Board’s cannot act though without accurate and timely information. In Enron’s case they were not given this.
In the end Enron, had become the perfect storm of fradulent behavior following deregulation, due to the size of their misdeeds and the amount of regulatory agents that lacked the motivation to handle the problems. The faith in the company became strong because no one had began questioning the huge stock growth. As it grew several external agents were motivated not to check on what was occurring, but instead they encouraged the stock growth. In the end many organizations, and individuals were at fault, and they faced their downfall. The biggest lesson to be learned from the events at Enron is that the board of directors must effectively execute their responsibility to monitor managements actions to effective protect the stockholders and the public. After SOX and the public awareness of the failure of Enron there will likely never be an exact repeat of corporate fraud of this magnitude but boards of directors should not forget the lesson learned. As for China where deregualtion has yet to occur, they can now see the need for the regulatory to monitor private corporations to look after the public and stockholders interest. China will also need stronger external and internal monitoring systems to be operating in order to safely deregulate industries that involve economies of scale.
ENRON and CG Sam Shepperson Bin Wu Jinna Wang Bruno Rodriguez Maggie Brennan Torkel Larsen Fuglerud Kaja Eckhoff Ola Oyan Nguyen chi Cuong
Introduction to Enron Case Enron was the 7th largest company in America when it declared bankruptcy in 2001. Company was in commodity trading involving energy. The Sarbanes-Oxley Act of 2002 (SOX) was enacted by Congress in response to the events that occurred at Enron between 1993 and 2001.
Enron’s Board of Directors The Board of Directors at Enron was disproportionately connected to the company. The Enron’s board was larger than average with 18 members, which can be linked to lack of oversight due to lack of responsibility. Meetings were short, not much discussion. Some figures have claimed that the board was 43% independent at its lowest.
SOX Corrections Mandated that a majority of the board be independent of the company. Companies must have at least one financial expert on their auditing committee. 100% independent audit, compensation and nominating committees. Board actions must be changed, not just its independence on paper. Still unchanged.
The Issues at Enron Compensation structure at Enron seemed normal by business standards. They were performance and incentive based, but the compensation was tied to stock value. Lead to earnings manipulation by managers to reach the goals set by the company. Everyone had an interest in seeing current stock value increase.
Lack of Board Oversight ofExecutive Compensation CEO Kenneth Lay was granted by the board a credit line for $7.5 million. Lay used the credit line to take $77 million in cash from the company. Made worse when Lay paid back the credit with Enron stock. When CFO Fastow’s compensation from SPEs was questioned, no information was given and the matter was dropped. $750 million in bonuses in year when net income was $975 million.
SOX Responded by making it illegal to have corporate loans to insiders. Accelerated reporting requirements for insider sales. The Securities and Exchange Commission was granted increased transparency for executive compensation.
Related Party Transactions andSpecial Purpose Entities Enron did a lot of their business in off-balance sheet activities. These were labeled SPEs. 4 main issues: Enron employees operated the SPEs. The SPEs had debt guaranteed by Enron. The SPEs assets and liabilities should have been consolidated into Enron’s accounts. Borrowing ability of some SPEs linked to value of Enron stock.
The Issues at Enron SPEs were used to make sales to RPTs re- evaluating the price of assets for market value even though it was an internal transaction. SPEs offset losses, and made several questionable financial moves. Violated GAAP rules by having stock value be counted towards profit. Took losses and gave gains, making a huge disparity of value.
SOX Corrections CEO and CFO must certify the financial statements. Section 404, complained to be costly, made it so an external auditor must check on managers assessment of internal control system. No internal checks on the SPEs and RPTs allowed the Enron collapse.
The Biggest Issue for Enron Traders had valuable insider information on commodity prices, making them immune to market pressure. They could manipulate market price. They were allowed to count future value of transactions on current balance sheets. Historical cost was not used in accounting, used market values like an investment bank.
Government Oversight Enron lobbied to have the CFTC not monitor them and won in 1993. Later the same year a CFTC member joined Enron’s board. FERC could not handle Enron. Enron was a key leader for deregulation, which the FERC had to handle.They worked together causing a lack of motivation to challenge Enron.
SEC-Asleep at the wheel The SEC who the American public trusts with oversight of accounting filings failed to respond to the problems. Claimed to be under staffed and lacking resources they could not handle their workload. Helped Enron avoid having to administer several legislative acts that could have prevented Enron’s actions. Lack of regulatory decisions.
SOX Corrections SEC gained more funding and has increased its oversight. Increased monitoring of audit profession. CFTC and FERC both had little changed after Enron, but have sought legal action against Enron employees and players. Can be seen as a deterrent for repeats in the future.
Arthur Anderson Auditing Auditors normally would not certify false accounting because the size of their fee would be small in comparison to their loss of reputation.This was not the case for Enron AA was being paid to be the internal and external auditors, essentially checking their own work. They also received consulting fees from Enron. In total they received $52 million in 1 year from Enron with a projected $100 mil. in the future.
Audit changes PCAOB part of SEC now regulates the auditing profession. External auditor is appointed by and reports directly to the audit committee of the board. In addition, under SOX section 404 auditors are charged with certifying internal control systems and identifying material internal control weaknesses.
Lessons for CG post Enron Biggest issue is the amount of regulatory agents that did not have the motivation to handle the size of Enron’s misdeeds. Several external checks were motivated to encourage the stock growth that was occurring. The Board of Directors must change their actions to monitor the management decisions. Enron was the perfect storm after deregulation.
Implications for China Deregulation in China still needs to occur. Several lessons can be taken from the events at Enron. Need to have oversight of private corporations when deregulation occurs to look after the public’s interest. Need external checks and balances. Government must watch companies that operate in economies of scale.
A particular slide catching your eye?
Clipping is a handy way to collect important slides you want to go back to later.