe that it was firstly
started from the internal side where Board of directors and management team ought to play their
roles as the leaders, to monitor all the activities of company and carry out them in an ethical way,
but they did it against the common value; as the consequence, led to the contagion of external
governance.
First of all, Enron senior management team was responsible for the formulation and
implementation of the companys strategy, including its operating and financial results. To
implement its strategy, it formed a joint venture or SPE, Enron faced the choice between
showing the entity into its balance sheet or moving it off their balance sheet. Given its desire to
retain its investment grading, senior choose off-balance sheet treatment. The focus on revenue
over the real earnings was the fault of upper management. They provided unclear financial
statement with their shareholders and analysts. Moreover, using the complexity of business
model (SPE), company used techniques to hide the real debt, aiming to create favorable figures
and to ignore the liabilities. Finally, when the loss was too large since the crisis of fuel industry,
company failed to keep the requirements of maintaining SPE independent (has at least 3% of
SPEs assets), and had to merge SPE into their financial statement, that led to the significant
increase in companys total debt and the decrease in profits.
Secondly, Enrons management team just focused on the short term earnings to maximize their
profits. They established long term fixed prices for selling energy followed by the signed
contracts. This action was not matching with the fluctuations of future energy prices. As the
result, the fuel crisis occurred in the year of 2000 boosted up the price of fuel very high in the
world, but Enron had to sell it at the old price which was much lower than the current price, so it
had to suffer a large loss from this unforeseen situation. The wrong decision from Enrons
executives not only led to the loss, but also led to unethical actions to hide this loss and create
unreal profits to keep their investors.
Thirdly, we cannot forget the responsibility of Board of Directors. Actually, they are the main
part of Enrons failure because Lay, Jeffrey Skilling, or Andrew Fastow could not operate
without the consent and approval of Board of Directors. If they concerned about the reports or
illegal practices, the company would not fall into this situation. They did not take full of
responsibility to protect their shareholders and employees although they had enough power to do
it.
Besides the major failures resulting from internal governance, the external one also had not little
impacts. For instance, Enrons auditors, Arthur Andersen failed to do their real job. Andersens
job was to determine and testify annually as to whether Enron had followed generally accepted
accounting practices in statements of its financial results. But they, on the contrary, intentionally
accept receiving large amount of money in return of providing consultancy services to Enron.
This self- interest forced them to hide the real figures for Enrons earnings. Therefore, without
the correct financial information from auditors, the legal counsel, the SEC or the NYSE and
other entities cannot accountable for Enrons failure to notice the warning signs in its illegal
practices.