1.
Enron faced major business risks: aggressive accounting, corporate governance, and outside pressures. These risks increased the likelihood of material misstatements and fraudulent activity. Enron used hundreds of SPEs or Special Purpose Entities as part of its aggressive accounting practices. According to GAAP, A company must consolidate financial statements if it owns 50% or more of another company. SPEs, however, only required a 3% investment by an outsider for it remain off the balance sheet. Enron took advantage of this loophole, which it used to hide millions in debt from the public. Three prominent SPEs, used by Enron, were known as “Chewco,” “LJM2,” and “Whitewing.”
Enron had issues related to corporate governance. Enron’s audit committee only met a couple of times a year and covered numerous topics in a short period of time. The audit committee also lacked the technical knowledge needed to understand auditor questions, the financial statements, and the complicated transactions used by management (Healy and Palepu). As a result, Enron was able to hide its fraudulent activity from the audit committee with ease. Another issue with corporate governance is the role of the auditors. Arthur Andersen was accused of conducting less than adequate audits due to a conflict of interest; they collected over $50 million in audit and consulting fees from Enron in 2000 (Healy and Palepu). Essentially, Arthur Andersen looked the other way as Enron continued to lie to investors.
Enron, like most companies, had to deal with outside pressures such as meeting earnings expectations. Not meeting earnings expectations will cause the stock price to drop. Enron met these expectations by managing its earnings, which increased their stock price. As a result, Management received large bonuses and the value of their stock options skyrocketed. Like most companies, Enron executives were compensated with stock options. Stock options are tools used to align management’s goals with investor’s goals. However, stock options can lead management to focus on short-term stock performance and manage earnings to meet earnings expectations.
2.
A company’s Board of Directors, or BOD, act on behalf of the investors has a whole. The board of directors have various responsibilities to the company and investors. Some of their major responsibilities are selecting and appointing the CEO, establishing the audit committee, establishing company policies and objectives, and compliance with laws and regulations (Healy and Palepu). The audit committee could have prevented Enron’s collapse. The committee was comprised of business men, a former Chair of U.S. Commodity Futures Trading commission, and a former dean and accounting professor (Healy and Palepu). The committee had more expertise than the average corporate audit committee, which means they should have known about the fraud. However, the committee’s brief meetings, and lack of technical knowledge prevented them from seeing warning signs and understanding managements accounting practices. They should have practiced due diligence and followed up on the issues that were confusing or didn’t make sense.

Healy, Paul M. and Krishna G. Palepu. "The Fall of Enron." Journal of Economic Perspective (2003).
Powers, William C., Raymond S. Troubh and Herbert S. Winokur. "Report of Investigation by the Special Investigavtion Committee fo the Board of Directors of Enron Corp." 2002.