Though the Enron debacle has been reasonably well documented, some less publiciz

Question

Though the Enron debacle has been reasonably well documented, some less publicized activities of demonstrably questionable ethics were a bit obscured in the whitehot glare of the companies meltdown. Among these was an unusual proposal to the investment bankers at Merrill Lynch. Deceptively simple in its particulars, Enron approached Merrill Lynch about the purchase of three barges that generated electrical power off the coast of Nigeria. The deal was odd for a couple of reasons. First, Merrill Lynch is not at all in the electricity generation business and second, the Nigerian political situation was, in 1999, dicey at best as years of authoritarian dictatorship were being replaced by the first federally unifying and democratic constitution in that nation's history These things aside, the deal was odd because the notions of "sale" and "loan" were obscured as was ownership of the barges in question. Further, this would be a case of off-the- balance-sheet partnerships that would keep debt off of the books, and make a "loan" appear to be revenue. Merrill Lynch would not itself be engaged in accounting fraud, at least not directly, but it seemed reasonably clear that

Explanation / Answer

1. Being accountable to its stakeholders, Merrill Lynch did have the responsibility to supervise the accounting principles of another company with which it is engaging in business. If we look at the case, it is clearly highlighted that the deal between Enron and Merrill Lynch was odd at best, hence Merrill Lynch do seem to be culpable participants in the Enron’s accounting fraud.

Enron approached Merrill lynch to purchase three electricity generating barges off the Nigerian coast. Merrill Lynch was not into electricity generation business, and Nigerian political scenario was also extremely volatile at the time. Also, the ownership of the barges in question was obscure, and was meant to make ‘loan’ look like ‘revenue’ in the balance sheets.

2. Due diligence is the act of investigating the activities of a business before engaging in any business with another firm. It incorporates investigative measures regarding all the relevant matters that pertain to business deals. Due diligence can include financial due diligence, legal due diligence, human resource due diligence, and operational due diligence.

Merrill Lynch in this case, had the due diligence to investigate the offer Enron made to them, and evaluate the deal and the accounting practices at Enron, as the deal was odd in nature, and presented itself in a way that highlighted Enron’s urge to disguise their debt and loan into revenue in their financial statements. Merrill Lynch failed to showcase effective due diligence in accepting the Enron’s deal and became culpable participant’s to the Enron’s accounting fraud, for which it had to pay the price later in form of a $80 million fine to SEC.    

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.