Help Bachelor of Business (HONS) Year 2 - HUBBU

FIN 304 Global Financial Management Semester 3, 2011
Members : Tan Mun Tick (B0803747)

Lecturer Due date

: :

Mr. Mohd Jamil Jelani 28th December 2011

Internal system that causes Enron to bankruptcy is the management of the firms and also the board of directors. Arthur Anderson performed badly and causes Enron in a dangerous position. Which parts of the corporate governance system. history. Arthur Anderson has been hired by KennethLay as Enron’s auditor. and also provide financial and risk management services to the customers worldwide. deliver types of physical commodities and energy. Holdings $63. internal and external. The internal system happens within the company such us the management of the company while the external system happens outside the company such as legal counsel. do you believe failed Enron the most? Enron Corporation is one of the world’s largest commodities. Enron declared bankruptcy on December 2. . On the other hand. energy and services company. The company market natural gas and electricity. Although many of the debts are categorized as off balance.Case 1 : 1.4 billion of assets. 2001. over reporting of profit and under reporting of debt also cause Enron to fall. Besides. primarily CEO KennethLay and COO Jeffrey Skilling(later CEO) are responsible to formulate and implement the company’s strategy. There are two reasons why Enron will bankrupt due to the internal and external factors. now categorized as on balance sheet. including its handling and financial results. Enron has been ranked seventh in the Fortune 500 depend on the annual revenues grew which is $10 billion in the early 1990s to $101 billion in 2000s.S. equity markets and debt markets. fastest growing and perfectly managed business in United States. The firm was awarded the most reformatory. The senior management team in Enron. Enron made the largest corporate of bankruptcy in U. However. Unfortunately.

the production of Enron actually stopped when the credit rating agencies announced the credit rating of Enron downgraded to below investment. Arthur Andersen which is an auditor in Enron did very serious mistakes for accounting treatment of Enron’s activities. it will cause troubles to the company. Andrew Fastow sold all the trouble assets in the company to gain profit through special purpose entities in the short period. If they did not perform well in the company. debt maturities were not scheduled. It is very important to maintain an investment grade in order to trade with other companies. . legal counsel. The tracking of daily cash was relaxed. Enron’s debt increased from $13 billion to $38 billion and makes the company downgraded. Arthur Andersen got charged on criminal obstruction of justice charges.On the other hand. The upper management had make a big mistake of focusing the revenue more than the real earnings. However. The special purpose entities were particularly project to recall ill assets and lock poor profits. external corporate governance bodies such as auditors. Andrew Fastow as the CFO of Enron try to use Special Purpose Entities(SPEs) to save Enron. Because of that. company-wide risk was disregarded and off balance sheet was ignored although the obligation remained. this solution only can save Enron for a short period of time but not long term. and regulators play very important role. Until November 2001. Arthur Andersen ignored all of the weaknesses and he even destroyed thousands of documents and computers related to Enron tale. equity market and debt markets. For the external system. Finally.

. In equity markets. There ratings are very important as are needed for the company’s debt securities to be promulgated and traded in the market place. Enron fell between fractures of most U. For the debt markets. This brings Enron continue to mask their operation activities and the result was based on the information gives as per financial reports. The New York Stock Exchange did not independent first-hand validation of commitment. off balance sheet is important dispute about continuing as the credit rating agencies whether they had full information and knowledge choose to overlook them in the company’s total indebtedness. regulatory bodies by the industry. U. trust other people instead on the reference of other bodies like the Enron’s auditors. general legality of much of what Enron did and strategies. when Enron was questioned why it did not combat certain practices or ideas. paid companies like Standard & Poor’s and Moody’s to provide it with a credit rating. every company wanted to get a credit rating. Same as Arthur Andersen.S.Vinson & Elkins which is the legal counsel in Enron played a role to provide legal opinion on structures.S. the credit rating agencies having problem when rating Enron because they can only provide analysis on what was known to them of Enron’s financial activities and results and operational. the Securities and Exchange Commission (SEC) did very little firsthand research or confirmation of reporting hard work itself. Federal Energy Regulatory Commission (FERC) had some remote oversight responsibilities in regard to some of the trading and markets which the company participated in. Enron explained that they did not inform for the complexities and details of the management and ownership of the SPEs. Also. but these were split issues from Enron’s overall activities. However.

