Agenda
Case Summary: History of Enron's rise and fall.
What happened
Lessons: Sarbox
Domestic :Egypt CG standards
OECD Principles of Corporate Governance.
ROSC-WORLD BANK(June 2009)
Conclusion
Reference/Research
Questions
Q1: What were the essence and causes of
this corporate
Q3: How did Sarbox (2002) Act try to amend the situation ?
Q4: What are the home country CG standards /guidelines and
how do they measure up to current USA and OECD CG standards?
Q1
Introduction about ENRON
What were the essence and causes of this
corporate scandal in the financial
markets?
1985
Enron's life began as an interstate
pipeline company throughthe
merger of Houston Natural Gas and
Omaha-based InterNorth. Kenneth
Lay, the former chief executive
officerof Houston Natural
Gas,became CEO, and the next
year wonthe post of chairman.
1985
The firm's business model evolved to focus
on two related themes:
the acquisition and operation of power plants and
electric distribution companies, and
trading operations in which Enron created markets
for trading gas and electricity and financial
securities based on those commodities.
1990
Enron's principal innovation in energy markets was
to combine financial contracts with contracts for
physical delivery.
This innovation was applied to the natural gas and
electric power markets and was being extended to
the markets for basic metals, broadband, and pulp
and paper at the time of the firm's collapse.
1999
By the close of the nineties it was clear that trading
operations had become Enron's primary focus and
the firm began systematically shedding its physical
assets following what it referred to as an asset
light strategy.
From this perspective, Enron's operations mimicked
those of a trading or investment banking firm.
1995
2000
2001
Cracks began to appear In August of that year,
Jeffrey Skilling, a driving force in Enron's revamp
and the company's CEO of six months, announced
his departure, and Lay resumed the post of CEO.
In October 2001, Enron reported a loss of $618
million its first quarterly loss in four years.
2001
On Dec. 2, 2001, Enron filed for bankruptcy
protection in the biggest case of bankruptcy in
the United States up to that point. Roughly
5,600 Enron employees subsequently lost their
jobs.
The next month, the U.S. Justice Department
opened its investigation of the company's
dealings, and Ken Lay quit as chairman and
CEO.
2002
On Feb 14, 2002, Sherron
Watkins, the Enron whistleblower,
testifies before a Congressional
panel against Skilling and Lay.
Sherron Watkins is an Enron vice
president. She wrote to Lay in the
past expressing concerns about
Enron's accounting practices.
Q2
Theories: What is Corporate?
Analysis: CG institutions /mechanisms: Fail
of Board, Employees, Executive and
Gatekeepers
What is a Corporate ?
The most common form of business organization,
and one which is chartered by a state and given
many legal rights as an entity separate from its
owners. This form of business is characterized by
the limited liability of its owners, The process of
becoming a corporation, call incorporation, gives
the company separate legal standing from its
owners and protects those owners from being
personally liable in the event that the company is
sued (a condition known as limited liability).
A Corporate:
Environment
al Groups
Shareholders
&Board
Credit
Supplier
Customers
Corporation
Employees
Local
Community
Management
Government
Corporate Governance:
What is Corporate Governance?
The corporate governance is a set of
systems , structures ,processes and
mechanisms by which a corporate entity is
led, directed and controlled in the best
interests of shareholders and other
stakeholders.
Corporate governance rules are primarily
applied on listed joint stock companies and
other financial institutions taking the form
of joint stock companies.
The corporate
governance
framework should
protect and facilitate
the exercise of
shareholders rights.
Which are briefed as
follows: the right to
receive income
The right to vote
The right to appoint
an authorized
representative) on
their behalf
They possess legal
rights to challenge
the order of the
company's
management in the
court of law
The corporate
governance
framework should
promote
transparent and
efficient markets,
be consistent with
the rule of law and
clearly articulate
the division of
responsibilities
among different
supervisory,
regulatory and
enforcement
authorities.
The corporate
governance
framework should
ensure the
equitable
treatment of all
shareholders,
including minority
and foreign
shareholders. All
shareholders
should have the
opportunity to
obtain effective
redress for
violation of their
rights.
