a presentation about the enron scandal

1. ENRON and CG
Sam Shepperson
Bin Wu
Jinna Wang
Bruno Rodriguez
Maggie Brennan
Torkel Larsen Fuglerud
Kaja Eckhoff
Ola Oyan
Nguyen chi Cuong

2. 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.

3. 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.

4. 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.

5. 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.

6. Lack of Board Oversight of
Executive 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.

7. 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.

8. Related Party Transactions and
Special 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.