this may lead a loss of millions of jobs and billions of dollars for pensioners as well as other stakeholder’s funds. Enron sell off the troubled assets to partnership and this could help Enron to burden the firm`s total hiding underperforming investments and indebtedness . measure and give reward management`s performance and at the same time they should have work out for strategic oversight of business operations. Conversely. Enron should not look for a short term constructive instead they should look for a long term constructive for the company. Furthermore. Andrew Fastow formed SPEs for Enron and this leads Enron in a worst position. However. Elkins and Vinson should give an advice to Enron when they discover anything that may be harmful to Enron or the legal counsel should take an action by withdrawing service or the legal counsel can give counsel to Enron rather than using the cover of financials that were acceptable because they were cleared by the auditors. If Enron hopes to get more accurate information then Enron should consult more than one auditor firm and legal counsel. Thus.2. this solution that was performed was only temporarily advantage for Enron and it was not a long term result . Based on what I have mentioned in question 1. Moreover. Even though. Kenneth Lays should rely on few audit firms instead of relying on one auditor firm and legal counsel only.Nevertheless. 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. According to the first question. because they are afraid of losing their jobs. other employees tend to collude with their senior management. the founder of Enron. The integrity of accounting and financial reporting systems is to be ensured by the boards and they should also supervise the process of the exact disclosure and communication. the management team and the board of directors tend to appears individual and identical as well as it is obvious that a road to disaster tends to occur. The directors should directly monitor. CFO of Enron. there are few major failures that may lead Enron to collapse. the legal counsel. Moreover. the other employees could have done the right thing when they actually knew that what was happening was wrong. The actions that can be taken in order to prevent the failures to occur are internal and external part of corporate governance system. Employees should speak up with their problem they faced or problem that they couldn`t understand. .

if Enron realize these problems and they take actions to fix it on time earlier Enron could have prevented on what they are facing now.Finally. The most important part of the company is the internal and external parts. .

Vinson and Elkins claimed that the details and complexities of management and ownership of SPEs had not been fully informed when they were questioned on why they did not oppose certain practices and ideas and why they did not stop those error options promptly. Therefore. and other related parties in order to maximize the growth in short term earning and to achieve inflated expectations by investors. In the late 1990s Enron`s business model was emerging and the revenues of the company grew faster than the earnings. Besides that. As a result of the growing deficit in corporate cash flows. and not an example of many failures to come? The reason why a number of people would believe that this was an isolated incident because the executive was a criminal in its operations and it was also unethical in its business dealings.3. risky and dishonest practices from time to time for the recordings of obfuscation and earnings of their CEOs. Whereas. The core cause of Enron case was human failure that other publicly traded firm does not have the issue and Arthur Andersen actually reported with dishonesty towards Enron. accounting firms. If all publicly-traded firms in the United States are operating within the same basic corporate governance system as Enron. why would some people believe this was an isolated incident. legal advisers. CFOs. In addition. Enron and some firms undertook deceptive. It has led a fundamental financial management problem for Enron. encouraged pushing the limits may appears if simple accounting mistakes have took place and if there is overreaching in a culture. . they were able to convince their business associated and employees to disguise the deprived performance and deceive the investors as well as the public largely by convincing their business associated and employees to actively practice of fraudulent transactions and deceive as well as undermine the system at play. In addition. the board and the management should be a distinctive in difference between the board of directors and the management so that integrity and transparency in reporting may arise. legal counsel.

in addition to these exposures. Also. there are three different pound-denominated exposures arising from the British subsidiary by McDonald’s. The British subsidiary of McDonald’s is currently borrowing money at a fixed interest rate. If the loan is designated as permanent. In this case study. referring to U. which is : a. If it is not considered as permanent. According to the swap of floating for fixed. As a result. the floating interest rate decreases and McDonald will pay less for the fluctuating payments because of cross-currency swap. An inflow stream of royalties arising from payment by the British subsidiary of a percentage of sales (£) to the parent company in the U. The equity capital the parent company has in the subsidiary b.Case 2 : 1. McDonald’s can use the floating interest rate to take over fixed interest rate with the help of cross-currency swap.S accounting practises it noted some ‘permanence’ of the intra-company loan. the foreign exchange profits and losses related to the loan low directly to the parent company’s profit and loss statement. . 1. the foreign exchange profits and losses related to the intra-company loan flow only to the cumulative translation adjustment (CTA) on the consolidated balance sheet.S.30% per annum and total of £125 million loan c. 2. Cross-currency swap is defined as a financial instrument in helping financial managers to get the future and current floating of money or the spreading of money market rate between different countries without effectuation external layout. How does the cross currency swap effectively hedge the three primary exposures McDonalds has relative to its British subsidiary. Define Intra-company debt in the form of a 4 years fixed rate which is 5.