The corporate
governance
framework should
ensure that timely
and accurate
disclosure is made
on all material
matters regarding
the corporation,
including the
financial situation,
performance,
ownership, and
governance of the
company.
The corporate
governance
framework should
recognize the rights
of stakeholders
established by law or
through mutual
agreements and
encourage active
between corporations
and stakeholders in
creating wealth ,jobs,
and the co-operation
sustainability of
financially sound
enterprises.
The corporate
governance
framework should
ensure the strategic
guidance of the
company, the
effective monitoring
of management by
the board, and the
boards
accountability to
the company and
the shareholders
External
corporate
governance
controls
corporate managers;
corporate boards;
gatekeepers;
shareholders,
and especially institutional investors.
Corporate Governance
Shareholders (or
stakeholders?)
-Too much trust,
Incompetence
- Lack awareness and/or
understanding of role ,
-No control & reporting
systems,
- Lack of motivation,
Conflicts of interest
BOARD
Corporate Governance
Shareholders (or
stakeholders?)
-Too much trust,
Incompetence
- Lack awareness and/or
understanding of role ,
-No control & reporting
systems,
- Lack of motivation,
Conflicts of interest
BOARD
Major players
MANAGEMENT
Dishones
t&
Conflicts
of
Interest
EMPLOYEES
ENRON had an inside legal staff of over 100 lawyers,
and an accounting staff of several hundred trained
accountants
All seemed to be operating in a way that supported
the executive management team
As employees were being paid good salaries
Until Sherron Watkins finally tried to raise
awareness of potential problems
Corporate Governance
Shareholders (or
stakeholders?)
-Too much trust,
Incompetence
- Lack awareness and/or
understanding of role ,
-No control & reporting
systems,
- Lack of motivation,
Conflicts of interest
Productivity &
Competitiveness
BOARD
Major players
MANAGEMENT
Corporation
Direction
Dishones
t&
Conflicts
of
Interest
Ethics and social
responsibility
Viability and legitimacy
Focus
GATEKEEPERS
External auditors, analysts, and credit rating agencies to detect and expose
the questionable financial and accounting decisions that led to the collapse
of Enron
An argument can be made that during the 1990's the deterrent effect of
legal liability for gatekeepers declined as well, further reducing market
discipline
Thus, to make gatekeepers more effective ways must be found both
To reduce their conflicts of interest and
To increase the threat of market discipline if they fail to adequately
represent the interests of investors and creditors.
Incentives/Pressures
Tight Debt Agreement
Unrealistic Expectations
Attitudes/Rationalizations
Lack of a Code of Conduct
Disregard for Financial
Reporting
Q3
Introduction to SOX
How did Sarbox (2002) Act try to
amend the situation ?
Introduction to SOX
SarbOx stands for SarbanesOxley
Paul Sarbanes is a United States
Senator who represented the state of
Maryland. Sarbanes
2. Auditor Independence
Establishes standards for external auditor independence, to limit conflicts
of interest.
3. Corporate Responsibility
Senior executives take individual responsibility for the accuracy and
completeness of corporate financial reports
Q4
What are the home country CG
standards /guidelines and how do
they measure up to current USA and
OECD CG standards?
2. Board of Directors
Q5
How could these home standards be
ameliorated to competitively attract
more international investment from
abroad ?
Extraordinary
transactions
are not
generally
subject to GMS
approval.
Institutional
investors do
not typically
vote or engage
with their
investee
companies.
Egyptian companies
must now follow EAS
that are based on IFRS
(with the previously
mentioned four
exceptions to IFRS);
auditors must follow
ESA, which similarly,
are largely (but not
exclusively) based on
ISAs.
Non-financial reporting
has improved
somewhat, however,
overall remains
underdeveloped; e.g.,
only 16 percent of EGX30 companies disclosed
their governance
structures and three
percent their internal
control and audit
policies.
