This is a graded discussion: 20 points possible due Apr 16 Chapter 11.1 Discussi

Question

This is a graded discussion: 20 points possible due Apr 16 Chapter 11.1 Discussion - Merill Lynch and the Nigerian Barge Deal 24 24 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 Enron was. However, Merrill Lynch ultimately took the unusual deal and after the Enron meltdown, found themselves under investigation by the SEC and settled by paying a fine of $80 million. 1. What is Merrill Lynch's responsibility to supervise the accounting procedures of another company with which it is engaged in business? Does it appear from the case that Merrill Lynch was unwittingly duped by agents at Enron or culpable participants in Enron's accounting machinations? 2. In what ways did Merrill Lynch fail to follow the dictates of due diligence in its evaluation of the offer from Enron? Unrea Subscriboc

Explanation / Answer

1) It appears that Merrill Lynch were culpable participants in Eron's accounting machinations due to the fact that the deal did not make any bussiness sense for Merrill Lynch. Merrill Lynch entered a deal to purchase barges when electricity generation was not a part of its portfolio. To add to it the political instability casts more doubt into the intention behind Merrill Lynch entering the venture. It was Merrill Lynch's responsibility to do the due diligence from accounting perspective before entering the deal especially when it is a wealth management company itself. The muddy nature of the ownership situation and the fact that Merrill Lynch and Enron entered into a clear Lose-Win deal indicates that the wealth management company was hand in glove with the Enron's plan of misleading the investors. Even though on paper it was a simple business transaction on the part of Merrill Lynch, the hard facts of the case indicate purposeful neglect towards Enron's accounting fraud.

2) Merrill Lynch failed to follow the dictates of due diligence in the following ways
a) Investment risk assessment not done
b) Failed to supervising accounting procedures of the deal to ensure that ownership of the barges were clear to all parties and investors - investors of Enron would see the loan as a revenue
c) Analysis of Merrill Lynch's revenue generating capacity from the deal - why did the company enter into a deal to enter a new venture (Electricity generation) in a country striken by political instability

c)

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