Enron failure reflects a very intriguing business case in terms of directors liabilities.

The magnitude of its business transactions would make anyone feel comfortable with regard to its future business prospects; however, it all ended up into a tremendous bubble that caused millions of shareholders to lose billions of dollars. You need a strong legal and finance background to understand the rationale of the fraudulent operations that led to Enrons bankruptcy. In multi-national corporations, due to their inability to supervise companys daily operations, shareholders elect the board of directors to engage in representing their best interests and maximizing their wealth. Unfortunately, Enrons case unveils a completely different story. As management graduates, we have always been fascinated by the creative yet fraudulent accounting practices invented by Enrons directors. To better understand the malign and living mechanism created and operated by Enron directors, we firstly need to briefly explain the role and functioning of the Special Purposes Entities (SPEs). SPEs are off the book financial instruments used under certain time restrictions for the sole purpose of facilitating the companys capital raising process. When a companys level of indebtness goes beyond a certain level, the capital structure risk increases the companys cost of borrowing. This information is immediately reflected in the stock market by drastically lowering the companys perceived value and consequently its stock price. To prevent this process from happening, Enrons Board of Directors, used SPEs to create huge shadow transactions, artificially improve its business performance and adjust capital structure to accepted levels. As one reads through these lines, the first question he/she might have is: How is it possible that no member of the Board of Directors reacted in time to prevent these fraudulent

procedures from leading the company to bankruptcy? We can provide two answers to this question: 1) At the time that these Special Purpose Entities were being created and implemented by Enron, many of the Board Members could not really understand the fraudulent rationale behind them. They were quick to avoid any responsibility by appointing Enrons Chief Financial Officer, to be the sole person in charge of supervising the proper functioning of SPEs 2) The three main Enron officers, Kenneth L. Lay, (Chief Executive Officer & Chairman of the Board of Directors), Jeffrey K. Skilling, (Chief Operation Officer and later Chief Executive Officer) and Andrew Fastow (Chief Financial Officer) were altogether highly involved in the illegal activities undertaken by Enron so they were just too far from revealing the truth. Enron directors liability is multi-dimensional, involving various elements of ethical and legal misconduct. Some of responsibilities related to Enron directors are: a) Misrepresentation: Lay, Skilling, Fastow and all other Board and executive members failed to fulfill their ultimate goal: representing shareholders best interest and maximizing their wealth. b) Risky & Illegal Accounting Practices: Enrons Board Members and Executive Officers are legally responsible for not disclosing all the required information with regard to Enrons operations thus leading the company to bankruptcy. c) Conflict of Interest: Enrons Board members and key executives agreed on placing the private equity funds (or SPEs) under the control of Enrons CFO; thus allowing him to perform business transactions under the expense of Enrons shareholders.

d) High Bonuses: Enrons board of directors granted extremely high bonuses to its members as well as to other key executives. Enron was using shareholders money to finance the mundane life of its key executives. e) Board Dependence: Due to their financial ties with Enrons executive officers, board members lacked the required independence in supervising the managers operational activities. f) Off the Book Activities: Special Purpose Entities were created for the sole purpose of artificially lowering the companys level of indebtness and increasing executives wealth at the expense of Enrons shareholders wealth. The above reasons are just enough to unveil the directors implication in the companys bankruptcy. Enrons directors could not see any profit out of the legal and existing accounting standard, so they became creative enough to convert the legal standards into illegal practices. However, their fraudulent business case did not succeed, forcing them to face the deserved punishment.