McDonald’s tries to internation the cost of payment for a seven-year agreement by hedging the rising cost of paying the pound and lock in the dollar. In conclusion. When McDonald is paying out pounds. the foreign currency that McDonald is holding will be reduced. by using cross-currency swap McDonald’s corporation can hedge the British pound exposure very effectively. To make the cross-currency swap more effective.McDonald by using the seven years swap hedging model is able to receive dollars and pay out pounds. . The royalties that need to deliver back to country are being hedged to avoid more expensive payments.

interest on loans. besides the mismatch in the persistence of the exposure and hedge. the spend and complexity of inspection and administrative the currency venture from external subsidiaries with short-term derivatives will cause a higher level of foundation risk involved in hedging whose ripeness more closely matched the exposure. To manage exchange rate exposure. A company will face currency exposure when they have cash inflows and outflows over time in two or more currencies and above. McDonald’s should use the currency swap but not future or forward contracts because the exposure of the firm faces are long-term exposure. The asset-based pounds flow in of cash could then be off-set by generating pound-denominated cash flow out from a cross-currency swap to replace pound and acknowledge receipt of dollars.S based McDonald’s Corporation. Also. How does the cross-currency swap hedge the long-term equity exposure in the foreign subsidiary? A company will face the exchange rate changes due to the degree of exchange rate exposure. swaps. a lot of hedging instruments must be used such as futures. The president compensation on the cross-currency swap at last of the agreement efficiently repeats a long-term exposure input in its British assistant. The most important characteristic of the exposure result from the appearance of foreign subsidiaries is its long-term duration. . By using cross-currency swap. payment of royalties and the repatriation of gains by foreign subsidiaries would be better hedged by using the swap of currency provide its elastic property than by distributing foreign liability rapidly.2. According to Clark and Judge. When the overall cash inflows cannot be matched with the overall cash outflows ether in given currency or same currency. the company is facing currency exposure and this will cause possible losses to the company because of the fluctuating exchange rates. the royalties and dividend distribution from the British subsidiary and principal and also interest payment on internal company liabilities are cash flow in denominated in pound to U. Foreign currency exposure can arise from different sources such as dividends. long-term currency swap or long-term foreign currency able to simplify the risk management and decrease the fundamental risk through a decrease in the persistence diversity. forwards and options. Interest payment then will change to British pounds.

.Once the swap agreement has ended. With everything considered crosscurrency swaps is very advantage in hedging currency exposures on an operating basis or ongoing. McDonald’s is require to make a payment in pounds and a final supreme liquidation because of the cross-currency swap.

However in this case. Two different firms had the same outcome result on an earnings per share basis. The possibility strike of FAS 133 on the hedging tactics of McDonald’s should be considered. one firm had a decline in the reported other comprehensive income (OCI). Accounting for Derivative Instruments and hedging activities that issued in June 1998 was essentially have considering to be valid for all fiscal quarters within monetary years beginning after Jun 15. include the principal and carry to the other comprehensive income (OCI). the debate in FAS#33 has continuous following McDonald’s. McDonald’s require to mark-to-market the value of the marked exchange on a qualified (quarterly) basis. Under FAS133. Pursuant to FAS#52. but not the income measured use in the reported earnings per share. under FAS 133 the firm require to mark-to-market the whole cross-currency swap position. Pursuant to FAS#133. GAAP and informational in the additional remarks to the financial statements. Lastly. There is a question should the market give them a penalty or not. and the mark-to-market its cross-currency swap. Since McDonald’s decide to choose and specify the loan as permanent.S. Also.3. Should Anka and McDonalds worry about OCI? Other comprehensive income (OCI).1999. it is not expect as permanent when foreign exchange profits and losses participant to the loan stream rapidly to parent company’s profit and loss statement. the foreign exchange profits and losses related to the intra-company loan flow only to the cumulative translation adjustment (CTA) on the incorporated balance sheet. Companies have the choice of taking the interest associated with a foreign currency denominated loan and carry the loan directly to the parent company’s profit and loss statement. Anka Gopi also consider the current strategies by listing all the pros and cons and compare and make a decision what actions should be taken. Anka and McDonald’s should have very worry about OCI. . if all things are being considered. is defined as the income required under U. and include the consequent gains or losses on the exchange in Other Comprehensive Income (OCI). Until today.

‘Vinson & Elkins And Enron Unplugged’ viewed 25 December 2011 http://www. Multinational Business Finance. 4) Press Room.scribd. n. ‘McDonald’s Corporation British Pound Exposure’ viewed 25 December 2011. United States: Pearson.viewed 25 December 2011.Reference List 1) Anon. 2010. 2011. 2) Anon.contentpilot. Eiteman. twelfth . http://www. http://www. viewed on 16th December 2011. ‘Governance Failure At Enron’ .com/doc/52445648/ATM-MA 3) David K.

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