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Introduction:

The Enron scandal, revealed in October 2001,

eventually led to the bankruptcy of the Enron


Corporation, an American energy company based
in Houston, Texas, and the dissolution of Arthur
Andersen, which was one of the five largest audit
and accountancy partnerships in the world.
In addition to being the largest bankruptcy
reorganization in American history at that time,
Enron undoubtedly is the biggest audit failure. It is
ever the most famous company in the world, but it
also is one of companies which fell down too fast.

Review of Enrons Rise and Fall:


In 2001 Enron was one of the worlds largest energy

groups, operating
mainly in the USA. But in that year, the company
admitted that there had
been a number of financial reporting irregularities over
the period 1997 to 2000.
During 2001 it became apparent that a number of
special-purpose entities were not consolidated in the
balance sheet.
Consequently, earnings (reported profits) were
substantially overstated and in late 2001 the company
filed for bankruptcy.


During most of the 1990s Enrons stock price was

rising steadily.
During 1999 the stock price increased
dramatically and at the beginning of 2000 was
standing at over $70.
During 2000 the stock price peaked at justover
$90, but by the end of 2000 was standing at just
over $80.
During 2001 the stock price declined sharply and
by the beginning of December 2001 the stock
stood at less than $1.


In early 2001 Enron was ranked (on the basis of

revenues) as seventh in the Fortune 500 with revenues


of over $100bn.
Enron during the 1990s had grown at a phenomenal
pace and some analysts were already predicting that it
would be number one by 2001.
At its peak in 2001 Enron had 30,000 employees around
the world, of which 6,000 were located in Houston,
Texas.
The collapse of Enron was devastating for the city of
Houston, since many of its inhabitants were related to
employees or knew friends who worked at the company.

Problems associated with the


collapse of Enron:
Complex accounting system of SPVs:
One of the reasons of Enron collapse was

establishing a special entity named as SPE;


which was made to sell immaterial assets to
Enron.
Executive Remuneration:
A part from the salaries, executives were
getting extra benefits, as the CFO of the
company himself received a profit of $30
million. It was also alleged that executives
may have benefited from insider trading.


Audit committee:
The audit committee of enron was ineffective, they were

comprising of six members out of which three members


were located out of the station and one of the members
got very huge amount for providing consultancy service
along with the member of the board.
Separation of CEO and Chairman:
when the CEO of Enron Jeff Skilling resigned, Lay took
both the responsibilities of CEO and Chairperson which
worsened the situation because one of the role of board
is to evaluate the senior management including CEO,
but combining the role of CEO and Chairperson
eliminated an important check on CEO and
Management.


Disclosure and Audit:
The problem with the Enron was that they

were not making aware their shareholders on


time to time about the real situation; instead
Enron misrepresented its earnings report to
the shareholders and employees.
The earnings report looked true to investors
and they were continuing investment in Enron
stock, but the reality of those reports were not
accurate.

Corporate Mechanisms and


Controls:
Internal corporate governance control:

Internal corporate governance controls monitor


activities and then take corrective action to
accomplish organizational goals, such as;
Monitoring by the board of directors
Internal control procedures and internal
auditors
Balance of power
Remuneration
Monitoring by large shareholders


External corporate governance control:

External corporate governance controls encompass


the controls external stakeholders exercise over the
organization. Examples include:
Competition
Debt Covenants
Demand For And Assessment Of Performance
Information (EspeciallyFinancial Statements)
Government Regulations
Managerial Labor Market
Media Pressure
Takeovers

Role of corporate governance


in addressing the issues of
Enron bankruptcy:
Under SOX 2002:
Establishment of public company accounting

oversight board (PCAOB)


Conflict of interest
Audit committee
Audit partner rotation and Prohibition of nonaudit services
CEOs and CFOs required to affirm financials
Whistleblower


Under Cadbury committee on corporate

governance:
There should be full and clear disclosure of their total
emoluments and those of the chairman, including
pension contributions and stock options. Separate
figures should be given for salary and performance
related elements and the basis on which performance
is measured should be explained.
Executive directors pay should be subject to the
recommendation of a remuneration committee made
up wholly or mainly of non-executive directors.


Sociological theory:
Sociological theory has focused mostly on board

composition and wealth distribution. Board composition,


financial reporting, and disclosure and auditing are
important and necessary mechanism to promote equity
and fairness in society.
Under Code of corporate governance:
No person shall be elected or nominated as director of

more than seven listed companies simultaneously;


Provided that this shall not include the directorship in
the listed subsidy of the listed holding companies.

Consequence of Enron Collapse:


In September 2004 Enron was allowed to sell

its interest in three natural gas pipelines and


Portland General Electric for $3.1bn, with the
purchasers assuming about $1.5bn of Enrons
debt.
The result of these transactions, the remnants
of Enron were due to be restructured as
Prisma Energy International Inc., with almost
5,000 employees. Prisma was destined to own
a mixture of pipeline and power assets in 14
countries.


The major audit firm Arthur Andersen became one of

the casualties of the Enron collapse.


In July 2002 Arthur Andersen had a reputation for
outstanding auditing integrity and competence but by
the end of 2002, it was effectively finished and barred
from auditing in the USA.
In 2004, the media has in general gone out of its way
to praise Sherron Watkins as a heroine of the Enron
saga, she was quite modest about her role at Enron.
Watkins view of Arthur Andersen is that there was too
much emphasis on unrealistically high levels of pay.
Other casualties of Enron saga was each of the JP
Morgan Chase, Citgroupe and Merrill Lynch were fined
a millions of dollars for deals with Enron.


According to many analysts, the following

problems were related to Enron collapse:


Involvement in derivatives trades and lack of
information and knowledge about the market,
when it was extremely volatile, that could give
the company a comparative advantage.
The espoused core values in the company
was in fact quite different from the reality.

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