Lawsuits
Thousands of ENRON Employees and investors lost their
savings, children college funds and pensions
Shareholders filed lawsuit
Employees filed lawsuit
Creditors filed a lawsuit
(Reuters) - A U.S. judge sentenced two former Enron energy
traders involved in the scheme to manipulate California
energy prices to two years' probation and a $10,000 (5,100
pounds) fine each on Wednesday after they co-operated
with authorities in the case
Etc
Conclusio
n
Conclusion
The ENRON failure has not been the result of
just questionable activities by ENRONs
executive management team. The cast of
contributors to the failure and bankruptcy are
both inside and outside the company. Its the
total system that resulted in failure that needs
to be further understood and investigated.
Conclusion
Multiple corporate governance mechanisms, both internal and
external, failed to constrain the actions of Enron's management
team:
In particular, Enron's board failed to oversee management and apparently
did not understand the risks inherent in the firm's business strategy.
It also appears that several board members and the external auditor faced
potential conflicts of interest that attenuated their role as monitors.
Further, the board, analysts (credit and equity), external auditors, and
federal agencies failed to identify problems at Enron or did not respond to
obvious signs that there were problems at the firm.
Finally, Enron's role as a dominant player in nascent and inefficient
markets, afforded the firm's management the opportunity to manipulate
prices, asset values, and thus the firm's financial position
Conclusion
US GAAP, as structured and administered by the SEC, the
FASB, and the AICPA, are also responsible for the Enron
counting debacle.
Enron and its outside counsel and auditor felt comfortable
in following the specified accounting requirements for
consolidation of SPEs.
The SEC had the responsibility and opportunity to change
these rules to reflect the known fact that corporations were
using this vehicle to keep liabilities off their balance sheets,
although the sponsoring corporations were substantially
(often almost entirely) liable for the SPEs obligations
References
http://bizfinance.about.com/od/smallbusinessfinancefaqs/a/sarbanes-oxley-act-and-enron-scandal.htm
http://insanadfindingthepony.blogspot.com/2010/04/enron-scandal-and-people-of-wal-mart-by.html
http://business.nmsu.edu/~dboje/enron/chronology.htm
Chronological history of Enron http://usatoday30.usatoday.com/money/industries/energy/2006-01-23enron-chronology_x.htm
http://en.wikipedia.org/wiki/Special_purpose_entity
http://en.wikipedia.org/wiki/Timeline_of_the_Enron_scandal
http://www.applet-magic.com/enron.htm
http://blj.ucdavis.edu/archives/vol-6-no-2/Corporate-Governance-and-Sarbanes-Oxley-Post-PostEnron.html
http://www0.gsb.columbia.edu/faculty/fedwards/papers/U.S.%2520Corporate%2520Governance
%252010-05.pdf
http://www.hawkama.net/files/toolkit/content/cgprogramspartners/Egyptian_Code_of_Corporate_Gover
nance_Guidelines_and_Standards_October_2005__Egypt_English.pdf
http://apps.chron.com/news/specials/enron/background.html
http://online.wsj.com/article/SB113898435336064528.html
http://www.hawkama.net/files/toolkit/content/cgprogramspartners/Egyptian_Code_of_Corporate_Gover
nance_Guidelines_and_Standards_October_2005__Egypt_English.pdf
References
http://www.cbc.ca/news/business/story/2006/05/25/enron-bkgd.html
ELSEVIER - Journal of Accounting and Public Policy 21 (2002) 105127 Enron: what happened and what we can learn from it - George J.
Benston, Al L. Hartgraves - Goizueta Business School, Emory
University, 1300 Clifton Road, Atlanta, GA 30322-2710, USA
ELSEVIER Journal of Corporate Finance 13 (2007) 929-958 Corporate governance post-Enron: Effective reforms, or closing the
stable door? Stuart L. Gillan a,John D. Martin b
a Finance Department, Rawls College of Business, Box 42101, Texas
Tech University, Lubbock, TX 79409-2101, United States
b Department of Finance, Hankamer School of Business, Baylor
University, Waco, TX 76798, United States